Prime minister Malcolm Turnbull says he is working on a plan to deliver income tax relief to Australian households.
In a speech to the Business Council of Australia, Turnbull said that “just because we’re in challenging fiscal times doesn’t mean we should raise the white flag on making the tax system better”.
He added that “in the personal income tax space, I am actively working with the Treasurer and all my Cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus.”
In September, Treasurer Scott Morrison said the federal government’s final cash deficit for 2016/17 was $33.2 billion — $4.4 billion less than the $37.6 billion forecast in May. This is largely because economic growth has been running marginally ahead of Treasury forecasts, and although iron ore prices have fallen significantly this year they remain above the levels factored into federal revenue.
The government will unveil the mid-year budget update in the coming weeks, and it is expected to show a continuing pace of repair that is slightly better than expected. This gives the government room to deliver tax cuts.
The Turnbull government has made some limited moves on income tax, lifting the second highest income tax threshold from $80,000 to $87,000 earlier this year. But Turnbull now appears to be laying the groundwork for a significant reduction in taxation rates that would free up more money in household budgets.
“My commitment to all Australians is this – whether you’re starting out in your first job, whether you are a worker providing for your family, or a business hiring staff, our goal is always to leave more money in your pocket, not in ours,” Turnbull said.
“Higher taxes penalise people who are trying to get ahead. But when you reward hard work and enterprise, you encourage hard work and enterprise.”
The pressure on Australian households is becoming one of the most important themes in the Australian economy. This month, the RBA, in its monthly statement on interest rates, made special mention of the pressures on households, saying that household consumption levels were “one continuing source of uncertainty”.
“Household incomes are growing slowly and debt levels are high,” the RBA said.
Consumption — largely driven by household spending — makes up for just over half of Australian GDP, so weak activity levels can pose significant risks to economic growth. Monthly retail sales data since the middle of this year has continued to surprise economists by how weak it has been, reflecting pressures on household budgets.
Commonwealth Bank chief economist Michael Blythe likes to explain that there are only four channels for adjusting household incomes: wages, interest rates, taxes and social welfare payments.
Wages growth remains extremely weak and running in line with inflation. Interest rates look like they are on hold for the forseeable future. The government has been looking to reduce its social welfare bill.
That leaves taxes.
With the budget in better shape than the government has predicted — thanks to some sensible forecasting and little income tax relief — it might finally be time for Australians to catch a break.