Budget Repair Based On Tax Hikes

Written by:
10 April 2019
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Treasurer Josh Frydenberg claimed in his budget speech last week that the government had repaired the budget “without increasing taxes.” Unfortunately budget numbers and government rhetoric do not always match reality. The forecast surplus is actually on the back of high growth in tax revenues.

Built into our tax and monetary system are automatic tax increases. Just to maintain a constant taxation level requires either continual increases of tax thresholds or decreases in tax rates.

Since the Coalition came to government in 2013, they have failed to cut tax rates and they have only adjusted one bracket threshold. They have sat on their hands and allowed bracket creep to go to work. Increases to nominal wages ensures everyone pays more tax at their marginal rate and pushes many taxpayers into higher tax brackets.

The household tax to income ratio has continued to increase over the last decade from below 12 per cent to over 14 per cent, and government revenue from personal income tax has consistently outstripped nominal wage growth.

The truth is, we are long overdue for tax cuts that reverse the effects of bracket creep. Building on last year’s announced tax changes, this budget promises further relief from ever increasing taxes. In addition to abolishing the second highest tax bracket in 2024, an additional threshold is increased and the 32.5 per cent marginal rate is reduced to 30 per cent in five years’ time.

But these promised tax cuts come ahead of an election with the government well behind in the polls. It is unlikely that we will ever actually see the full implementation of these tax cuts and one must question the Coalition’s commitment to lower taxes, given their inaction over the last five years.

Ultimately, this is a budget that will play well in opposition. Any changes made by a Labor government that do not match the Liberal plan will be labelled as tax hikes. The Liberals will hold a future Labor government to a standard they themselves could never meet, while maintaining the narrative that they are the party of lower taxes.

This would mirror the tactic employed by Labor after it lost government in 2013. Labor loaded up significant spending increases and successfully labelled the government’s lower rates of increased spending as “spending cuts.”

It is also important to note that the government’s $45 billion surplus over the next four years is a forecast resting on a number of key assumptions. The budget currently remains in deficit, and will only improve if the forecast wage growth, low interest rates, and favourable economic conditions prove to be accurate. Future spending, tax cuts, and debt repayments depend on it.

Let’s not forget the budget woes of recent times. After blowing up the country’s financial position with irresponsible and misguided Keynesian stimulus spending, then-Treasurer Wayne Swan announced a number of years of budget surpluses that never eventuated.

The lesson here is that we should take the budget estimates with a grain of salt – especially a pre-election budget of a government facing the prospect of opposition.

The only sustainable way of delivering tax relief while paying down debt is to reduce the size of government. This budget does not provide any restraint on government spending, which continues to be locked in at 24.5 per cent of GDP. In the absence of substantial spending cuts, future governments will no doubt turn again to increased taxation to maintain government finances.

The government’s tax plan does include a number of critical improvements to the current structure. Removing the second highest tax bracket, increasing thresholds, and reducing tax rates are all extremely welcome steps.

Unfortunately, since forming government in 2013, the Coalition has been unable to implement tax cuts on this scale or reduce government spending. We now face the chilling prospect of having our tax cuts held at the mercy of a Labor government.

Kurt Wallace is a Research Fellow at the Institute of Public Affairs.

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