Budget 2018 contains political opportunity, and a ticking time bomb

Updated

So begins the election campaign.

And what timing. This year's budget takes full advantage of a sudden and unexpected turnaround in the Federal Government's revenue fortunes, delivering with it the ammunition to fight an Opposition that until now has led the way on policy.

But as much as it provides political opportunity, budget 2018 has a ticking time bomb buried just outside the four-year forward estimates. The income tax package, the centrepiece of the Coalition's pitch for another term, while not cheap, has relatively modest costs until 2022.

Beyond that, however, the plan is to replace the current five tax brackets with just four in 2024, completely eliminating the 37 per cent tax bracket. Treasury estimates this will prevent an extra 1.8 million taxpayers from moving beyond the 32.5 per cent top marginal tax bracket.

It's a brilliant political pitch for the middle ground, the swinging voter.

Exactly how much that will cost is anybody's guess. While the Government doesn't have to tell us because it is outside the forward estimates, Treasurer Scott Morrison let slip that over 10 years, the tax cuts will cost $140 billion.

Compare that with the costed changes, the first of which takes effect on July 1. They will cost just $14 billion over four years.

Any future government, eyeing off that long-term proposal, would view it with some concern. That's because individual income taxes make up the bulk of government revenue; slightly more than half.

Company taxes, by comparison, provide about 20 per cent of revenue.

Tax cuts real, not lower income relief

A big part of the tax pitch to voters is that the Government wants to ease the terrible burden of bracket creep.

No treasurer will ever admit this, but bracket creep is every government's best friend. It allows them to raise extra cash by just sitting back and doing nothing. And it gives them a political edge, with promises to cut income taxes — or altering the brackets — immediately prior to an election.

The fact is, bracket creep could be eliminated entirely with the sweep of a pen. All the Government needs to do is to link the brackets to the wage price index. When wages rise, so do the brackets. Simple.

To the Government's credit, the tax cuts have been structured to ensure the benefits flow through precisely to those it has targeted; initially to lower income groups and beyond that to middle income groups.

Unlike previous measures, these are not tax cuts dressed up as lower income relief where most benefits flow through to the wealthy.

Can revenue bounty be sustained?

Mr Morrison has become the first in more than 11 years to find a pleasant surprise in the tax revenue numbers. Ever since the financial crisis, rosy projections for budget recovery have been dashed by revenue shortfalls.

Even since last Christmas, when he delivered the half-year projections, improved conditions have provided an unexpected $25.9 billion boost to revenue over the next four years. With the tax changes, that is reduced to about $12 billion.

The improvement comes from a number of factors. First, employment growth has been good, particularly in the past year. That's boosted personal income tax receipts. Second, iron ore and coal prices have been much stronger than forecast, boosting company taxes.

Can this revenue bounty be sustained?

Job creation, and the better tax take, has been driven largely by population growth, much of which is only belatedly being backed up by infrastructure spending. Capital city congestion is driving a backlash against the kind of growth rates we've witnessed in recent years.

On the corporate tax front, a hiccup in China would seriously impact our corporate tax take.

Conservative forecasting to be applauded

If there is one thing this Government should be applauded for, it is that for the past three years it has adopted a relatively conservative approach to economic forecasting, which is partly responsible for the better than expected revenues.

Having seen a $15 billion windfall on its tax receipts in the current year alone, it is forecasting only a further $11 billion in the next four years. Of that financial boon, it has committed to spending just 40 per cent.

Likewise, on commodity prices. Last year it projected iron ore prices at $US55 a tonne. Instead, they averaged $US67 a tonne and even after it was obvious late last year that prices were trending higher, it maintained its lower estimate at the half year update.

This year, again, it has kept its iron ore estimate steady.

The combination of sudden windfalls and elections has a long and tragic history in Australian politics.

The Government certainly hasn't wasted the golden opportunity that has appeared before it. But at least it has staggered the spending, and it hasn't committed to spending it all.

Topics: government-and-politics, budget, tax, federal-government, economic-and-social-development, economic-trends, australia

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