A huge amount has been written about the 2018-19 Budget presented on Tuesday by Treasurer Scott Morrison as a 7 year plan to make personal income tax “lower, simpler and fairer” (see attached Morrison on Effect of Tax Cuts). But the proposed changes in the structure of the income tax system are not worth considering other than as possible thoughts for future budgets. There will be at least three more elections by 2025 and many thoughts raised or proposed about the structure. It is already apparent that the proposed changes in the tax treatment of those on high incomes will not get through the Senate and neither will the already proposed further reductions in company tax.
The proposed structural tax changes in this budget may, in part, be included to divert attention away from the absence of any significant changes in the levels of taxation and government expenditure included in the budget itself. The large proposed spending on infrastructure, of which Turnbull has sought to portray himself as instigator, does not impinge on the underlying cash result, which is estimated to now be in a miniscule surplus in 2019-20 (previously in 2020-21).
I wondered before the Budget was unveilled if it would meet the Coalition’s “small government” objective and suspected the widely foreshadowed reductions in taxes would be limited because of the failure of the Coalition to effect a more substantive reduction in the budget deficit of $48.5bn which Labor left it in 2013-14 and which was still at $23.6 bn (1.3 per cent of GDP) in the Mid-Year estimates for the current financial year (2017-18). I noted that expert analysts predicted that the reductions would likely be limited to only about $8bn, which would be a reduction of only about 2 per cent of total taxes.
In fact, the budget provides that, even after allowing for the much-flaunted income tax cuts, total individual income tax payments are estimated to increase by no less than 6.0 % in 2018-19. For the four years to 2021 the estimate of the cuts is only $11.6bn, which means that the tax cuts over those four years would only reduce the collection of income taxes by slightly more than 1 per cent from what they would otherwise be (for comparison, the estimate/projection of income taxes for the four years is now $954bn).
The cuts in total taxation over the four years are fractionally more than $11.6bn (see below the Tax Outlook published in Budget Paper No 1 for 2018-19). Overall, there is an increase in the proportion of national income (GDP) paid in total and income taxes. Total taxes and income taxes as a proportion of GDP are available from the budget papers as follows (income taxes in brackets).
2016-17 21.6% (11.0%)
2017-18 22.7% (11.2%)
2018-19 23.1% (11.4%)
2019-20 23.3% (11.4%)
2020-21 23.6% (11.8%)
2021-22 23.9% (12.1%)
The previous highest rate of total taxation was 24.3 per cent of GDP in each of 2004-05 and 2005-06, when the mining boom lifted incomes. The proposed maximum tax by Morrison is an arbitrary 23.9 per cent of GDP which, strangely, would allow for an increase in total taxes of 0.8% of GDP, or $17bn, between now and 2021-22.
Table 2 (below) reconciles the 2018-19 Budget estimates of tax receipts with the 2017-18 Budget and the 2017-18 MYEFO estimates. Since the 2017-18 MYEFO, tax receipts, including new policy, have been revised up by $8.2 billion in 2018-19 and $12.0 billion over the four years to 2021-22. Excluding new policy, tax receipts have been revised up by $8.0 billion in 2018-19 and $25.9 billion over the four years to 2021-22.
Expenditure and Net Debt
The foregoing assessment of the Budget in regard to tax cuts has similarities when the provisions for expenditure are examined. This shows that expenditures are estimated t o increase by 3.1 per cent in real terms in 2018-19, following an increase of 2.7 per cent real in the current year. In essence, spending under the Coalition government has been increasing at about the same rate as GDP since 2013-14 and hence has not shown any sign of reducing the size of government.
The forward estimates do provide for a slower growth after 2018-19, but the next election is likely to see a return to keeping pace with GDP. With revenues estimated to be higher than spending from 2019-20 on, there is an opportunity to start reducing net debt as the Howard-Costello government did (by 2005-06 net debt was almost zero and the federal government became a net assets holder).
Net debt increased under the Labor government from 2009-10 to about 13 per cent of GDP in 2013-14 and an estimated 18.4 per cent in 2018-19. It is now estimated to fall to 14.7 per cent in 2021-22, but that depends on lowering spending and/or saving more from collections of taxes.