Deloitte Access Economics Budget Monitor

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3 MAY 2023: With the ‘cyclical serendipity’ of high commodity prices continuing to provide an enormous boost to tax revenues, the 2023-24 Federal Budget is expected to detail a substantial improvement in the forecast deficits over the next four years compared to the official forecasts from October 2022.

But while the budget bottom line might be the beneficiary of billions in additional revenues in the short term, the longer term structural budget deficit is expected to have worsened.

Releasing the May 2023 edition of the Budget Monitor publication, Deloitte Access Economics Partner and report lead author, Stephen Smith, said: “The temporary surge in tax receipts – to the tune of $83 billion in additional revenue over the next four years – is delivering an astonishing turnaround in the government’s fiscal position.

“As a direct result of that extra revenue, government spending will also be lower than otherwise thought, with the 2023-24 Budget expected to show that spending on interest costs will be billions of dollars lower over the next four years, thanks to both smaller deficits and lower interest rates.”

“The budget position crept back into the black over the 12 months to March 2023, but on our estimates the 2022- 23 financial year will end in a small underlying cash deficit of some $8.7 billion.

“Despite the near term improvement in the budget bottom line, however, anyone expecting the May 9 Budget to include a cash splash aimed at Australians doing it tough is likely to be disappointed,” Smith said.

“Something will be included to cushion the cost of living blow, with a likely focus on offsetting yet another round of rocketing electricity prices. Do too much, though, and the government risks putting additional upward pressure on inflation and encouraging the Reserve Bank of Australia to hike interest rates further. Do too little and low-income households, and the economy more generally, will be left teetering, especially after the 11th interest rate increase over the past year.

“A balancing act requires some balancing. JobSeeker should absolutely be increased, but inflation pressures haven’t gone away. A middle ground would be to phase in a lift to JobSeeker, and to change the indexation so that it keeps pace with other payments, such as the age pension, over time.”

Next week’s budget will detail a substantial improvement in the forecast deficits over the next four years compared to the official forecasts from October, but it’s also expected to show a worsening of the longer term structural deficit. Government spending as a share of the economy will very likely be higher in the future than it has been in the past, particularly as past permanent increases in expenditure come to book.

“Not everyone will be happy about that,” Smith said. “But given the seven large and critical areas of government spending that are growing most rapidly – health, education, welfare payments, aged care, the NDIS, defence and interest costs – it’s hard to credibly and comprehensively reach a different conclusion.

“While higher spending appears unavoidable, importantly, that can’t be via a blank cheque. That points to the importance of pursuing real tax reform as opposed to just budget repair. All Australians should be on notice that taxes will likely need to be higher in the future. The fact that the budget is in a healthier position right now provides the perfect opportunity for reform. The aim should not just be more revenue, but a more productive, efficient, sustainable and equal society.”

Deloitte Access Economics has modelled some examples of policy changes which, together with others, can both improve Australia’s tax mix and shift the budget back towards a more sustainable footing over time.

“Tax reform isn’t necessarily popular, but ideas should be on the table for a respectful discussion. In various combinations, and complemented by reforms to competition in markets, regulatory efficiencies, innovation and education reforms, and an improvement in the efficiency of public services, the reform of Australia’s taxes can shift Australia in the right direction for a stronger and fairer economy. A better debate on tax simply cannot wait.”

Tax reform is not an end in itself. Rather, it serves a number of important economic and social functions. To this end, good tax reform should be consistent with the interrelated objectives of efficiency, equity, investment which drives productivity, and economic development.

Less personal income tax

“The budget needs more revenue and that means tax revenue needs to increase overall,” Smith said. “But that doesn’t mean that every tax should increase. Australia’s personal income tax rates have been the subject of much discussion in recent years, with particular reference to the legislated Stage 3 tax cuts which will apply from 1 July 2024. Most of that discussion has focused on the large cost of the tax cuts and the fact that they mainly benefit high income earners. Both of those features of the Stage 3 tax cuts are true. However, even with the Stage 3 tax cuts in place, the official forecasts from the 2022-23 October Budget still show personal income tax collections increasing by 1.5% of GDP over the next decade, and the average rate of personal income tax climbing to a record high of 26.4%.

“In Deloitte Access Economics’ view, changes need to be made at the bottom end of the personal income tax structure to reduce complexity, ease administrative burden and contain the contribution that personal income tax makes to the revenue base, with more efficient taxes filling the void. The current tax free threshold of $18,200 has been unchanged for more than a decade. The tax free threshold should be increased to $30,000, while flatter personal income tax thresholds would help to deal with bracket creep.”

A broader-based GST with a higher rate

“One of the most efficient taxes levied by the Commonwealth is the GST, and so it should raise a greater proportion of Australia’s tax revenue,” Smith said. “The GST is not a progressive tax because Australians with higher incomes spend a smaller proportion of that income relative to Australians with lower incomes. Our modelling of an increase in the rate of the GST to 15%, and a broadening of the base, is therefore accompanied by appropriate compensation for low income households.

“And importantly, this proposal would see the Commonwealth retain the additional revenue raised, rather than the states and territories.”

A less generous capital gains tax discount

“The capital gains tax discount of 50% for assets held for longer than 12 months is intended to provide an allowance for inflation and encourage savings, but it provides too much relief, and is also a contributor to Australia’s obsession with residential property investment, and hence the intergenerational gulf in home ownership and housing affordability,” Smith said. “We have modelled a reduction in the discount from 50% to 33.33%. A lower discount would more accurately compensate for inflation and contribute to a fairer tax system.”

Additional areas that should be included in the reform discussion include:

• Specific and targeted reviews of the largest and fastest-growing Commonwealth spending programs, including reform of the NDIS and eliminating waste and fraud in the Medicare system
• Reducing the corporate tax rate for large businesses to 25%, while more efficiently taxing those segments of the economy which earn economic rents – a generally accepted principle in good fiscal management
• Comprehensively dealing with inefficiencies in the way labour income is taxed relative to income from saving and investing
• Introducing a carbon tax to ensure that the cost of polluting is ultimately borne by the polluter and helping to incentivise the clean energy transition
• Introducing road user charging
• Reforming superannuation where tax concessions distort the incentives to save
• Supporting the states and territories to abolish inefficient taxes such as stamp duty and reform other taxes such as payroll tax.