Treasurer Scott Morrison declared Australia had reached a "turning point on debt". Credit:Alex Ellinghausen Workers earning up to $90,000 a year will be the first to benefit from the tax package but the gains will flow to wealthier households over time, setting up a clash with Labor over whether to amend the reform bill in the Senate. Preparing for that fight, Mr Morrison declared the package had to be passed in full to "flatten" the tax system and eradicate bracket creep for millions of workers, so that an increase in salary or overtime would not push people into a higher tax bracket. "It's not designed to be broken apart – it's a package deal," he said. Mr Morrison denied he was "spending" money on the reform plan and rejected the idea he should wait for future tax revenue increases to be confirmed rather than forecast before legislating the full tax cuts for workers.

"It's not spending – it's them being able to keep their own money," he said. The government is assuming Labor will seek to amend the reform bill to curb the tax cuts that go to all workers over time, creating a clear division between the two major parties ahead of the next election, whether it is later this year or early next year. Officials did not release any year-by-year costs for the personal tax cuts but Mr Morrison confirmed the government would sacrifice $140 billion in revenue over 10 years, including the stated cost of $13.4 billion over the four years of the official estimates. Highlighting the upbeat forecasts that help fund the new plan, the budget records a $25.9 billion increase in revenue over four years compared with the last update but says $13.9 billion of this will be sacrificed by policy decisions including the tax cuts. That leaves an increase of $12 billion in revenue over four years. In a pragmatic decision to avoid new arguments in the Senate over spending cuts, the government has limited the savings measures in the budget to just $1.9 billion over four years.

The second phase of the company tax cut package remains in the budget, with Mr Morrison calling on the Senate crossbench to consider the company and personal tax cuts as a combined package to lift growth. The bumper gains in revenue help reduce the 2018-19 deficit to $14.5 billion compared with $23.6 billion predicted in the last budget update, making this the last deficit after more than a decade of red ink before the $2.2 billion surplus projected for 2019-20. A key chart shows the budget surplus should climb to more than 1 per cent of GDP from about 2026 but that it would get close to 2 per cent of GDP by 2029 if the government did not proceed with its new decisions including tax cuts. The government has also showed progress on gross debt – all borrowings that incur interest before including assets like the Future Fund – which was forecast to reach $684 billion in 2028 in the last budget update but is now on track to reach $532 billion instead. The government has confirmed its fiscal rules, including a commitment to "bank" any increase in revenue, but is ignoring that rule when giving up some of the forecast tax gains in order to return money to workers.

The decisions come on the back of a stronger outlook for the economy, with nominal GDP growth upgraded to 4.25 per cent this financial year compared with 3.5 per cent in the last budget update. The government also assumes growth in wages of 3.5 per cent a year from 2020, even though growth was only 2.1 per cent in the last official statistics and economists expect it to remain below the government's hopes. Industry Super Australia chief economist Stephen Anthony called the economic assumptions "heroic" but Mr Morrison insisted they were conservative on key issues like commodity price forecasts. Deloitte Access Economics director Chris Richardson warned of a "dangerous combination" with a government trailing in the polls, an election not far away and the economy delivering a big lift in tax revenue. "History would suggest this is a dangerous thing, this is when the big mistakes get made," he said.

"But, to its credit, the government's been relatively restrained. It's handing back less than half of the windfall." Mr Richardson said the economic forecasts were "broadly believable" despite questions about the growth in China. Independent economist Saul Eslake said the economic growth forecasts were "reasonable" and the commodity price assumptions were "conservative", while the tax policy could be adjusted if circumstances changed. "There is fat built in to the forecast surplus from 2025-26 onwards by assuming that the tax cut comes in," Mr Eslake said. Loading

"They're now forecasting surpluses of 1 per cent of GDP out over the horizon when we're not having a mining boom. That's not unreasonable. "I think budget repair is important, I think it's important to get the debt on a downward trajectory but I don't think they have to run surpluses of 2 per cent of GDP."