Deficit levy: Government MPs openly question proposal to raise taxes for higher-income earners

Updated

Government MPs are starting to openly question the proposed deficit levy, urging the Prime Minister to focus on cutting spending rather than raising taxes and breaching the Coalition's election promises.

But Finance Minister Mathias Cormann says a tax increase on those earning higher incomes is necessary to ensure wealthier people pay their share of fixing the budget.

Liberal Senator Zed Seselja has rounded on the idea, saying he supports smaller government.

"I'm not a fan of a debt tax; I wouldn't want to see that kind of thing imposed," Senator Seselja told 666 ABC Canberra.

"I can understand why governments look at these sort of things, when you've got the kind of deficit that we've inherited, when you've got the kind of debt we've inherited.

"But what I don't believe ... we should be doing is adding another tax burden onto Australians. If you take a lot of money out of people's pockets through higher taxes or through a levy [it flows through to the economy] so that would be something I don't want to see.

"I think the Liberal Party should be a party that is about lowering taxes, not increasing them."

His criticisms are being echoed by Liberal Senator Cory Bernardi, who has emailed supporters warning of the "folly" of increasing taxes.

"A conservative government should be taking less tax from people and expecting them to be more self-reliant," he said.

"Taking more of their weekly wage will only act as a disincentive or make it even more unaffordable for people to do the right thing."

Senator Bernardi has told the ABC the deficit levy, which could be imposed on people earning above $80,000 per year, would be targeting the wrong people.

"A small fraction of taxpayers pay more in tax than they receive in benefits," he said.

"This levy appears to be targeting those who are already doing more than their fair share."

He also hit out at the Government's failure to rule out cuts to the fuel tax rebate for farmers and miners.

"We ran a campaign about reducing one tax that was only paid by a few mining companies, but now there's speculation the Government is about to increase the cost for every miner and every farmer in the country," he said.

The ABC understands Queensland Liberal MP Teresa Gambaro has requested more details from the Treasurer's office, which has not yet been received.

Another MP, who does not want to be named, has told the ABC they are willing to cross the floor on the debt levy if it becomes government policy.

Nationals MP John Cobb says he does not back the debt levy either.

"I personally don't like a debt levy, no," he told ABC News Online.

"The issue for me is that I don't like levies coming out of the blue. I think that it's the wrong way to deal with issues - it does not teach people or governments to manage their budgets.

"I don't like it as a signal to people or governments of any persuasion.

"I was never in favour what Labor did with the Queensland flood levy and it created some bad practices.

"It's not the thing that I would do."

Mr Cobb said he backed other revenue raising measurers like the GP co-payment

'Need to make sure everyone shares the burden'

But Tasmanian Liberal Senator David Bushby is backing the Government's reasons for considering the idea, saying a debt levy on high-income earners is a fair way of ensuring everyone contributes.

"We need to make sure everybody shares the burden" he said.

But he acknowledged it would require a lot of explaining to the electorate.

"It's up to us to explain the reasons," he told the ABC.

"I acknowledge that will be a bit of a challenge but it is possible because the decision is the right one."

Senator Cormann says a deficit levy is the "only way" of making sure the poor do not bear the brunt of improving the budget's bottom line.

"The only way we can effectively ensure that higher-income earners carry their fair share of the burden is through well-targeted, time-limited measures through the tax system," Senator Cormann told AM.

"If we want to repair the budget, and if we think that we need to make a special, immediate effort before structural savings can properly kick in, then there's two ways that you can do it: you can cut spending, or you can increase your revenue.

"Now, in terms of cutting spending, that necessarily is targeted at those who receive government payments.

"If we were to do as Bill Shorten appears to be suggesting, and that is exclusively focus on spending, then what he really is asking us to do is to force lower-income families to carry the whole burden of the budget repair job ahead of us."

Senator Cormann said the Government was "not making any excuses" when questioned about the pre-election promise not to introduce any new taxes.

"What we are doing is making judgments that in our view are in the best interests of the country," he said.

"We're not doing any of this out of fun. We're not considering any of these measures because it gives us any pleasure. We're doing it because, in our judgement, we need to consider some of these things to strengthen the country."

