Tax cuts story may be overwhelmed

It seems the fate of the Abbott/Turnbull Coalition governments to have an uphill fight selling their budgets. For the first time in a number of years the Treasurer has a positive story to tell the electorate, a budget with tax relief for all taxpayers, big infrastructure plans and new spending for key groups like seniors.

The initial press response to the budget was almost uniformly positive, giving the government’s narrative — tax relief, responsible spending and a surplus — the chance to develop real momentum. Yet along comes a new bunch of section 44 disqualifications, Labor members no less, to flood the media not even 24 hours after the budget was released.

What the Coalition would have given for such a distraction in the week after the 2014 budget…

However, once the tide of the citizenship drama recedes, the bones of the budget will be laid bare and suddenly the story may not look so positive.

The government argues that it delivers significant tax relief to Australians but also retains its fiscal prudence. While it is true that the budget is inching closer to balance, and the government is cutting tax rates, the improvement comes not from responsibly trimming wasteful spending but from a huge boost in revenue.

What is really happening is that the government is taking a dollar and giving taxpayers back 20 cents.

Given the consistent, massive over-estimation revenue in budgets over the past decade there is always a risk that the revenue won’t appear. To be fair, for the first time in the life of the Coalition government, the surplus moves from the projections to the estimates. This seemingly small move suggests a much higher degree of confidence that it can be delivered.

But the Coalition is betting its re-election hopes on the long-awaited massive tide of revenue finally washing in to fund it all. It’s a risky strategy.

The government is committing upfront to spending or returning most of that expected additional revenue to taxpayers. Only a third will be retained to reduce the deficit: a $33 billion cash deficit in 2016-17 turns into a $2.2 billion surplus in 2019-20, but in that time revenue will increase by nearly $100 billion.

Eventually, spending may start to fall, but not until after the next election (and even then only if the government is re-elected without new spending commitments).

Some elements of the tax cut package do have economic merit. Increasing the top and bottom threshold of the 32.5% tax bracket is a good move, given that is where most full time workers fall. Longer term, the abolition of the 37% threshold creates a better, flatter tax structure.

The abandonment of the hidden income tax increase via the Medicare levy rise is also positive.

Yet the benefits of this package cap out at around $9 billion a year at the end of the forward estimates and some of the bigger elements won’t take effect until 2024 (if then). Taxpayers will have suffered through more than a decade without substantive relief from bracket creep by that point. Even with the cuts, they will be effectively worse off.

We are already paying an extra $24 billion in income tax in 2018-19 than we were in 2016-17. By the time we get to the forward estimates we will be paying an additional $45 billion on top of the amount paid in 2018-19, despite the tax cuts.

The story is even direr for companies: company tax receipts will increase by 30% between 2016-17 and 2018-19, yet they look less likely than ever of getting even the relatively minor tax cuts proposed by the government.

Their only small compensation is that this should put paid to the argument that companies aren’t paying their fair share of tax. They are doing an extraordinary amount of the heavy lifting in this budget.

The government has delivered what is largely an election budget, with handouts for most groups in society. However, in order to maintain their promise of a surplus, a lot of the action is pushed out into next decade. If it works, it may be a political insurance policy for the future: it will force a Labor government to either cancel popular changes or fund them.

But it is a strategy that leaves them vulnerable to attack now. Having had the budget narrative checked by the citizenship decision, Morrison may not find it easy to convince the electorate that the government deserves another term. In real terms the electorate will see little benefit from these changes before the election.

Simon Cowan is Research Manager at the Centre for Independent Studies