The Coalition’s promised “speed limit” on taxes has been set high enough that it can be met without offering any new tax cuts at the federal election, as a prominent economist accuses the opposition of a “shallow” economic policy offering.
Angus Taylor on Monday restated his party’s commitment to limit the amount of federal taxation to 23.9 per cent of the size of Australia’s economy.
“[We] must restore a tax-to-GDP cap and fiscal guardrails to reduce wasteful spending,” the shadow treasurer said.
That figure, a longstanding Coalition budget rule, is based on the average rate that has prevailed since the Howard government. It has never been exceeded since that time and budget papers project it will not be breached over the next four years.
That means the Coalition can commit to a 23.9 per cent limit without needing to provide any costed policy for tax cuts in the election campaign, something Mr Taylor previously suggested he would do but which Peter Dutton had since poured cold water on.
“It depends really on where the figures are, and we’ll get more detail in the budget,” the opposition leader told reporters on Monday.
“What we don’t want to do is fuel inflation … So if we can afford to do tax cuts, we will, but it will depend on how much money is in the budget.”
Labor did away with the 23.9 per cent limit, which Treasurer Jim Chalmers calls “arbitrary”, but has nonetheless stayed beneath it.
Federal tax hit 23.8 per cent of GDP in 2022-23 but fell with the introduction of the stage 3 tax cuts, and it will rise no further than 23.5 per cent over the next four years, according to the latest budget forecast.
Treasurer Jim Chalmers will deliver the last budget of this parliamentary term next week. (ABC News: Mark Moore)
The budget’s less precise medium-term projections suggest the figure will creep up to 24.5 per cent by 2034-35, but by convention this assumes no further tax cuts over that period, which history suggests is extremely unlikely.
The Coalition’s commitment to 23.9 per cent amounts in practice to a promise for tax cuts at some point over the decade, but without details about what form they would take.
Mr Taylor said Labor had “broken every promise on tax it made before the last election, and hard-working Australians are paying the price… Labor abolished the tax cap in its first budget, the Coalition will restore it”.
Mr Chalmers said Mr Taylor had “a lot of nerve talking about the tax cuts when [he] tried to prevent 3 million people getting the tax cut that Labor is delivering”, a reference to the Coalition’s short-lived objection to Labor’s redesigned stage 3 tax cut.
Eslake says Liberals ‘shallow’ on economic policy
Economist Saul Eslake said a 23.9 per cent limit was “entirely arbitrary” and would not address the imbalance between tax revenue and the pressure on the government to spend.
“It has been clear since the last Morrison government budget that spending as a proportion of GDP is going to be 1.5—2 percentage points higher than the average from 1975 to 2019,” he told the ABC.
Federal spending is set to hit 27.2 per cent of GDP next financial year, the highest level seen for 40 years apart from during the pandemic.
“It’s very clear that the public wants more spending on health, aged care, disability care and probably child care as well, and any party that says it’s not going to meet those expectations is not going to be in government,” Mr Eslake said.
“There is also a bipartisan consensus that, whether the public want it or not, they’re going to get more spending on defence.
“Unless we want to leave the cost of all that spending on future generations, we need to have what some people call an adult conversation with the electorate about how to raise additional revenue in the least economically damaging or fairest ways.”
Mr Eslake said both parties were avoiding this question.
“The fact that the best [the Coalition] can come up with is an arbitrarily chosen number from a period that is receding into ancient history, it just shows you how shallow they are and how little thought they are really putting into remedying Australia’s fiscal challenges.”
Economist Saul Eslake says the Coalition is not thinking deeply enough about the budget’s structural challenges. (ABC News: Owain Stia-James)
He said he was not critical of Labor for shirking tax reform in its first term, having dropped it from the party’s platform after a range of tax policies were rejected in the 2019 election, but he said it should show more ambition this time.
“I don’t have any sense the government is planning to go to the people asking for a mandate to reform the tax system,” he said.
ANU economist Kristen Sobeck said the appropriate level of taxation was “for the public to decide”, but that it was more urgent to change the mix of Australia’s tax collection, rather than the amount.
“The composition of how we pay for things is just not sustainable,” she told the ABC.
“No matter what level we set it on, if we continue on with this excessive reliance on personal income tax and also corporate tax, it just doesn’t work.
“At the moment, it’s really 30, 40 and 50-year-olds who are paying the majority of income tax, and they’re going to get smaller as a percentage of the population.”
Dr Sobeck said taxing land more heavily instead of incomes would be more equitable, more efficient and good for Australia’s productivity, but it was not part of the political discussion because it was “political suicide”.
Kristen Sobeck says tax reform to reduce our reliance on income tax could have benefits for equity, efficiency and productivity. (ABC News: John Gunn)
“Tax reform would be a win on efficiency, a win on equity, a win on productivity, so there’s a lot of wins. Usually we think of those things as a trade-off, but Australia’s case is a bit of a unicorn. It’s just that would be incredibly unpopular.”
Labor likely to avoid budget surprises amid global turmoil
Labor appears likely to avoid substantial new tax policies in next week’s federal budget, which Labor source said would have “fewer surprises”.
Instead, the treasurer will use a speech to the Queensland Media Club on Tuesday to highlight Labor’s existing spending promises, including its $8.5 billion expansion of the bulk-billing incentive, $7.2 billion for the Bruce Highway, and several billion dollars to prop up the Whyalla Steelworks.
Mr Chalmers will frame the budget in the context of global uncertainty, saying the Trump administration’s trade policy has brought “seismic” and “self-sabotaging” changes with a “manageable” but noticeable effect on the Australian economy.
“Even in the most benign scenario, global growth over the next three years is expected to be its weakest since the 1990s,” he is expected to say.