It is not known whether the debt levy will be proposed by the Commission of Audit, which will be released this afternoon.

It will give the clearest guide yet to the Government's first budget, due in a less than a fortnight.

Senator Cormann says it will show Labor left the budget loaded with unsustainable spending that must be curbed.

It will contain 86 recommendations covering the 15 largest government programs.

Labor's finance spokesman, Tony Burke, says the document will be the "report the Government wanted".

"It will simply be a guidebook on how to break every election promise Tony Abbott made," he told Radio National.



Term Definition Deficit/Debt

The deficit is just the amount of money that the government spends beyond what it receives in a financial year.

Just because you return the budget to surplus doesn't mean that the debt incurred by the previous deficits disappears.

Any deficits, or shortfalls, instead are added to existing government debt, which currently sits at $319 billion.

While $319 billion sounds like (and is) a lot of money, by international standards Australia's public debt is quite low, sitting at 21 per cent of GDP, the second lowest of the advanced economies - and that's just gross debt, which doesn't include the value of Australia's financial assets, such as the Future Fund.

However while government debt can pose problems, it isn't quite the same as personal debt and can often serve a purpose.

Governments take on debt by issuing bonds to investors that are paid a return, with ratings agencies allotting a credit rating to government debt. A high credit rating, such as the one Australia has, allows governments to borrow at a very low rates, with investors trading profit for security.

Some economists argue this ability to borrow at a lower rate than the market should be use to fund infrastructure projects that are likely to make a profit, as well as boosting productivity. Forward estimates The forward estimates are a series of projections released alongside the budget predicting revenue and expenses for the next four financial years. As they rely on assumptions about revenue and indicators, they are often subject to change - as the mining boom unfolded the estimates often undervalued the amount of revenue, and after commodity prices peaked they have had to be revised downwards. But the estimates are seen as a useful way of showing the government's longer-term plans for spending. Revenue collapse Over the past few years there has been a significant drop in the amount of tax revenue coming into the government. There is some contention over the reasons behind the drop, but economists are united in saying that at least part of the problem facing the government in its quest to return to a surplus stems from a lack of revenue, rather than too much government spending. GDP The annual value of goods and services produced by a country. GDP is generally recognised as one of the key indicators of the state of a country's finances. Nominal GDP A version of the gross domestic product that has not been adjusted for inflation. This means the GDP will appear higher than it actually is, as it fails to take into account the devaluing effect of inflation. However it is also the measure of GDP that is closest related to government revenue and spending, as both are affected by inflation. Terms of trade

Terms of trade measures the relationship between the prices a country receives for its exports and the prices it pays for its imports. A rising terms of trade means the nation is getting better prices for its exports relative to what it pays for imports, and vice-versa. Australia benefitted from rising terms of trade during the mining boom as the prices of iron ore, coal and other commodities surged, while the price of many imports such as electronics and clothes stayed steady or fell.

Economists are cautious about drawing too many conclusions from high or low terms of trade figures, but trends in the movement of the terms of trade are useful for predicting changes in the standard of living. Tax expenditures Tax expenditures are sources of revenue the government goes without due to tax concessions. While they are not government spending, they represent significant losses of potential revenue for the government. In 2013-14 expenditures hit the budget bottom line to the tune of $115 billion, and while some of this is offset by increases in productivity and increased spending, it remains a significant source of potential revenue the government is missing out on. Among the most well-known examples of tax expenditures are superannuation concessions and the capital gains tax exemption on the family home. Negative gearing Negative gearing allows property investors to write the interest costs of their mortgages off as an income tax deduction against other sources of income, and has been blamed for soaring property prices as it subsidises loss-making real estate investments. Superannuation concessions

Super concessions are tax breaks designed to encourage people to put more money into superannuation, in theory saving the government money down the track by reducing the burden these people will have on the public purse when they retire.

Currently superannuation is taxed at 15 per cent, with super earnings not taxed at all once you hit 60 years of age. Employers are required to put aside 9 per cent of an employee’s income into a super fund. The superannuation concession allows people to voluntarily contribute more to their superannuation and still be taxed at the rate of 15 per cent, well below the majority of tax rates.

