Crisis: Slugging households to fix budget 'unsustainable'   
May 27 2017
Financial Review


Australia faces a budget crisis because the Turnbull government is asking households to bear an unsustainable tax burden for budget repair, says Bob Gregory, emeritus professor of economics at ANU.   

 

A budget crisis looms because the Turnbull government is asking ordinary households and workers to do the heavy lifting of budget repair by paying higher income taxes as company taxes and wages sag, top budget experts say.

The 2017 budget is built on heroic assumptions about company taxes and wages growth returning to pre-global financial crisis levels, and the burden will instead fall on wage and salary earners who will have to pay higher effective income tax rates via bracket creep to close the gap.

The squeeze on households as company taxes are being cut and indirect taxes flatline is unsustainable and will bring about a budget crisis, yet the major political parties are silent on the issue, Bob Gregory, emeritus professor of economics at Australian National University, will say on Tuesday.

"My view is that it will not be possible to increase income taxes to levels implied by forecast company tax revenue," Professor Gregory, a former Reserve Bank of Australia board member, will tell the Melbourne Economic Forum.

"Of course the crisis will be greater and arrive sooner if Treasury has again over forecast company tax revenue," he will say.

The government raised the threshold for the 37 per cent second top income tax rate last year to ease bracket creep – the process by which average tax rates increase as wages increase with constant thresholds – last year, while Labor wants to increase the top rate to 49.5 per cent.

This will bring the political bogeys of increasing the GST and imposing a mining tax back on to the agenda, Professor Gregory will say, adding to the political stresses around budget planning.
Squeeze on households

Households are already trimming their spending as wages stagnate and mortgage borrowings increase to record levels to pay for boom-level house prices.   

John Fraser, Secretary of the Treasury, was forced to defend the government's wages growth forecasts during Budget Estimates at Parliament House in Canberra.



With wages grinding below 2 per cent a year, a record low in data dating to the late 1990s, the government is under pressure over budget projections that the measure will surge towards 4 per cent in coming years.

Mr Fraser said his department's wages outlook was its "best forecast and projection" taking into account the "far greater optimism at the global level" which he said was now being picked up more widely after Treasury noted it 18 months ago.

"It is a palpably more optimistic world that we're facing," he said, referring to buoyant financial markets and economic data.

"We haven't uninvented the business cycle," he said, adding that meant there would be improvements in wages as the labour market tightens.

But John Daley and Danielle Wood, chief executive and fellow of the Grattan Institute, write in The Australian Financial Review on Tuesday that Treasury has consistently forecast about $30 billion too much revenue each year for seven years because its rose-tinted model over-estimates nominal GDP and wages growth.

Dr Daley and Ms Wood will tell the forum that governments need to be more realistic because over optimistic revenue and growth forecasts are leading them to deny the need for budget repair and rely too much on bracket creep.
Treacherous politics

The treacherous budget politics of hitting households hardest will make it harder to win public approval for tax cuts for large companies, which have been blocked by the Senate, especially as many are foreign multinationals, Professor Gregory will say.

"It seems difficult to argue, as is implicit in current policy, that Australians should increase personal income tax rates to historically high levels in order to cut company taxes that will largely accrue to foreigners."

Professor Gregory will say the GFC marked a dramatic turning point in the Australian tax mix. Company taxes had increased as a share of GDP since the mid-1980s until that point, personal income taxes had fallen, and indirect (sales) taxes had flatlined.

From the GFC until 2020, by sharp contrast, company taxes fall, indirect taxes remain unchanged or fall, despite the introduction of the GST in 2000, and personal income tax revenues increase after the Howard era tax cuts take effect.

Reality bites Treasury's wage forecasts Grattan Institute

This is inconsistent with political rhetoric, which focuses on cutting company tax rates and forecasting increases in company tax revenue that don't occur, while ruling out GST increases.

Valkie wrote on May 30^th, 2017 at 5:32pm:


Which rich ones got the $60 billion ?

The major parties are silent because they have as much idea as that deer caught in the headlights.... they can see that train coming, but they are mesmerised by it and have forsaken the initiative...

All they can do is repeat the same old mantra over and over again - raise taxes on the majority by a bit so everyone 'lifts' their share ... lower taxes on companies in the fervent hope they will actually re-invest and put on more people...

Meantime, we are expecting a fly past at any time, and a shower of goodies....

Sprintcyclist wrote on May 30^th, 2017 at 9:23pm:

So less demand in the economy
So less sales in the economy
So less jobs in the economy
So more NewStart paid out
So less PAYE & company tax paid


So even bigger debt and deficit.

Sprintcyclist wrote on May 30^th, 2017 at 9:23pm:

The inevitable result: a deep recession, massive hit to company profits, massive loss of jobs, the Budget deficit blowing out by tens of billions more, and the Coalition getting obliterated at the next Federal election and being out of power Federally for a generation.

Do you really want that?

NO need to slug households. The Canberra camorra could start here to rake in a few dollars:

Border protection policies cost Australia

$10b

in three years, international aid groups find

http://www.abc.net.au/news/2016-09-13/offshore-detention-cost-australia-10-billi...

Point the alleged refugees in the direction of China; that's where our jobs are going.

Valkie wrote on May 31^st, 2017 at 6:58pm:


Is there some valid reason to pay off the debt.

Sir lastnail wrote on Jun 1^st, 2017 at 6:17pm:

We don't actually have to pay it off. What we need to do is stop the bond debt from growing faster than the rate of inflation.

Deficits into perpetuity can be sustainable, provided that the deficit to GDP ratio is lower than the nominal inflation rate times the growth rate of the population. Deficits are effectively a growth in the money supply because the government is spending money into existence. As long as the growth in the money supply is not too fast, it's not a problem. Only if the government spends too much does it cause problems with inflation. The government isn't spending too much at the moment because inflation is low. The current problem with the Budget is insufficient revenue.

78% of all Federal Budgets have been in deficit and we haven't gone broke. In fact, surpluses are often a sign of fundamental problems with the economy. We had Budget surpluses during the Whitlam government caused by stagflation, residual high inflation during the Hawke government, and an overheated mining boom during the Howard government.