Wage earners will shoulder an escalating tax burden to move the budget into a sustained surplus over the coming years, putting election pressure on the Morrison government and Labor to offer better long-term tax relief for workers.

New analysis by the independent Parliamentary Budget Office reveals the average tax rate paid across all income earners will jump to 25.2 per cent, from 22.9 per cent over the next decade, if sluggish wages gradually increase and people move into higher tax brackets.

However, the PBO warned there was a fiscal risk that lacklustre wage growth didn’t improve.

Separately, Treasurer Josh Frydenberg on Thursday signalled the budget may return to surplus before the 2019-20 forecast, aided by the fastest economic growth in six years delivering higher corporate and personal tax receipts to the government.

The Morrison government is on track to hit its self-imposed tax-to-GDP ratio cap of 23.9 per cent by 2020-21, due to the abandonment of the company tax cuts for big business and a plan to fast-track tax breaks for small-to-medium companies, according to leaked Treasury costings revealed by The Australian Financial Review earlier this week.

Advertisement

Mr Frydenberg has ruled out revisiting the big business tax cuts which Labor blocked and were unpopular with voters. 

Hence, the government may have to consider offering a further round of long-term personal tax relief to meet its budget rules, potentially setting up an election clash between Coalition tax relief and a higher taxing, higher spending Labor.

​According to the PBO, middle income earners would be the hardest hit by higher taxes by 2026-27, despite the Morrison government’s seven-year tax plan to phase in personal income tax cuts resulting in a temporary trimming of the tax slug on individuals earning above $37,000.

“Both with and without the [government’s] Personal Income Tax Plan, average tax rates increase as taxable incomes increase, even in circumstances where income earners do not cross a marginal tax rate threshold,” the PBO noted.

“This means that although the impact of bracket creep will be reduced as a result of the Personal Income Tax Plan, taxpayers will continue to experience higher average tax rates as their incomes grow over time.”

Labor opposes the government’s second and third tranches of tax cuts for middle-to-higher income earners, meaning that under current policy settings the personal tax take would be considerably higher under a Bill Shorten government.

Labor’s acting Treasury spokesman Jim Chalmers highlighted the PBO’s analysis saying the largest increases in average tax rates would occur in the low-to-middle-income groups.” 

The PBO also said the dumping of the unlegislated big business tax cuts meant company tax receipts would rise over the medium term with increased corporate profitability.

Mr Frydenberg said the 3.4 per cent annual economic growth figure published on Wednesday was stronger than anticipated and “that will flow through in the final budget outcome”.

“I will release a final budget outcome later this month and certainly that [economic data] was good news for the budget,” he told the Nine Network on Thursday.

The May budget projected a small underlying cash surplus of $2.2 billion in 2019-20 , with deficits of $18.2 billion and $14.5 billion respectively forecast for 2017-18 and the current financial year.

While the soon-to-be-announced final budget outcome for last financial year is not expected to be in the black, the higher company tax revenues from the stronger economy and higher commodity prices could push the budget towards balance for 2018-19.

Stephen Anthony, chief economist at Industry Super Australia and a former senior Treasury budget official, said the government would have been tempted to bring forward spending into the recently completed 2017-18 year to artificially lower future spending and target a surplus in 2018-19.

“A single-digit deficit is likely in 2017-18 before heading towards booking a surplus this fiscal year,” Mr Anthony said.

“It will come down to where they choose to time various spending items.”

Economists see long-term headwinds to the budget from an ageing population, weak productivity and subdued wages.

“The whole outlook and projection is predicated on wages growth returning to 3.5 to 3.75 per cent,” Mr Anthony said. “That’s not likely to happen any time soon.”

Ratings agency Moody’s said the stronger economic growth would have positive benefits for the budget.

“We were expecting the budget to move into surplus. We still think that will happen and this stronger growth is helpful,” said Martin Petch, Moody’s Investors Service’s lead analyst for Australia’s sovereign rating.

 “The numbers are moving in the right direction.”

“An issue we do have is that as part of an upcoming election campaign there is always uncertainty around policy changes or initiatives and their [potential impact] on fiscal consolidation.”

Read More

LEAVE A REPLY

Please enter your comment!
Please enter your name here