Exclusive: Australia Institute says debates about funding what people need should not be decided by limits and targets

The treasurer, Scott Morrison, describes it as the “speed limit” on taxes but a new paper says the Coalition’s 23.9% tax-to-GDP cap is an “arbitrary” limit that will push the government to make austerity cuts to fund new programs.

While a dramatic improvement in revenues has given the Coalition room to ditch the planned $8bn Medicare levy increase and offer income-tax cuts, the Australia Institute has warned in a briefing note that the combination of a limit on tax and a surplus target will necessitate spending cuts in future.

The paper echoes concerns from the shadow treasurer, Chris Bowen, about eroding the revenue base, as Labor prepares to match “targeted tax relief” and promise larger surpluses by raising revenue in other areas.

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Tuesday’s budget is expected to contain modest personal income-tax cuts on top of the company tax cut package, fulfilling the Coalition’s aim to limit tax to 23.9% of GDP.

According to the Australia Institute authors David Richardson and Bill Browne, the cap started its life in 2014 as a Treasury assumption about the future level of tax, and despite budget documents stating it is not a government policy, it has gradually hardened in Coalition rhetoric to a target.

The rate is based on the average tax-to-GDP ratio during the Howard government years following the introduction of the GST in 2000-01 and before the global financial crisis of 2007-08.

On Sunday, Morrison described the tax-to-GDP ratio as a “speed limit” and warned that exceeding it would put “jobs and the economy and essential services at risk”.

But the Australia Institute authors argue that the 23.9% limit is “just the latest of equally arbitrary ceilings to which governments have committed from time to time”.

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“When they are taken seriously, arbitrary tax to GDP ratios can severely limit choices available to the electorate,” they said.

The authors said that if the cap was higher or no cap was imposed, the government would collect more revenue and could deliver higher projected surpluses or more spending.

The Australia Institute paper says the goal for surpluses to be 1% of GDP has been stated by the Treasury but is similarly “completely arbitrary” and there is “no objective reason” for governments to pursue it.

Morrison has left open the possibility of abandoning the 1% target but as recently as Sunday he said the fiscal rules stated that surpluses of that size were the goal.

The Australia Institute authors say mandating surpluses “is a form of austerity” and the combination of a surplus objective and a tax ceiling “means that there is only one degree of freedom that the secretaries allow a government of either side”.

“Spending is to be sacrificed. That is the fiscal straightjacket the secretaries would impose on Australia.”

The authors say Australians expect improvements in infrastructure, health, education, aged care and the environment, and debates about funding these should be “part of the political arena” rather than being decided by caps and targets on revenue and spending.

They warn that cutting taxes during surges in revenue results in a “right-wing ratchet” that then requires cuts to assistance to the poor when revenues fall.

On Sunday, Bowen told the ABC’s Insiders program the tax cap meant that future generations would be forced to pay down debt and on the government’s own figures it would not be able to deliver a surplus of more than 0.5%.

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The federal budget is expected to show a dramatic improvement in revenues – Deloitte Access Economics estimates that the company tax take has risen by $36.2bn since this time last year and income tax is $10.6bn higher.

On Sunday, when asked why the Coalition planned to use a temporary revenue boost to give permanent tax reductions, Morrison said the government would “build the budget up to surplus” but must not do so by “taxing the economy, because that is like the snake eating itself from the tail”.

“It is a self-defeating exercise. It never ends well.”

He said governments needed to keep spending under control and “if you are going to make expenditure commitments ... then you’ve also got to make the savings at the same time to make sure you pay for them”.