The government could almost halve Australia’s $50bn budget deficit by redesigning stage-three tax cuts, introducing further changes to tax breaks on superannuation and charging a 10% royalty on offshore gas, according to a new report..
The report by the Grattan Institute presents a menu of options it believes could take a bite out of the $50bn-a-year structural deficit facing the federal budget.
The report finds that Australia now needs to shrink its deficits by 1.2% of GDP every year. If deficits are not slashed, Australia faces a rising debt interest bill that adds a further $10bn to the deficit every year by 2033.
Many of the biggest reforms are likely to remain in the political too-hard basket, such as raising the GST to 15% and splitting extra revenue with the states (worth at least $6bn a year), ending Western Australia’s GST deal ($5bn a year) and including more of the family home in the pension assets test ($4bn).
But others are now on the table after the government refused to rule out further changes when releasing its proposal to save $2bn a year by halving tax concession for earnings from super on balances above $3m.
On Wednesday the treasurer, Jim Chalmers, said the treasury was “working through options” on the petroleum resource rent tax (PRRT) on gas.
Chalmers told Radio National there was “some common ground” between the government and Grattan, including “modest but meaningful changes in the works for superannuation tax breaks”.
“There are some things that we wouldn’t come at, but I think the overall point that the Grattan Institute’s making in that report is that we do have a structural issue in the budget,” he said.
The report comes as the Coalition prepares to take the budget fight to the government, with deputy Liberal leader Sussan Ley visiting 16 seats in 16 days to campaign on the cost of living crisis.
Ley will visit a range of marginal seats in five states, including four held by teal independents (North Sydney, Warringah, Mackellar and Goldstein), Labor inner city gains from the Coalition (Bennelong and Higgins) and metro seats the Liberals are desperate to hold (Menzies and Sturt).
Ley said the visits would be “crucial” for the opposition’s policy development to understand “what supports workers and small businesses are looking for in the budget” and into the next election.
The report, whose lead author is Grattan’s chief executive, Danielle Wood, found that Australia was on track for a structural gap between revenue and spending of about 2% of GDP every year by 2030.
But it said the true figure is likely to be closer to 3%, due to budget pressure from increased wages in aged care and possibly early childhood education, increased defence spending including Aukus and the need to address the “extremely low level of income support” on jobseeker and the parenting payment.
Both the women’s economic equality taskforce and economic inclusion advisory panel have recommended the latter be increased.
The Grattan report noted that the stage-three income tax cuts will cost the budget about $20bn a year from mid 2024, rising to $31bn by 2030.
Stage three abolishes the 37% marginal tax bracket completely and lowers the 32.5% marginal tax rate to 30%. It also raises the threshold for the 45% marginal tax rate, meaning everyone earning between $45,000 and $200,000 will pay the same 30% marginal tax rate.
While there is “some justification” to give back revenue from income earners moving up tax brackets, Grattan said the stage-three cuts are “too big” and “overcompensate for the effects of bracket creep”.
“A reasonable compromise would be to proceed with most of stage three but retain the 37% tax bracket.
“This would mean reducing the 32.5% tax rate to 30% – benefiting everyone earning more than $45,000 – and raising the top tax threshold from $180,000 to $200,000.”
Grattan estimated this would net the budget an extra $8bn a year.
The Greens and the Senate crossbench have repeatedly called for stage-three tax cuts to be revisited.
While the government studies options to reform the PRRT, the Grattan Institute proposes two such changes: changing the method of pricing for gas to raise $3bn to $4bn a year, and introducing a 10% commonwealth royalty on offshore gas for a further $4bn.
The Grattan report proposed $11.5bn more could be saved from super tax concessions including by applying the 30% tax rate on earnings on balances of more than $2m, taxing earnings in retirement at 15% and capping pre-tax contributions at $20,000.
It suggested $7bn could be saved by halving the capital gains tax discount to 25% and limiting negative gearing so that losses from rental and other forms of passive income cannot be “written off against unrelated labour income”.
Setting a minimum tax rate of 30% on distributions from trusts would save $2.3bn a year, it said.
The report also calls for “better processes for infrastructure and defence procurement”; ending the WA GST deal; improved hospital efficiency; cutting politicised grants; counting more of the family home in the pension asset test; abolishing the family tax benefit part B for couples and abolishing business innovation visas. Together these changes could save $15bn a year, it said.
Chalmers said family tax benefit changes were “not something that we’ve been contemplating or considering”.
After releasing its super policy in February, the only tax change the government has ruled out is changing the existing capital gains tax concessions for the family home.
