Thursday, April 05, 2018

Morrison's dilemma: Awash with money, but not enough

Just quietly, the budget is in an excellent position to deliver tax cuts. A year ago, it wouldn’t have been thought possible. Certainly the Treasurer Scott Morrison didn’t think it was possible. He used the May budget to announce a tax increase (a hike in the Medicare Levy) without which he wouldn’t have been able to credibly continue to promise a surplus by the end of the decade.

His budget pencilled in a wafer-thin surplus of $7.4 billion in 2020-21. Without the Medicare levy increase, it would have been even less: a "rounding error" surplus of $3.15 billion, a mere fraction of a per cent of GDP.

Since then, money’s been rolling in. At first in a trickle (the December budget update lifted the 2017-18 revenue estimate $3.6 billion) and then a flood. By the end of February the government had taken in $5.5 billion more than it had expected in predictions made just three months earlier.

It’s an astounding $3 billion ahead on company tax. It’s the suddenness of the jump that’s important. When China began pushing up coal and iron ore prices in 2016 tax collections barely moved. Mining companies used their losses to cut their tax bills. The belated jump in tax payments suggests they’ve been used up. From here on, tax payments should climb with profits.

The government is $1 billion ahead on income tax. That’s $1 billion ahead of what it expected just three months ago. Remember that proud boast of a record 420,700 jobs created in the past year? Most of those extra jobs were unexpected. The budget predicted jobs growth of 1.5 per cent. The economy has delivered growth of 3.3 per cent. Most of the newly hired workers are full-time and paying serious tax.

So big has been the jump in revenue that in two months so far this financial year, November and February, the budget has been in surplus. In those months the government took in more revenue than it paid out, something it hasn’t done for a decade.

The question facing the Treasury in the lead-up to next month’s May budget is how much of that boost in revenue is permanent. How much of it can be baked into predictions of future income as guaranteed, and able to be given away in tax cuts, should the government want to do that instead of strengthening the projected surplus.

Here’s my guess: the government will discover that its income has permanently become $5 billion a year higher than previously forecast. That’s $5 billion a year available to be handed to voters in income tax cuts. And more.

The government has already announced (but not released estimates for) measures that will raise several more billions, allowing for bigger income tax cuts. One will require foreign investors deriving income from so-called “stapled structures” used for infrastructure projects to pay tax at 30 per cent rather than 15 per cent. Morrison said last week it could come to be worth billions.

It can also book more from its moves against multinational tax avoidance. Also last week Morrison revealed that the anti tax avoidance measures announced so far had persuaded 38 large companies that sell to Australians to bring their sales onshore for tax purposes, meaning “an additional $7 billion in income each year will be returned to the Australian tax base”.

And there are other measures proposed or likely that can be used to garner money for tax cuts. There’s the talked about further cut in foreign aid, there’s clawing back of university fees from former students who have died. There could even be further cuts in projected spending on Newstart and other benefits as a result of changes to the law approved last week that will make it harder for beneficiaries to claim benefits to which they are legally entitled.

So far this financial year the government is $3 billion behind in what it expected to spend on welfare and other payments, suggesting there’s room to expect to spend less next year. My conservative guess is that the government will feel it has something in the order of $8 billion a year to hand out in income tax cuts in the budget due in four weeks time.

It could have more, safely another to $4 billion a year more, if it (reluctantly) abandoned the rest of its proposed company tax cuts, using the sound reasoning that they failed to pass the Senate.

Eight billion could comfortably buy a $5000 lift in the threshold of each of the top three income tax rates. The 32.5 per cent threshold would climb from $37,000 to $42,000, the 37 per cent threshold would climb from $87,000 to $92,000 and so on. Or it could buy a cut of one percentage point in each of our four tax rates with a bit left over.

It’s beyond doubt that we need personal income tax cuts. Bracket creep is eating away at our incomes even though in real terms our wages are scarcely climbing. Morrison’s problem is that however generous his offering, it can be trumped by Labor. It’ll be able to use the money it will book winding back the excesses of negative gearing and dividend imputation, as well as company tax cuts. He’ll be able to be generous, but probably not generous enough.

In The Age and Sydney Morning Herald