Hewson's View | Small change for wallets but national cost is substantial

Don’t look over there. Look over here. Look at me.

This week’s distraction – from what have been the lingering and debilitating distractions of same-sex marriage and the dual citizenship debacle – was Turnbull’s announcement that he intends to give personal tax cuts to “middle income Australians, while also meeting our commitment to return the budget to surplus”.

He gave no details, of course, at this stage.

SNIP, SNIP: Tax cuts aimed at middle income earners have been promised by Malcolm Turnbull, but where does the money come from? Illustration: Sam Bennett.

SNIP, SNIP: Tax cuts aimed at middle income earners have been promised by Malcolm Turnbull, but where does the money come from? Illustration: Sam Bennett.

So far tax has not been a successful issue for Turnbull, having failed to win the argument for tax cuts for the large, mostly multinational, corporates.

Clearly, he is not giving up on this, as he made the announcement of the additional personal tax cuts at a dinner hosted by the Business Council of Australia.

However, he will be bedeviled by the by the persistent “Whinging Wendy” question of “Where’s the money coming from”?

The corporate tax cuts, still unfunded, were to cost some $50 billion through to 2025.

The basic reality is that cutting tax rates for the ‘middle’ is very expensive, so it’s hard to afford a significant cut.

For example, just to lower the second bottom tax rate from 32.5 cents in the dollar to 30 cents would cost over $7 billion in 2020/21, eliminating the assumed budget surplus in that year, but only giving a tax cut of $325 a year for someone earning $50,000 a year, up to $1,250 a year for people earning more than $90,000.

Electorally, it is easy to be waved away as simply a “hamburger and a milkshake” a week!

While Turnbull will undoubtedly argue (when they release the Mid-year Economic and Fiscal Outlook in mid-December) that revenue is stronger than was forecast at budget time last May, and therefore the process of budget repair is going somewhat faster than predicted, this will be quite misleading.

The major reason that the government could claim to be able to achieve a small surplus in 2020/21 was the heroic assumption underlying its figuring: that the growth in wages, which has been historically slow, would near double in the next few years, thereby providing the additional revenue required to move the budget back to surplus over the four-year budget period.

The concern is that wages growth will remain particularly sluggish, which compounds the financial stress being faced by many households struggling to meet the recent dramatic increases in key elements of their costs of living – housing, health, childcare, electricity, and so on. 

Turnbull’s pitch is that tax cuts will help, but will they ever be affordable?

In the broader budget context, both sides of politics have made very significant commitments in the big spending areas of schools and education, hospitals and health, the NDIS, defence, and infrastructure, running through the 2020s, all “unfunded”.

 As they’ve done for years, governments will rely heavily on what economists call “bracket creep” – additional tax revenues as increases in incomes push workers into higher tax brackets – to do much of the budget’s heavy lifting.

This is, in itself, becoming a very significant election issue, that Turnbull’s commitment this week is designed to moderate... if the cuts are ever delivered.

Turnbull is desperate to regain the political agenda, perhaps even to save his job. But, will another promise of a personal tax cut actually be believed?

 – John Hewson