Australia Institute says treasurer must tax more, not cut business taxes, in lead-up to mid-year economic update

This article is more than 3 years old

This article is more than 3 years old

The treasurer, Scott Morrison, has refused to rule out Monday’s mid-year economic update (Myefo) recording a budget deterioration since May, as experts predict, and blamed Labor for “sabotage” of the budget.

Also in the lead up to Myefo, the Australia Institute has released a research paper, that calls on the government to consider further revenue-raising measures because the declining tax take during and after the global financial crisis – not government spending – caused Australia’s string of deficits.

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The Taxing Times research paper by the progressive thinktank’s senior economist, Matt Grudnoff, finds that if the tax to gross domestic product ratio had stayed at 23.9% (the average between 2000 and 2008), the budget would only have been in deficit for two years before returning to surplus.

Instead, tax revenue fell as low as 20.5% in 2010-2011 as income tax, GST and company tax fell due to the downturn.

The paper recognised that aim to keep the tax take at 23.9% would have been harmful during the contraction, but suggests a modest increase in tax could now help achieve a budget surplus earlier than the 2020-21 projection.

That projection may be further delayed when Morrison releases what he says will be a “responsible, conservative and transparent” mid-year update on Monday.

Morrison promised the state of the budget was better today than it was a year ago, three years ago and when the Coalition was elected in 2013, in effect not ruling out a deterioration since the May budget.

Morrison, who handed down a $40bn budget deficit in May, the third deficit of the Abbott-Turnbull government, claimed it “continues to ensure that we do not spend more than we save”.

He promised the government would deliver all its election promises and “still make an improvement to the bottom line”, in reference to “[continued] progress in getting the growth in government expenditure under control and arresting the growth in commonwealth debt”.

The May budget projected government net debt would hit $326bn in 2016-17, higher than at any point in the Rudd-Gillard government, which, Morrison said, had “lost control of the nation’s finances”.

Morrison said there was an “air of unreality about the scale of the fiscal challenges” the nation faced.

He said the update would “once again reinforce the need for the parliament to support the government’s legislation to repair the budget and restore it to balance” and accused Labor of “active and cynical budget sabotage”.

In recent weeks Morrison and his finance minister, Mathias Cormann, have said it was only a projection, not the government’s policy to achieve a surplus by 2020-21.

On Sunday, Cormann welcomed higher commodity prices since the May budget but warned they were “not enough” to offset the effect of low wage inflation, falling income tax receipts and low growth in company profits.

In late November, Deloitte Access Economics warned the federal budget deficit was projected to expand by another $24.3bn over the next four years.

Since the election, $21bn of the Coalition’s $40bn of unlegislated “zombie” budget measures have passed parliament, some with Labor support, but others are stubbornly resisted by the opposition.

On Sunday, the shadow finance minister, Jim Chalmers, said the government only had itself to blame for adding $100bn to net debt at a time when the country did not face a crisis like the GFC.

He said the nation’s triple A credit rating could be secured “at the stroke of a pen” by tearing up the government’s 10-year $48bn company tax cut package.

The Australia Institute’s model shows that, if the tax take had stayed at 23.9% during the GFC, Australia would have returned to surplus in 2011, 2012, and 2013 before deficits from 2014 onwards.

Between 2009 and 2016 accumulated deficits would be about zero. In fact, after consistent deficits since 2009 accumulated deficits and government debt blew out by $300bn.

The current tax to GDP ratio is 22.4%, and is projected to reach 23.9% again in 2021-22, almost coinciding with the 2016 budget’s projection of a surplus in 2020-21.

“While the treasurer is keen to focus on the spending side of the budget with many proposals to cut spending particularly to low income households, the main cause of the current budget outcome is the fall in revenue,” the paper concluded.

“Hopefully the treasurer’s recent comments that the budget has an earning problem are a belated recognition of this.”

Ben Oquist, the Australia Institute’s executive director, said the numbers clearly show that “when the government cuts its income, it finds it near impossible to run at a surplus”.

“Despite a strong rhetorical focus about finding expenditure savings, the government’s own forecasts for a credible path back to surplus rely on a return to pre-GFC tax-to-GDP ratios.”

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Oquist told Guardian Australia the fact the tax to GDP was higher than the 23.9% average in many years before the GFC showed Australia was “nowhere near the level that we could be at”. Australia’s tax to GDP ratio is low by international standards, he added.

He said the government had recognised higher revenues would contribute to budget repair through cracking down on over-generous superannuation tax concessions and reindexing fuel excise.

But he said if the government was concerned about Australia’s triple A credit rating it should abandon its $48bn over 10 year company tax cut package, agreeing with Labor and the Greens.