Tax cuts good politics, but not good policy

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All that was missing from last week's federal budget was the sounding of the starter's pistol for the upcoming election race. Treasurer Scott Morrison has crafted a narrative aimed at convincing the public that another term of Coalition rule will bring with it increased prosperity.

ScissorsIncreased investment in infrastructure and in home-based aged care services is important, but has been somewhat overshadowed by the promise of tax cuts. Tax relief for middle-income Australians might be good politics, but will this decision prove to be good policy?

Accompanying the promise of tax relief was a commitment by the Treasurer not to grow taxes beyond 23.9 per cent of our economy. Setting limits on government revenue might make for a good sound bite, but it comes at a cost.

The government's proposed tax cuts will create long-term structural changes to government revenue sources, which may eventually prove to be economic folly in future-proofing Australia against global economic shocks, and in dealing with current unmet needs of poor and vulnerable Australians.

At a recent Senate economics hearing into the government's proposed corporate tax cuts, Business Council of Australia CEO Jennifer Westacott pointed to Treasury modelling that showed that the proposed corporate tax cuts would deliver about a one per cent lift in Australia's GDP, or around $180 billion over a ten-year period.

Put another way, the $65 billion cost in lost revenue would deliver a $180 billion lift in GDP. On these numbers, one could argue this is a wise investment; for every dollar foregone in corporate tax revenue GDP improves by $2.77. Should the Treasurer hold to his maximum tax to GDP ratio of 23.9 per cent then the additional revenue brought into the tax base due to increased GDP would be $43 billion, some $22 billion less than what the government has shelled out in tax cuts.

Adding further pressure on future funding of government service comes the proposed personal income tax estimated to cost government revenue somewhere in the order of $140 billion over ten years. Combined, the Coalition government intends to forego some $200 billion in revenue over ten years. That is almost ten years of funding for our public hospitals or around five years of funding to assist families and children.

 

"The reality is likely to be very different, resulting in Australians having higher out-of-pocket expenses for childcare, school fees and visits to the GP or further cuts to government-funded services and support."

 

As our population increases and gets older the demand on government services will also inevitably rise. The only way a sitting government can reconcile the difference between increased demand for services and the structural adjustment to its revenue base is to assume that the GDP uplift resulting from the tax cuts and infrastructure investment will be sufficient to fill the revenue shortfall.

The reality, however, is likely to be very different, resulting in Australians having higher out-of-pocket expenses for childcare, school fees and visits to the GP or further cuts to government-funded services and support.

Opposition Leader Bill Shorten responded to the budget with his own suite of new measures, most notably bigger tax cuts for low- and middle-income earners, which would cost the budget a further $5.8 billion over three years. He, like Morrison, has ignored the most marginalised in our society — those required to live on Newstart and other welfare payments.

Commentators have rightly nailed him for this glaring omission. Cost of living pressures don't disappear when you are on welfare; they only get worse.

Governments should never tax more than they need. However, they have a duty to act in the interests of all society, not just those who voted for them. To implement tax cuts at a time of record government debt, a budget deficit and woefully low welfare payments is wrong.

If the recent increase in revenue is burning a hole in the government's pocket, then it has open to it a suite of other options that would both provide relief to households and stimulate economic activity such as lifting Family Tax Benefits and increasing pensions and Newstart payments.

Such measures properly targeted will deliver increased economic activity and improve conditions for local businesses. While such measures can add to the structural costs of government, increases to something like Family Tax Benefits might be only temporary until businesses deliver proper wage growth for their workers.

Unfortunately, this budget will go down as another missed opportunity to find a middle path that balances the needs of those excluded or hurt by our economic policy settings with those served well by it.

Many will view this budget as a positive platform from which the Turnbull government will launch its next election campaign. In truth, it is a budget of good politics rather than good policy.

 

 

Joe ZabarJoe Zabar is the Director of Economic Policy for Catholic Social Services Australia and author of An Economy that works for All.

Topic tags: Joe Zabar, Budget 2018, welfare

 

 

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Existing comments

What our economy, society and pollies do not yet do is differentiate between income and wealth. It slugs the former and leaves most the the latter untouched. Good policy would encourage hard work, talent and entrepreneurship by limiting anyone`s income tax to say 30%, and company tax to say 20%, but then tax houses, where most of out wealth is currently lodged and cannot be avoided easily. This could be introduced gradually and be very progressively designed. But it would provide the sort of tax income to really look after the less well of as well as pay of our debts and control the inequitable aggregation of huge wealth by a small minority. If we are not radical and exciting in our national approach we are going to hit the political wall.
Eugene | 15 May 2018


Joe, A Federal government that issues its own fiat currency under a free floating exchange rate can never run out of money. As long as there are idle resources in an economy like capital, plant, machinery, unemployed and underemployed people then deficits can continue and don't have to be funded by taxes. This is macroeconomic reality. Please study Modern Monetary Theory (MMT) which is now Macroeconomics 101
Wayne McMillan | 27 June 2018


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