A $355 billion hole in the federal budget shouldn’t stop spending on welfare, tax cuts: report

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The coronavirus crisis will punch a $355 billion hole in the federal budget, according to a new report which calls on the Federal Government to continue massive stimulus spending to create jobs and lift the nation out of a recession.

Deloitte Access Economics’ latest budget monitor predicts a slightly better budget position than previously forecast, thanks largely to rising iron ore prices.

It estimates the federal budget will see an underlying cash deficit of $85.7 billion for the 2019-20 financial year, $198.5 billion this financial year, $45.1 billion in 2021-22 and $25.6 billion in 2022-23.

The report urges the Government to replace the Job Keeper wage subsidy with another temporary wage subsidy focussed on adding new jobs.

It suggests boosting the level of spending in the economy via infrastructure and social housing and providing higher welfare benefits for the unemployed and elderly.

And it calls on the Federal Government to bring forward its personal income tax cuts, adopt a business investment allowance and delay the legislated rise in compulsory superannuation.

The report’s lead author, Deloitte Access Economics partner Chris Richardson, said many people were too focused on worrying about the cost of state and federal government policies introduced to fight the virus, rather than the need to do it to save lives.

“The budgetary impact of the fight against the coronavirus will have a rather smaller impact on the Australia of the future than many expect,” Dr Richardson said.

“There’s a lot worth worrying about amid a pandemic, but too many people are worrying rather too much about the cost of protecting our livelihoods at the same time that we’re protecting our lives.”

Call to bring forward personal income tax cuts

On Friday, Treasurer Josh Frydenberg unveiled the final position of the federal budget after the 2019/20 financial year.

He said the underlying cash balance was a deficit of $85.3 billion, or 4.3 per cent of GDP, compared to the forecast surplus of $5 billion, or 0.3 per cent of GDP at MYEFO.

As the budget faces greater pressure, a number of groups have been calling on the Morrison Government to dump the later stages of its legislated personal income tax cuts, arguing it benefits higher-income earners and support should instead flow to people who need it.

Dr Richardson said doing that would be “downright dumb” and called for the tax cuts to be brought forward.

“The personal tax cuts have had terrible press, seemingly seen as the spawn of Satan,” he said.

The Morrison Government’s personal tax cuts were legislated in three stages:

  • The first stage, which began in mid-2018, gave a tax cut of up to $1,080 a year (increased from $530 the year before) to low-and-middle-income earners using a tax offset. The $87,000 threshold under which the 37 per cent tax rate applied increased to $90,000.
  • Stage two begins on July 1, 2022, increasing the top threshold of the 19 per cent tax bracket from $37,000 to $45,000 and raising the low income tax offset from $645 to $700, while the $90,000 threshold under which the 37 per cent tax rate applies increases to $120,000.
  • Stage three is scheduled to begin in July 2024, removing the 32.5 per cent and 37 per cent bracket and applying a 30 per cent rate to all earnings between $45,000 and $200,000.

Treasury modelling showed that by the time the legislated cuts to personal income taxes are fully implemented in 2024-25, they would have made little change to the share of wage and salary income paid.

“The shares of tax paid by the top 1 per cent and the top 5 per cent of taxpayers will go up a little, while the share paid by the top 10 per cent and top 20 per cent will go down a little,” Dr Richardson said.

If both phase 2 and 3 of the tax cuts were brought forward (and the existing low and middle income tax offsets are removed one year early) Mr Richardson estimated it would come at a cost of $21.0 billion in 2021-22, $14.8 billion in 2022-23 and $15.4 billion in 2023-24.

With no wage rises, people avoid ‘bracket creep’

Additionally, those Treasury numbers assumed rising wage growth — which typically pushes people into higher tax brackets.

But the effect of higher wages pushing people into higher tax brackets — known as bracket creep — has been muted because of the COVID-19 crisis.

“Bracket creep is much less creepy than it used to be,” Dr Richardson said.

“The collapse in wage growth now underway means the taxman’s usual ‘stealth tax’ will be in the slow lane in the next few years.

“And now the coronavirus crisis has knocked the stuffing out of wage growth — which means it has also knocked the stuffing out of bracket creep.”

He said the arrival of the second phase of the tax cuts would leave families paying $7.7 billion less in taxes than if the 2014-15 tax system had been indexed over time.

And the third phase of the tax cuts would leave families paying a little over $20 billion less in taxes than if the 2014-15 tax system had been indexed over time.

“In other words, tax cuts designed to combat bracket creep look like overachieving, because the collapse in wage growth has slowed bracket creep,” Dr Richardson said.

He said if the tax cuts were brought forward in the October 6 federal budget, this could be the “cherry on top” of other stimulus measures that were also needed.

Will our economy grow the other side of COVID-19?

Federal policies to fight the COVID-19 crisis have come at a cost of more than $200 billion.

Dr Richardson estimated the impact of the lost tax take because of the weaker economy on federal net debt in 2022-23 would be $401 billion worse than Treasury had been projecting.

But he said while debt has gone up, interest rates have gone down, and the cash cost of interest paid by the government would be lower.

He said the government was expecting interest costs to fall by about $4 billion in 2022-23, but Deloitte expects it will be $2.4 billion lower in 2022-23 than it was in 2018-19.

“That gap — $1.6 billion in 2022-23 — is the equivalent of an ongoing cost to the average taxpayer of just $2.66 a week,” he said.

“For not much more than the cost of a sausage sandwich at Bunnings, that may be the biggest bargain you’ll ever score.”

Dr Richardson said Australia’s economy will grow again on the other side of the war against COVID-19.

In the meantime, he suggested the Government introduce an investment allowance for companies, what he dubbed “the poor man’s version of a company tax cut”.

Deloitte Access Economics had advised stakeholders on the impacts of such an allowance, he said, noting it had been used by both sides of politics in the past.

“Prior schemes have generally applied only to plant and equipment, or in specific circumstances such as dealing with the effect of drought on farmers,” Dr Richardson said.

“The introduction of a permanent investment allowance would be aimed at encouraging additional business investment via increasing the after-tax return on new investment.”

Another debate is whether Australia should go ahead with the scheduled increases in compulsory super, taking it from its current 9.5 per cent to 12 per cent by 2025.

Dr Richardson said it would not be a bad idea to delay or abandon the super guarantee increase until wage growth rises above 3 per cent or unemployment returns to 5 per cent.

By business reporter Nassim Khadem (Original ABC Article)