Monday, April 30, 2018

Turnbull in best position to offer tax cuts in nine years

A “humongous” lift in Australia’s tax take has put the Turnbull government in the best position to deliver personal income tax cuts in nine years.

New Department of Finance figures reveal a rolling annual budget deficit of just $14 billion in the year to March- the lowest rolling annual deficit since 2009.

The data shows company tax revenues are up 23.3 per cent on the previous year, while personal tax revenues are up 5.4 per cent. Company tax is bringing in $36.2 billion more than it did a year ago, personal tax an extra $10.6 billion, goods and services taxes an extra $7.5 billion, and superannuation an extra $3.2 billion.

Deloitte Access calculations to be released on Monday show the Coalition could afford to spend $8 billion per year on personal income tax cuts and still leave room for a paper-thin forecast surplus of $3.8 billion in 2020-21.

Middle to lower income Australians will be the biggest beneficiaries of the tax cuts in next month’s budget, and will likely be phased in over several years.

One way for Treasurer Scott Morrison to deliver cuts worth $8 billion per year would be to lift the threshold for the 32.5 cent rate from $37,000 to $43,000 and the threshold for the 37 cent rate from $87,000 to $93,000. Another would be to lift the $37,000 threshold to $38,000 and cut the rate from 32.5 to 30 cents. A third would be to lift the tax free threshold from $18,200 to $20,000 and the $37,000 threshold to $40,000.

Calculations in the Deloitte Access Budget Monitor show that if revenue continues to climb at its present rate, the budget will be in surplus within 12 months.

“To be clear, that is not what we are forecasting,” said Deloitte Access partner Chris Richardson. “What has happened is that a bunch of big taxpayers have run out of accumulated tax losses at pretty much the same time, I'd call it October.

“Instead of a steady shift to companies paying tax again, we had a surge, but it won’t continue at that rate.”

The Budget Monitor predicts a budget balance $7 billion better than officially forecast this financial year, $7.2 billion better than officially forecast next financial year, $1.6 billion better in 2019-20 and $2 billion worse in 2020-21.

“The humongous improvement won’t last, but what concerns us is that the government will give almost all of it away in tax cuts and other election sweeteners,” Mr Richardson said.

“Time and time again we have seen the economy do better than forecast and politicians unfurl the ‘Mission Accomplished’ banner and stop taking difficult decisions because they think it will do things for them.

“Think of Paul Keating and the so-called L-A-W tax cuts which he had to abandon, think of Wayne Swan announcing four years of surpluses which he had to walk away from. Less obviously, think of Peter Costello and John Howard announcing the baby bonus and increased family benefits and tax cuts, that later turned out to be unsustainable.”

“It would be wise to not applaud too loudly when the tax cuts are announced.”

Speaking on Sunday, Mr Morrision said the budget would focus on making the economy strong. "That means lower taxes, building key economic infrastructure, backing small business to create more jobs and opening up new markets for our exporters," he told Fairfax Media. Lower taxes would further strengthen the economy to create more jobs and guarantee essential services, he said.

Commonwealth Securities chief economist Craig James said that if the government eliminated the deficit first and then cut taxes it would save $16 billion to $17 billion per year in interest payments.

The Deloitte report notes a better option than tax cuts would be to spend $3 billion per year lifting the Newstart unemployment benefit by $50 a week and indexing it to wages.

“Newstart hasn’t kept up with national living standards for more than a quarter of a century and is shrinking sharply relative to average and minimum wages and the age pension,” the report says. “If we had to nominate the single standout fairness failure in Australia in 2018, itis undoubtedly our embarrassingly inadequate unemployment benefits.”

The Department of Finance data shows revenue well up on the official projections in the mid-year budget update released in December. The government expected to take in $319.9 billion in the financial year to March but took in $325.2 billion. It expected to spend $346.3 billion and spent only $342.6

In The Age and Sydney Morning Herald