Canberra’s econocrats have slashed their forecasts for global economic output as compromise loomed on a plan to scale back controversial, high-income tax cuts.
Amid warnings global monetary tightening might give way to worse, including stubborn inflation and rising public debt, Treasurer Jim Chalmers will warn in a speech on Friday that the budget would not be immune from international influences.
Labor appeared closer to agreeing on a plan for remodelling the stage three tax cuts currently expected to cost the budget $240 billion over a decade; alternative timelines have been discussed.
Dr Chalmers announced Treasury is cutting its budget forecasts of global growth this year by 0.75 per cent. But the downgrade will also extend to a one-point drop in 2023 and another 0.5 cut in 2024.
“This means that global output will be around $2 trillion lower in US dollar terms by the end of 2024 than previously expected,” Dr Chalmers will say in Brisbane on Friday.
“The risk of major economy downturns is rising, not receding.
“And the impact this has on Australia’s economy and budget is hardening, not softening.”
The debt-financed stage-three tax cuts, which are worth $243 billion over a decade after coming into force in 2024 will add to the budget’s persistent structural problems especially if current attempts to curb inflation do not succeed.
One option which some sources said was shaping as a logical point for compromise would be to amend the tax cuts before they take effect in July 2024, likely after this month’s budget.
Another proposal would have the tax cuts’ implementation delayed until 2025 or after the next election.
The amendments would likely make the net effect of the tax less regressive and return many but not all of the high income earners’ benefits to the budget.
All eyes are on Prime Minister Anthony Albanese who has kept a comparatively low profile this week.
Former Reserve Bank governor Bernie Fraser was among those to join calls for the government to drop its promise to keep the Coalition-era tax cuts which begin in 2024 and would hand $9000 to someone on $200,000 a year.
“There is no honour in the government standing by what in truth is really a very dodgy commitment,” Dr Fraser told The Australia Institute’s revenue summit in Canberra on Thursday.
Dr Fraser said the government had to instead honour plans for “building a fairer and healthier and happier country for all its citizens”.
Dr Chalmers appeared alongside Communications Minister Michelle Rowland to make the case for keeping the budget and global economic conditions aligned at a press conference on Thursday.
“People expect this government to be responsive,” she said.
Ms Rowland is a senior figure in the right of the party, like the Treasurer.
Earlier this week five MPs, mostly from the right, came out in support of keeping the tax cuts many making the argument that the government had to keep its promises.
Dr Chalmers has recently been warning of a widening crack at the centre of the government’s fiscal policy, or growth in expenditure that is not covered by revenue.
Economists remain concerned about the cumulative effect of central banks around the world jacking up interest rates to combat inflation.
One scenario canvassed including by Europe’s central bank has underlying inflation remaining stubbornly high even as peaks recede, a situation created partly by COVID stimulus a stronger American dollar prices and any lingering issues of energy supply.
The case for keeping tax-cuts cash out of consumers’ pockets in such a scenario would become stronger because having more money circulate through the economy would contribute to inflation.
And if rates and debt servicing costs remained high for longer than forecast or rose higher returning some of the cuts to the budget would expedite repair.
On Friday Dr Chalmers painted a picture of a budget beset by fast-rising costs including servicing government debt (14 per cent), defence spending (4.4 per cent), the National Disability Insurance Scheme (12.1 per cent), hospitals (6.1 per cent) and aged care (5 per cent).
