Welcome to Eureka Street

back to site


Tax cuts good politics, but not good policy

  • 12 May 2018


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.

Increased 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