The concessions have been criticised for disproportionately benefiting the wealthy, who get a much bigger discount on their normal income tax rates than those in lower tax brackets.

With many wealthy people likely to be ineligible for the pension on reaching retirement anyway, critics argue that the concessions cost the government far more in lost revenue than it would cost to support wealthy individuals with the aged pension.

According to the Australia Institute, superannuation concessions cost the Federal budget $35 billion in 2013-14 (with that number expected to rise to $50.7 billion by 2016-17), of which 30 per cent ($10.5 billion) goes to the top 5 per cent of income earners. Debt Levy

The debt levy has been proposed as a possible means for the government to pay back the budget surplus, and is expected to hit people earning more than $80,000 or $180,000 a year, taking an extra 1 per cent of their annual income.

The Government, including Prime Minister Tony Abbott, is claiming it does not constitute a broken promise, as the levy will not be permanent (and so is different from a tax), but widespread polling indicates this won't wash with the public. Middle class welfare Middle-class welfare is a term used by economists and commentators to refer to the increase in tax breaks and welfare payments for those on higher incomes that came in under the Howard Government. The private health insurance rebate for higher income earners has been singled out as an example of this. The majority of the policies labelled 'middle-class welfare' were maintained by the Rudd and Gillard governments, with any attempts to wind them back labelled "class warfare". But some economists have argued this has significantly contributed to the collapse in tax revenue. Parameter variations Parameter variations refer to the budget’s assumptions about the economy (such as growth, inflation and unemployment) and how these will affect revenue and costs. The parameter variations in the MYEFO were vastly different to those set out in the PEFO, leading commentators to question whether they were massaged to provide a worst-case scenario, giving the Government more freedom to implement unpopular cuts and space for a miraculous recovery in the upcoming budget. The age of entitlement is over

A term first mentioned by Treasurer Joe Hockey in a speech to British Conservatives in early 2012 that has become the informal motto of his time as Treasurer.

Despite following up his debut of the term with an attack on Labor’s attempt to wind back the health insurance rebate, Mr Hockey has signalled that in order to get the budget back to surplus, sacrifices must be made by all, from businesses to the man or woman on the street.

Whether this commitment goes beyond political rhetoric to actual structural reform is a question many expect to be answered in Tuesday's budget. So far the government's unwillingness to bail out the car industry, and public speculation about a debt levy on high income earners, indicate this may be the case. Efficiency dividend

A reduction in funding for Commonwealth government portfolios designed to drive efforts to increase efficiency. First put in place by the Hawke government, the dividend is based on the rationale that without market demands there is no pressure for government departments to find ways to save money through efficiency, and was originally labelled a dividend as it aimed to return revenue to the taxpayer.

The dividend only aims to reduce expenses around the operation of a department, not the overall funding, and so is applied before budgets are indexed to account for increases in wages.

There has been speculation an efficiency dividend will be applied to the ABC and SBS (which have previously been exempt) as a way of reducing funding to the broadcasters without breaking an election promise made by Tony Abbott that there would be no cuts to either organisation. Structural deficit

A structural deficit refers to a situation where the current tax structures of a country will fail to cover the expenses, even when an economy is performing at its peak. Governments commonly run deficits in times of economic downturn as a means of insulating the economy and ensure services are not impacted, with the understanding that surpluses during peak times will help pay down the debt incurred by going into deficit.

Working out whether a government has a structural deficit is complicated by the changing nature of sources of revenue and costs for governments, but governments and economic organisations try to remove the influence of temporary impacts on the budget bottom line to assess the long-term prospects for the economy. In the MYEFO the structural deficit was estimated at 2-3 per cent of GDP. Fiscal drag

Fiscal drag refers to when excessive taxation or a lack of spending by the government puts a dampener on the economy.

Bracket creep is a form of fiscal drag that occurs when tax rates do not keep up with wage increases in the economy, pushing wages up to a higher bracket, and resulting in the government taking more tax revenue.

Tax brackets are designed to be indexed to account for increases in inflation, however the indexes are usually set manually, and leaving them stationary while wages grow allows the government to increase the amount of revenue it takes from taxpayers without raising taxes.

