MICHAEL KEATING Why Labor should oppose Morrison’s tax cuts

Labor should oppose the second and third round of the Government’s proposed tax cuts which only take effect after the next election. The future is too uncertain to lock-in these tax cuts now. Furthermore, reasonable projections raise strong doubts whether they can be afforded, and they do not represent the best way to increase economic growth.

The Government’s tax plan is:

  1. From 1 July middle-income earners with a taxable income between $48,000 and $80,000 per year will have their tax reduced by $1080 for the 2018-19 financial year and thereafter, with smaller tax savings for those earning between $25,000 and $48,000, and between $80,000 and $126,000.
  2. From 1 July 2022 (after the next election), the top threshold of the 32.5 per cent tax bracket will be increased from $90,000 to $120,000.
  3. From 1 July 2024, this top threshold of the 32.5 per cent tax bracket will be further increased from $120,000 to $200,000, and the 37 per cent tax bracket will be removed completely.

Labor at this point is only committed to support the first tranche of this tax plan. The benefits from the second and third tranches flow entirely to the taxpayers in the top income decile.

There are obvious equity reasons for opposing this deliberate attempt to make the income tax scales less progressive. But there are also very good reasons to question whether this biased tax reduction can be afforded and whether it is good for the economy.

Are the second and third round of the Morrison tax cuts affordable?

Forecasting the future is always uncertain, and arguably too uncertain more than three years ahead. That in itself is a good reason for opposing the Government’s intention to legislate the second and third tranches of its proposed tax cuts this early.

Furthermore, there are good reasons for believing that the Government’s Budget projections are far too optimistic.

First, the official forecasts for economic growth have consistently proven to be over-optimistic in recent years. They continually assume that the rate of wage and economic growth will pick up over the next twelve months and then recover past shortfalls.

Thus the latest official revenue projections, released in the Pre-election Economic and Fiscal Outlook (PEFO) just before the election, are based on an optimistic projection for the rate of economic growth for 2019-20 and a return to close to past rates of growth in the following years. Already the Reserve Bank (RBA) has revised down its forecast for economic growth in 2019-20 by almost half a percentage point compared to the PEFO forecast, although we don’t know what the RBA’s thoughts are about the later years.

In my view a more realistic projection of nominal GDP would result in a total shortfall of budget revenue of $20 billion over the next four fiscal years compared to the PEFO projection (see Appendix).

Second, as I have previously argued (Pearls & Irritations, 14 May and 20 May), the official projection of an annual average increase of only 1.3 per cent in real government outlays over the next four years is unrealistically low. It would mean a decline in expenditure per citizen and is half a percentage point lower than the average annual 1.8 per cent real rate of growth in government outlays that this Government maintained in its previous two terms of office. Already this previous fiscal restraint, with outlays growing by less than GDP, has led to service deterioration and increasing numbers of low and even middle-income people missing out on services because they cannot afford the higher co-payments now demanded.

Instead, I suggest that a more reasonable projection of future government outlays would assume no less than a continuation of past restraint, rather than an unspecified and unlikely further tightening (see Appendix for details). Even assuming this tight expenditure restraint, however, my alternative projection shows an increase in payments over the next four years that totals to $25 billion more than the Government is allowing for.

Combining my alternative projections for Budget revenue and payments, there would still be a Budget surplus over the three years of the first round of tax cuts. Accordingly, against this measure this first round of tax cuts might be deemed affordable. In the fourth subsequent year, however, with the start of the second round of the Government’s proposed tax cuts, this surplus disappears. Instead, the underlying cash deficit on the Budget in 2022-23 is projected to be around $4.5 billion. This Budget deficit would also certainly increase further if the third round of tax cuts were introduced as planned in 2024-25.

