Here's why the political debate over tax is getting hot

Fri, 23 Mar 2018  |  

This article first appeared on the Yahoo7 website at this link: 


Here's why the political debate over tax is getting hot

Just about all economists agree with the general principal of budget management that the Federal budget should be in balance over the course of the business cycle and that the level of net government debt should be low enough to ensure the maintenance of Australia’s triple-A credit rating.

These big picture fiscal themes even have bipartisan support with both the Coalition and Labor arguing that they will both deliver a sound budget position when in government. But like someone planning to travel from Dublin to Cork, there are different routes that can be taken to get there. What is the best policy mix that will meet the end point of budget management of balanced budgets and low government debt?

In broad terms, there are two paths that the government can take to balance the budget and contain government debt.

One is to spend less money by cutting government funded services on education, health, roads, pensions and the like while keeping the tax base lower than it would otherwise be. Such a strategy can comfortably balance the budget as fiscal austerity trims the spending side.

The other way is to have tax laws to ensure there is enough revenue in the government coffers so that services can be provided to a large number of people at a high quality. If the tax system is progressive, the much of the revenue raise will be through fair means.

Some very basic accounting shows that if taxes are cut and therefore revenue to government falls, government services will need to be further curtailed if the budget is to be repaired and debt is to stabilise.

Which is where the current political debate over tax is getting hot.

The Coalition government is planning to deliver cuts to company tax cut that will cost the budget $65 billion over the next 10 years. In addition to this, it has indicated that the budget in May will include plans to cut personal income tax rates, the cost of which will be determined on budget night.

For those cuts to be much more than the price of one sandwich a week to the average tax payer, the cost to the budget is likely to be a further $50 billion over the next decade. The opposition Labor Party, conversely, is planning a range of tax measures that will boost revenue collections. Negative gearing rule changes, a scaling back of capital gains tax concessions and the change in dividend imputation tax payments to wealthy shareholders will raise substantial revenue that could be used to not only ensure a budget surplus and lowering of government debt, but will also allow for an expansion of funding for schools, universities, health care and the like.

Before these issues move front and centre in the election campaign, the government has the budget to deliver in May.

On budget night, the government will still almost certainly maintain its forecast for a budget surplus in 2020-21. A sharp lift in iron ore and coal prices is delivering a revenue boost. At face value, this will seem like a great outlook, which makes it all the more challenging for Labor to sell its tax plans to the electorate. The risk from the Coalition’s strategy, conversely, is linked to the fickleness of commodity prices. While they are strong, the budget numbers will look sound. But as we saw in the period from 2012 through to 2015, a shortfall in prices can cost the budget dearly. A slow down in Chinese economic growth, an escalation of the Trump tariff wars could easily undermine the commodity price outlook.

The budget and policy plans on tax will dominate the economic debate over the next year, which may also be categorised by which services will be cut to allow for taxes to be cut versus which services will receive a spending boost from the extra tax revenue.

comments powered by Disqus


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link:   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.