26 September 2023

Election race tax promises

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Stephen Koukoulas* says Morrison’s promise of no new taxes only sounds good if people want essential services cut.

The Morrison Government has made a pledge not to introduce any new taxes or to increase the tax rate on existing taxes if it wins the May 21 federal election.

In a classic example of politics swamping good economic policy, this pledge will make it difficult, if not impossible, for any future Morrison government to fund the growth in essential services in health, aged care, education, disability services, defence and infrastructure, all of which are seeing strong cost increases.

It also means the Morrison Government has given up on budget repair, which is a troubling issue when its own budget papers are showing Australia to be on track for 20 consecutive years of deficits, which will see government debt hit close to $1.2 trillion by the mid-2020s.

Indeed, the latest figures on the Budget show substantial deficits every year through to 2032-33 because of a shortfall in revenue to the government relative to the growth in government spending.

It seems obvious, but budget repair happens by allowing tax revenue to grow more rapidly than the growth in government spending.

With the economy running along at a solid pace of growth, the unemployment rate about to test a 50-year low below 4 per cent, and inflation accelerating to be well above the RBA’s 2-3 per cent target band, repairing the Budget should not only be relatively easy, but a policy priority.

The voters show quite clearly that they insist the Government provide a good base level of services.

This is being highlighted through the experience of the COVID pandemic, where the Government has supported the economy and society in difficult times.

No one likes to pay too much tax

It is easy to understand why there are no major promises of new taxes or increases in existing tax scales, other than the push to get large multinational companies to pay some tax on the revenue and profits they make in Australia.

The 2019 election campaign provided a lesson on tax.

Labor’s plans in 2019 to end franking credits – which impacts only 3 per cent of taxpayers – and to adjust the negative gearing rules to limit the distortions this policy creates in the housing market, were seen to be a factor behind its unexpected loss.

While both policies were set to add to the efficiency in the economy, were fair and equitable and collected revenue to allow for an increase in spending in services and to reduce the budget deficit, voters tended to shy away from the reforms.

Tough decisions ahead

Whichever side wins the election, it is imperative the budget position and tax policy is examined.

This is why Morrison’s promise of no new taxes is unhelpful and, frankly, poor policy.

Reforming the way tax is collected, who pays it and how much is collected are fundamental to judging the efficiency of the tax system.

Whether Labor or the Coalition win the election, the departments of Treasury and Finance will be telling the Government the budget is in fragile shape, a concern made all the more problematic with the sharp rise in government bond yields – the interest rate the government pays on its ever-growing debt.

This means Morrison will have to ditch his ‘no new taxes pledge’ or will have to impose serious cuts to the Budget’s big-ticket items to get it towards a surplus.

Labor has not fallen for the trap of making irresponsible promises on revenue.

But, should it win the election, Shadow Treasurer Jim Chalmers has pledged to introduce a Labor budget before year’s end.

This would be a wonderful opportunity to trim poorly structured and targeted spending currently embedded in the Budget and to look at the revenue side to see if there are some low-hanging tax changes that can be tweaked in the huge task of budget repair.

Either way, promises of no new taxes are lame economics and will be meaningless in a climate of perpetual budget deficits and ever-rising government debt.

If you want a world-best Medicare system, good aged and disability care, decent roads and realise defence spending needs to be elevated for many years, you just have to realise that to pay for it and balance the Budget, more tax will need to be paid.

*Stephen Koukoulas is Managing Director of Market Economics as well as being a Research Fellow, Per Capita.

This article first appeared at au.finance.yahoo.com.

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