It looks like Bill Shorten and Labor are preparing a bold budget strategy

Photo by Lisa Maree Williams / Getty Images

In early May Scott Morrison will be announcing a dramatically improved budget profile that will leave room for personal income tax cuts while still returning the budget to surplus in around three years.

The money is coming from a combination of spending restraint and higher-than-expected tax receipts, mainly from company taxes and helped by strong export prices.

This year’s federal budget will be a big one, laying the groundwork for the next election and challenging Labor to oppose likely income tax cuts to households that badly need relief from the rising costs of essentials that are chewing up their family finances.

Now it looks like Bill Shorten is ready to have something to say in response.

Today he’ll announce a dramatic plan to kill off cash rebates under the dividend imputation rules to shareholders, a measure largely targeted at retirees.

Dividend imputation allows salary earners to reduce their tax liabilities on dividend payments, but in cases where the person has a very low income — as in the case of a retiree — the tax credits mean they end up being owed money — a cash payment — by the ATO. Labor calculates the average value of this at about $4,800 on average.

On average. Some people with big portfolios stuffed with high-dividend-paying stocks will lose a lot more.

This will enrage some retirees. But Shorten knows most of them probably don’t vote for him anyway.

Labor’s calculations are that the measure will affect around 1.2 million individuals and superannuation funds, including 200,000 self-managed super funds. Dividend imputation tax credits for most people will continue — it’s just the cash rebates Shorten is planning to end.

Labor says killing off the cash rebates will save the budget $5.6 billion in 2020. Given the budget is likely to be on track to be close to a surplus by then, Shorten and his shadow treasurer can plan to spend a lot of it and still balance the budget.

Over 10 years it saves nearly $60 billion. This gives Labor a way to do something on income tax reduction and even on company taxes, if they choose, while keeping the budget on track.

Treasurer Scott Morrison has already telegraphed how he’s going to respond.

“Labor’s latest tax hike is a $59 billion slug on more than 1 million pensioners, retirees and low income earners who will get taxed twice by Labor on what they earn from investing their hard earned savings,” he tweeted this morning.

The budget battle is joined.