“Additional tax cuts of this magnitude would risk doubling up on what is already a risky bet with the national fiscal finances. But we’re not so naive as to believe that ‘not smart’ is the same as ‘won’t happen’.”
The Morrison government remained committed to delivering a budget surplus next financial year in 2019-20, a spokesman said on Sunday.
AMP Capital chief economist Shane Oliver said “bigger tax cuts are on the way” in the budget.
“Overall though it looks like there is scope for around $6 billion in extra fiscal stimulus in 2019-20 that would basically leave the budget projections into a surplus unchanged,” he said.
“It would make sense for the government to do this given the loss of growth momentum in the economy.”
The government is already phasing in $144 billion in personal income tax cuts in three stages over six years and has budgeted for an additional $3 billion in annual yet-to-be-detailed tax cuts, worth an extra $9.2 billion over three years.
However, because low-income earners have already benefited from the earlier stage 1 of the tax cuts, bringing forward stage 2 from the currently legislated 2022 could be a political problem because people earning above $100,000 a year would be the big beneficiaries.
People earning up to $90,000 a year would receive only an extra $10 a year.
A taxpayer earning $100,000 would receive $610 annually and a worker on $150,000 would get $1890 more a year.
Opposition Leader Bill Shorten is campaigning on fairness and low wage growth for battlers, so Deloitte’s Mr Richardson suggested the Coalition will be forced to strongly consider adding a sweetener for low-to-middle income earners.
Under the current stage 2 tax cuts that were legislated last year, the $90,000 income threshold above which the 37 per cent tax rate applies is raised to $120,000, from July 1 2022.
The income threshold for the 19 per cent tax rate is increased to $41,000, from $37,000.
Mr Richardson said one political option – though not fiscally responsible – would be to accelerate the tax cuts by three years to July 1, 2019, and further lift the 19 per cent tax rate threshold to $43,000, at a cost of $9 billion a year.
Under this option, people earning between $50,000 and $90,000 would receive an extra $280 to $310 a year in tax cuts, not just the 20¢ a week or $10 a year from only accelerating the tax cuts by three years.
“No, yet another personal tax cut is not what we’re recommending,” Mr Richardson said. “The national revenue base remains more fragile than most people realise.”
Deloitte tips the budget will almost fall into a cash surplus this financial year, forecasting a narrow deficit of $2 billion – an improvement on the government’s December deficit forecast of $5.2 billion.
The government’s pledged surplus for 2019-20 is forecast by Deloitte to be $9.8 billion, a $5.6 billion improvement, before any additional tax cuts.
That would leave room to forecast a wafer-thin surplus and about $9 billion of accelerated tax cuts, plus the $3 billion budgeted for in the December mid-year update.
Deloitte forecasts that real GDP will be downgraded from the government’s 3 per cent to 2.2 per cent in 2018-19 and 2.6 per cent in 2019-20. However, nominal GDP – which includes inflation – will be higher and underpin the improvement in revenues.
Strong job growth has offset the negative effects of weak wages, helping boost personal income tax collections.
The positives for the budget bottom line may prove temporary, the report warns. These include higher corporate profits, elevated coal and iron ore prices and a tailings dam outage in Brazil that has caused an iron ore supply crunch and helped drive up the price for Australian exporters in BHP, Rio Tinto and Fortescue Metals Group.
The downturn in house prices is expected to have a limited effect on tax collection for the commonwealth, though will likely moderate consumer spending. This will reduce collections of goods and services tax payments from the Commonwealth to the states.
Despite the government engaging in pre-election spending, expenses are being held down by less spending on welfare and lower inflation – the latter of which helps reduce government payments that are indexed to inflation.