Warnings from accounting firms KPMG and PwC have fuelled speculation that the government is planning on letting bracket creep do some of the heavy lifting when it comes to recovering revenue. Bracket creep

Fiscal drag refers to when excessive taxation or a lack of spending by the government puts a dampener on the economy.

Bracket creep is a form of fiscal drag that occurs when tax rates do not keep up with wage increases in the economy, pushing wages up to a higher bracket, and resulting in the government taking more tax revenue.

Tax brackets are designed to be indexed to account for increases in inflation, however the indexes are usually set manually, and leaving them stationary while wages grow allows the government to increase the amount of revenue it takes from taxpayers without raising taxes.

Warnings from accounting firms KPMG and PwC have fuelled speculation that the government is planning on letting bracket creep do some of the heavy lifting when it comes to recovering revenue. PEFO The Pre-Election Economic and Fiscal Outlook was released by the Federal Treasury shortly before the last election, and represents Treasury's and Finance's predictions on the current and future state of the economy. While budget bottom lines are often open to manipulation by governments, the PEFO is put together independently and the only outlook signed off by the heads of Treasury and Finance. MYEFO The Mid-Year Economic and Fiscal Outlook is an update to the budget that the government releases halfway through the financial year. The most recent MYEFO showed a major increase in the budget deficit from the PEFO, prompting speculation over whether the government was using a worst case scenario to strengthen the case for unpopular cuts and pave the way to a budget recovery. Vertical fiscal imbalance This refers to the fact that the Commonwealth raises the vast bulk of tax revenue, but the states have a large part of the spending responsibility. There is currently a large shortfall in the amount of tax the states receive compared to the cost of providing the services required of them, such as healthcare and education. This current imbalance is overcome by the Federal Government distributing money raised by the GST to the states, but this makes the states reliant on federal grants and subject to greater federal control. Underlying cash balance The benchmark measure of the government’s budget position: deficit equals less revenue than spending; surplus equals more revenue than spending; balance equals revenue matches spending. Unemployment rate Critical to the budget on both the revenue and spending fronts because a higher unemployment rate means less income tax revenue (and potentially less GST from consumption), while also meaning more money going out in unemployment benefits. Consumer price index Measures the inflation in the price of goods and services. Important to the budget because higher prices mean more GST revenue, although they also mean higher increases in government payments indexed to CPI and higher costs for government purchases. CPI Measures the inflation in the price of goods and services. Important to the budget because higher prices mean more GST revenue, although they also mean higher increases in government payments indexed to CPI and higher costs for government purchases. Wage price index

Measures the change in wage levels paid to employees. Important to the budget because higher wage growth across the economy means faster growth in income tax revenue, which can be magnified by bracket creep – individual income taxes (which includes non-wage related capital gains tax) make up around 46 per cent of federal government revenue.

Higher economy-wide wage growth may also mean larger rises in public service pay, but the income tax boost to the Government far outweighs this cost. Corporate profits Important to the budget because company tax makes up more than 18 per cent of federal government revenue. The faster corporate profit growth, the healthier are government revenues. A fall in company tax revenue, due to slower than expected profit growth and higher than expected deductions, accounted for a large proportion of the previous government’s revenue write-downs. Consumption subject to GST GST accounts for around 14 per cent of the Federal Government's revenue, although it is ultimately distributed to the States in grants. Not all goods are subject to GST, and the growth in consumption of exempt goods (such as fresh food, education and healthcare) has recently been much faster than the increase in purchases of goods subject to GST. Obviously, faster growth in the consumption of GST-levied goods means a greater increase in GST revenue for the government. GP co-payment The Government has introduced an upfront $7 co-payment for bulk-billed visits to the GP. After 10 visits, patients with concession cards and children under 16 will be exempt from the fee. Fuel excise This is a tax on petrol that currently sits at 39 cents per litre. The Government in the budget announced it would index the fuel excise twice a year to raise it in line with inflation, resulting in higher fuel prices.

Don't know your structural deficits from your bracket creeps? Ahead of the Federal budget ABC News has decoded all the economic jargon to help you understand what is in store this year.

Topics: government-and-politics, budget, business-economics-and-finance, tax, australia

First posted