The impact on economic growth

The Morrison Government argues that its tax cuts will promote faster economic growth and that is why they are justified. My objection is that the reason for Australia’s economic stagnation – and that is what we have been experiencing under this Government – is that wage growth is too low to sustain an adequate increase in aggregate demand (see Pearls & Irritations, 15 May and 27 May). As the second and third tranches of the Government’s tax cuts are firmly targeted at the top decile in the income distribution, they cannot really be expected to augment aggregate demand.

Instead further tax cuts would be better targeted at low to middle-income earners if the aim is to stimulate economic growth. But even better would be to invest in preparing workers to adjust to the technological changes that have been hollowing out the middle-level jobs. It is this impact of technological change on the labour market that is the most significant reason for the low wage growth and the failure of aggregate demand to grow consistent with maintaining past rates of economic growth.

Conclusion

While of course it is possible to play with the assumptions, I contend that any reasonable projection will show that the Government’s second and third round of tax cuts are not compatible with its promise to return and maintain budget surpluses. In addition, these later rounds of tax cuts are not directed to dealing with the underlying causes of the economic stagnation that Australia – like other advanced economies – has been experiencing for some years now. Instead, if the Government is serious about promoting stronger economic growth it would be focussing on the low rate of increase in the incomes of low and middle-income households, and how they might be best assisted to move into the better jobs that can be created.

Appendix: Alternative Budget Projections

The Table below compares the Government’s economic and fiscal projections with my alternatives. Although all projections of the future are inevitably uncertain, I would contend that my projections are the more reasonable. At the very least, what my alternative projections illustrate is the sensitivity of the Government’s Budget surplus to very small variations in key variables.

As shown in the Table below, my alternative revenue projection, presumes:

  • a slightly lower rate of economic growth – only a quarter of a percentage point less per annum, and
  • maintains the same ratio between revenue and nominal GDP as projected by the Government.

Second, as shown in the table below, my alternative expenditure projection reflects:

  • a modestly higher level of payments in 2019-20, and in the following years real government expenditure increasing at the same average annual rate as the Coalition Government has achieved since 2014, and
  • an increase in the price deflator for government services that is the same as projected in the official projections.
PEFO Projections
Alternative Projections
2018-19
2019-20
2020-21
2021-22
2022-23
2018-19
2019-20
2020-21
2021-22
2022-23
Nominal GDP growth %
5
5
3
Receipts % of GDP
25.0
25.2
25.1
25.4
25.0
25.0
25.2
25.1
25.4
25.0
Total receipts $b
485.2
505.5
522.3
551.0
566.9
485.2
503.3
517.3
545.5
559.4
Payments real incr. %
4.9
0.1
1.3
1.9
2.0
4.9
1.0
1.8
1.8
1.8
Payments price incr. %
2.1
2.3
2.3
2.5
2.1
2.3
2.3
2.5
Total payments $b
482.8
493.3
511.3
533.2
557.7
482.8
497.8
518.5
540.2
563.9
Net Future Fund earn
6.6
5.1
na
na
na
6.6
5.1
na
na
na
Underlying cash bal. $b
-4.3
7.1
11.0
17.8
9.2
-4,3
0.3
-1.2
5.3
-4.5
print
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4 Responses to MICHAEL KEATING Why Labor should oppose Morrison’s tax cuts

  1. Jocelyn Pixley says:

    I agree because Labor will be forever tainted if it passed that bill, one which promises a non-existent trickle-down effect. Pre-election, Keating did threaten to pass the GST, but Shorten did not threaten to pass the top-end tax cuts (to the best of my knowledge).

    As well, it looks like the in-coming Morrison government can pass its legislation without Labor or Greens help. I suggest both parties stare it down with integrity, by not passing such a disaster.

  2. Jaquix Deacon says:

    I found this article very easy to read, explained clearly, and authors obviously crunched the numbers himself. The govt of course is hellbent on pleasing “the base” rather than what would be far better for the economy.

  3. Agree with this for the reasons stated by the author plus the need for the
    ALP not to appear to be drifting back to a “third way” attitude.

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