Did you hear the news? It’s a budget miracle. Remember all the worry about debt and deficit? Gone. Not a problem. Disappeared. Or, better word – evaporated.
In recent months, revenue has started pouring into the government’s coffers.
According to Chris Richardson, a leading economist from Deloitte Access Economics, the budget’s “rivers of gold” are flowing again. The improvement in the budget has been “humungous”.
And though this year’s budget is still a week away, Treasurer Scott Morrison isn’t denying it.
This time last year, he was telling us another 0.5 percentage-point increase in the Medicare levy – costing about $425 a year to someone on average earnings – was vital to cover the ever-growing cost of the National Disability Insurance Scheme.
Now, however – and thanks to the unexpected miracle – Morrison tells us it won’t be needed.
And far from putting taxes up, he’s discovered there’s room to put them down. The budget will deliver “tax relief to put more money back in the pockets of middle to lower income Australians to deal with their own household and family budget pressures”.
But please don’t think of ScoMo as Santa. Apparently, these tax cuts won’t be humongous. They’ll be quite modest, but they’ll build up over 10 years.
Whether the next election is held this year or in the first half of next year, next week’s budget is safe to be the last before that election.
And there’s little doubt about the ground on which Malcolm Turnbull hopes to fight it: which would you prefer, the tax-cutting, low-taxing Coalition, or tax-raising, high-taxing Labor?
It’s true – sort of. Labor has announced plans to increase tax collections by clamping down on negative gearing and reducing the discount on capital gains tax, by taxing family trusts as companies, by abolishing cash refunds for unused dividend imputation tax credits and by restoring the Coalition’s budget repair levy of 2 per cent of income exceeding $180,000 a year.
As well, Labor wouldn’t proceed with the Coalition’s plan to cut the rate of company tax for big business.
Gosh. But it’s not that simple. Labor does have plans to raise government spending, but these tax measures leave it plenty of scope to offer its own tax cuts to low and middle income-earners. So it plans to raise the taxes mainly of better-off taxpayers, while cutting tax for everyone else.
The main question is whether Labor will content itself with matching Turnbull’s tax cuts, or up the ante.
If all this is sounding too good to be true, it is. Our problem with deficit and debt hasn’t suddenly gone away. What’s departed is the government’s worry about it.
So we seem about to conduct an election in cloud cuckoo land. Let’s forget our financial troubles and have a tax-cut bidding war. Won’t that be a nice change. (And not to worry, we’ll come back to earth after the election. Mind the bump.)
It’s true there’s been a significant unexpected improvement in tax collections, but much of that’s likely to be a one-off.
It still leaves the budget in deficit this financial year and the coming one, plus the year after, so we return to a paper-thin surplus in 2020-21, as long promised. We still face the prospect of 12 budget deficits in a row, with the net public debt peaking at a bit less than $365 billion, and an annual interest bill of up to $15 billion.
And don’t get the idea that once we finally get back to surplus we’ll be right, with annual surpluses gradually paying down the debt. In his book, Fair Share, written with Professor Stephen Bell, the former top econocrat Dr Michael Keating reminds us that, on the government’s own projections, the budget is likely to stay in surplus for only a few years before falling back into ever-widening deficit.
Although the present deficit is equivalent to less than 1 per cent of gross domestic product, the projections from the Intergenerational report of 2015 see it rising inexorably to 6 per cent – about $108 billion in today’s dollars - over the following 40 years.
Why? Because government spending is almost certain to continue growing strongly, for several reasons. Because of the ageing of the population – the number of retirees is growing much faster than people of working age. Because our demand for more spending on health and education is unlikely to abate. And because, with all its additional benefits, new medical technology gets ever more costly.
To be sure, the projections assume that, within a few years, total federal tax collections are capped at 23.9 per cent of GDP. Take away that cap and the growth in the deficit would be much more manageable.
But that’s the point. With the public’s unquenchable demand for more health and education – and our refusal to countenance major cuts in spending being the sorry story of the Abbott-Turnbull government – taxes must continue to rise. Unless we want to stay in a world of ever-rising public debt.
Remember that in the weeks ahead. The tax-cut bidding war the two sides are about to stage will be for their benefit, not ours. A terrific party, with a bad hangover, intended to distract us from the harsh truth that what we want has to be paid for, one way or another.
