It’s clear income tax cuts are coming in the federal budget for lower and middle-income households, but their scale remains unclear.
Already Scott Morrison has had to fend off suggestions that income tax cuts would be just enough to buy a “burger and a milkshake”.
Here’s what he said yesterday in a TV interview:
For a start they would be referencing back to something many, many years ago at a time when tax cuts were being handed out a lot more often, one. Two, it’s been a long time since there has been some real relief in this area. And, if they were to make that observation then it would be very hard to say that the Government is being irresponsible at the same time. You can’t have it both ways. What we have always said is that we would provide tax relief that is affordable and responsible. So, I’m not going to pretend that these are going to be mammoth tax cuts, or anything like that, that wouldn’t be responsible. They will be what is affordable, they will be real and they will be within what the Budget can afford.
The Coalition needs to be careful that what it positions as “relief for households” is not so small as to make it meaningless. The problem is that income tax is such a vast component of federal revenue that even small adjustments to tax rates have huge, multi-billion dollar ongoing cost implications. Look:
The malaise in Australian households is not just a political problem, but an economic one. The Reserve Bank of Australia continually refers to the uncertainty for the household sector, with wages growth struggling to keep pace with inflation and household debt at record levels. Household stimulus won’t just be welcomed by voters, but if there’s enough of it, it has the potential to send a positive pulse through the economy by lifting family spending.
One way to offset the perception that reductions in the income tax rate result in such a small dollar impact as to be effectively meaningless to households would be through a one-off payment — an idea floated by the Goldman Sachs Australian economics team led by Andrew Boak.
To be clear, great uncertainty remains and near term stimulus for Australian households could take many forms – beyond changes to taxation rates. For example, we would not be surprised if the government’s near term strategy was to provide households with some sort of one-off compensation payment for rising living expenses in a period of low wage growth. This would potentially deliver a more immediate boost to both income and consumption ahead of the election.
The benefit of this approach is while revenues have been surging, some of it appears cyclical, particularly with commodity prices and job creation running head of Treasury’s assumed levels over the past year. A one-off payment would redistribute some of that sugar hit but, of course, come at the cost of pushing out the return to surplus.
And at a political level, that pulse would serve to underpin the government’s narrative around economic growth.
Even if a one-off payment doesn’t materialise, Boak and his colleagues Bill Zu and William Nixon suggest it’s worth being on the lookout for a few avenues to provide relief to households:
… what is clear is that any surprises for households are more likely to be positive ones than negative ones – and this is quite a shift from the experience of recent years. There is no escaping that the narrative for households over recent years has been characterised by negative headlines on tax increases (including a temporary deficit levy, increase in the Medicare levy, flood levy, reintroduction of fuel excise indexation, bank levy, reduction in concessional rates for superannuation contributions, and the threat of a GP co-payment), “bracket-creep”, a wind-back in “middle class welfare”, and the risk of a sovereign rating downgrade. In turn, just as the government’s 2014 push to “end the age of entitlement” contributed to a persistent weakening in surveyed consumer sentiment, it is quite possible that household-friendly policies in the FY19 Budget deliver a material tailwind in 2H2018 to already improving sentiment and consumer spending.
We’ll find out when the Treasurer gets to his feet tomorrow night at 7.30pm.
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