No tax relief for you: Deficits, cost put cuts in too-hard basket

Neither major party will try to win over voters at the federal election with an offer of substantial tax relief after Opposition Leader Peter Dutton tied his policies to the state of a budget facing $120 billion of deficits.

As Treasurer Jim Chalmers in effect ruled out going to next year’s election, expected by May, with a major overhaul of personal income tax, Dutton said he wanted to “see the books” before offering any pledge despite earlier this year promising “strong” tax reforms for voters to consider.

Opposition Leader Peter Dutton has tied any tax policy to the state of the federal budget, which is forecast to be in deficit for the next four years.Credit: Alex Ellinghausen

Both are under pressure to consider reform after this masthead revealed Parliamentary Budget Office analysis showing that without a change to tax rates and thresholds, Australians would face a half-trillion-dollar increase in their personal income tax over the next decade.

Any tax relief, however, would punch a substantial hole in the budget, which is forecast to be in the red for the rest of the decade. Between the current financial year and 2027-28, the government is expecting cumulative deficits of $122.1 billion.

Based on the budget office’s forecasts, the cost of returning bracket creep to all taxpayers over the same period would be almost $150 billion. In the coming 2025-26 financial year alone, returning bracket creep – where a person’s average tax rate goes up as their income moves through a tax bracket or into a new one – would cost upwards of $40 billion.

Without massive cuts in government spending or a sharp lift in commodity prices and company profits, returning bracket creep without adding to expected deficits would be almost impossible.

Earlier this year, Dutton said he would go to the election with “strong tax reforms in keeping with the stage 3 tax cuts”.

Asked on Monday if he would take tax cuts to the election, Dutton said his focus was on bringing inflation down, noting he wanted to see the state of the federal budget.

“We want to see the books,” he told Sky News. “Let’s see how much money is in the bank.”

Speaking in Canberra, Chalmers said while the government had delivered tax relief to all working people through its revamped stage 3 tax cuts that started from July 1, the chances of another round were low.

“People shouldn’t expect us to take a big new income tax cut policy to the 2025 election,” he said.

“The tax cuts that we put in place from the first of July are rolling out right now. They are an important way that we’re helping people with the cost of living, getting inflation down, getting wages up, rolling out tax cuts and cost-of-living help.”

Any tax and spending plans of both major parties could be upended by the tariff policies of the incoming administration of US President-elect Donald Trump.

Analysis released on Monday by rating agency S&P Global found that Trump’s plan to impose 60 per cent tariffs on all imports from China would cause immense damage to the world’s second-largest economy and Australia’s biggest export market.

S&P found China’s economic growth would slump below 2 per cent for 2025 and 2026, less than half current forecasts. Chinese exports would fall by 10 per cent and investment by 5.5 per cent.

Trump administration tariffs for China are likely to cripple the world’s second largest economy - and those of its trading partners.Credit: AP

While the tariffs would slow America’s economy and increase inflation, the impact on China and its trade partners would be larger.

“The effect of 60 per cent tariffs on Chinese economic growth would be quite severe,” the agency’s Asia-Pacific chief economist, Louis Kuijs, said.

The government on Tuesday will announce the first project to win funding under its National Reconstruction Fund, which is aimed at diversifying the economy, retaining jobs in Australia and protecting the country from supply issues such as those that hit the world due to the pandemic.

Toowoomba-based manufacturer Russell Mineral Equipment, which produces specialist milling technology for copper, gold, nickel and zinc mining, will receive $40 million from the fund.

Industry Minister Ed Husic said the funding would build domestic manufacturing while retaining hundreds of jobs in Australia.

But the Business Council of Australia, in a new report on the country’s lagging productivity levels, said governments had to go much further.

The report found productivity growth, which has slowed to just 0.5 per cent a year, would have to quadruple to make up for the drop-off Australia has endured over the past decade.

Council chief executive Bran Black said wages and employment were at risk if productivity did not turn around.

“Unless Australia’s productivity performance is drastically reversed, our high living standards will be put at risk, and that means lower economic growth and lower wages,” he said.

The council said reforms, including reducing red tape, reversing the government’s recent industrial relations changes, overhauling the tax system and support for research and development, needed to be embraced by all governments.

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