Aged care before tax cuts: Experts say budget needs revenue, not tax relief

Two of the nation’s top policy experts, Bernie Fraser and Andrew Podger, have urged Treasurer Josh Frydenberg to dump at least part of his stage three personal income tax cuts and use the money to increase spending on aged care and other critical services.

As a long-running public survey showed support continuing to decline for the $17 billion a year tax cuts to middle and high-income earners, Mr Fraser and Mr Podger said future budgets would face a revenue squeeze if the tax cuts were maintained.

Treasurer Josh Frydenberg.Credit: Alex Ellinghausen

But tax experts said without the reforms, the nation’s personal tax system will become increasingly reliant on the incomes of high wage earners and overly complex.

The budget will extend for another year the low and middle-income tax offset, heading off a tax increase of up to $1080 next year for 10 million workers earning less than $126,000. The government remains committed to its legislated stage three cuts, which deliver their largest benefits to people earning more than $200,000 a year.

In last October’s budget, the government brought forward its stage two tax cuts that increased the threshold for the 19 per cent tax rate to $45,000 and the threshold for the 32.5 per cent rate to $120,000.

While the move cost $23.8 billion, the government was able to book a saving of $5.7 billion in the 2022-23 financial year when the stage two cuts were originally planned to start. That saving was due to low wages growth and fewer people moving into higher tax brackets.

Mr Fraser, a former Reserve Bank governor, said the third stage was “particularly and blatantly unfair”. He said another reason to stop stage three cuts is to help fund critical services. Next week’s federal budget is expected to include billions of dollars worth of aged care spending to tackle the numerous challenges raised by the royal commission.

“They have to be raising revenue and they can start by not giving away tax cuts like stage three,” Mr Fraser said. “Aged care and [managing] ageing in general is going to require an awful lot of spending. It’s going to be a lot more expensive than it is now.”

“Governments can’t borrow forever and they have to raise taxes. That includes not giving [tax revenue] away to relatively well off groups in the community,” he said. “Governments [globally] will have to come to grips with the fact they can’t keep relying on central banks to churn out more and more money.”

ANU Professor Andrew Podger, former Public Service Commissioner and former secretary for the departments of health and aged care and housing, said there should be significant changes to the stage three tax cuts.

“I think there is a serious question about whether the cost of stage three as it is in the legislation is something we can afford right now or if it might be wiser to have more revenue to fund the various things the government is trying to fund,” Professor Podger said, suggesting aged care and child care as among these costs.

“I would’ve thought broadly speaking it’s unwise to reduce the revenue from personal income tax unless you have some alternative source of funds readily available.”

He said continuing the low and middle-income tax offset for another year would be “a cop out” that fails to simplify the tax scale and address future bracket creep and he would prefer to scrap the offsets and replace them with a significant increase in the tax threshold.

“I think that would be much fairer.”

Deloitte Access Economics director Chris Richardson said sluggish wage growth and last year’s tax cuts meant the 2024-25 cuts were now more generous than planned and more than made up for bracket creep.

He said under the government’s plan, the share of total personal tax paid by the top 5 per cent of income earners actually increased. It edged down for people between the top 10 and 20 per cent of all taxpayers.

“The upshot was that lower income earners got two tax cuts, middle income earners got one, and higher income earners got none.” If stage three tax cuts arrive, households will pay $20 billion less in tax by 2024-25 than 2014-2015.

The long-running annual tax survey by independent progressive think tank Per Capita, released on Friday, shows there is little public support for the stage three tax cuts already legislated to begin in 2024-25. About 43 per cent of the more than 1500 people surveyed believe the tax cuts should be scrapped completely or reduced. About 29 per cent were comfortable with the current plan.

The survey also found reversing the stage three tax cuts and diverting the revenue to aged care was “the most popular choice of the various options given to find sufficient funding to address the recommendations of the Royal Commission into Aged Care Quality and Safety”.

The Blueprint Institute think tank recommended ending the low and middle-income tax offset and keeping the stage three tax cuts, arguing this must be viewed as one part of the overall package. As a three-stage package, the Institute said the reforms were a shift away from heavy taxation of labour and address bracket creep.

“[The offset] was always meant to be temporary; we can’t afford to entrench this complex and inefficient add-on,” it said, warning taxing at too high a rate penalises work and the offset and earlier stages of tax relief had resulted in “chaotic marginal tax rates”.

Start your day informed

Our Morning Edition newsletter is a curated guide to the most important and interesting stories, analysis and insights. Get it delivered to your inbox.