What to expect in Australia’s next budget? A tax cut that’s not a tax cut | Greg Jericho

Next week’s budget is guaranteed to be all things to all people – unless you are one of those people who the government thinks won’t vote for them. And while there is always a bit of guess work about what will or won’t be in the budget speech, you can be sure it will definitely contain a tax cut that is not a cut.

This year’s budget will have a lot more revenue than was expected 18 months ago.

Back in September 2020, in the depths of the pandemic, the outlook for tax revenue was not good. But since then, billions of unexpected revenue is coming into the Treasury’s coffers:

If the graph does not display click here

Mostly this has occurred because the pandemic has proven to be the most unusual recession in history – one that behaved unlike what happened in the 1970s, 80s and 90s recessions for the simple reason that this recession was purely driven by regulation.

And once the lockdowns were lifted the country was no longer in recession.

It also helped that the government, after much pushing, implemented a quasi-wage guarantee with jobkeeper that prevented income tax revenue collapsing like it normally does during a recession.

Next week, the extra revenue is set to continue because not only has inflation increased faster than expected, commodity prices have taken off because of the war in Ukraine:

If the graph does not display click here

This will lead to increased company tax revenue that will enable the government to spend a lot more money and still be able to say it is on the same path to a budget surplus.

Of course any talk about “budget management” or concerns about a surplus are all just cow manure when we still have the Stage 3 tax cuts in place.

The cuts, worth $15.7bn each year, are the most destructive policy for budget management and for equality in living memory.

But they are also part of the ongoing reason why we have a tax cut that does not really exist.

I was amused a month ago that there were suggestions that the government might dump the low to middle income tax offset (LMITO). This was never going to happen because it is an election year and doing so would hand a majority of voters a tax rise.

The LMITO was a device needed in the Stage 1 round of tax cuts because Stages 2 and 3 of the government’s tax plan were massively skewed to favour the wealthy.

The government needed to make it seem as if they cared about poorer people and so it introduced an offset that was “targeted” at low to middle income earners.

The fudge though was in the name. The median employee income in Australia is about $62,400, and yet the highest offset of $1,080 from the LIMTO went to those earning between $48,000 and $90,000, and the offset extended to those earning $120,000.

It was, shall we say more of a “middle to above average income” offset.

It was meant to be dumped when Stage 2 came in because those tax cuts would cancel out the removal of the LMITO. The Stage 2 cut would be worth, for example, $1,080 for someone on $60,000, so removing the LMITO would have made such a person no worse off (and also no better off).

When the government brought forward the Stage 2 cuts in 2020 it realised that outcome was not going to fly in the middle of a recession and so it extended the LMITO for a year.

And that handed itself a problem.

It means that whenever the government removes the LMITO, because it does not have Stage 2 cuts to cancel it out, it will be giving people earning less than $120,000 a tax increase.

https://www.datawrapper.de/_/xMlL6/

Oops.

This occurs even with the horrifically unfair Stage 3 tax cuts which will see the marginal tax rate for incomes between $45,000 and $200,000 set at just 30%.

Even with that change, if the government also removed the LMITO people earning under $85,000 would still get a tax increase. Because while flattening the tax rate to 30% gives someone on $60,000 a $375 tax cut, they would then miss out on the $1,080 LMITO – ie they would be $705 worse off:

If graph is not displaying click here.

And so the LMITO will remain and it will continue to be spruiked as a new tax cut.

Last year when the treasurer, Josh Frydenberg, did the expected and extended the LMITO for another year he said in his budget speech that “over 10 million low and middle income earners will benefit from a new and additional tax cut”.

Yes, a tax cut that delivered no actual cut in tax. It is not so much a tax cut as a decision not to increase tax.

This year some media organisations are already falling into line. And in an election year expect to hear again that amid handouts designed to temporarily offset increases in petrol prices, we shall once again receive a tax cut that does not cut tax.