Budget 2017: Scott Morrison slugs banks, workers

Scott Morrison has hiked income tax by $8.2bn and targeted the big banks and foreign interests as he stayed the course on a long-range budget surplus.

Scott Morrison is slapping a $8.2 billion income tax increase on workers and a new $6.2bn levy on the big five banks to help achieve a budget surplus within five years, blaming the Senate for the need to raise more revenue.

The Treasurer described the new measures as “basically a Senate tax” to change course after years of being blocked in the upper house, as the government abandons unpopular spending cuts while aiming for a surplus.

The bank levy is far greater than the industry expected and is being matched with tougher regulation, giving the government a way to counter Bill Shorten’s demands for a royal commission into the sector.

But the new levy accounts for about 5 per cent of the after-tax profit of the five banks that are expected to incur the extra cost and will spark a storm about whether it will be passed on to customers.

In another political risk, the Treasurer unveiled an increase in the Medicare levy from 2 per cent to 2.5 per cent on almost every worker, arguing that all Australians should help fill a funding gap for the National Disability Insurance Scheme.

The increase will cost a worker on $100,000 a year about $500 a year and could fuel concerns among the Coalition’s traditional supporters, who pushed back against a temporary deficit levy in the May 2014 budget.

Mr Morrison said the new taxes were a “pragmatic” response to the Senate’s objections to savings measures worth $13.5bn, which are being dumped after a series of failed attempts to legislate the cuts.

The “zombie” savings being dropped include the freeze on Medicare rebates for doctors, an unpopular saving that has helped fuel Bill Shorten’s attacks on the Coalition over healthcare.

“When those measures aren’t available to you, you don’t get the option of not balancing the budget over the forward estimates, and as a result we’ve had to turn to revenue measures to do that,” Mr Morrison said.

“This is basically a Senate tax for things not going through.

“If you can’t pass savings through the Senate then that revenue, unapologetically, has to be raised to ensure the budget remains on its trajectory.”

Employers will also pay $1.2bn more over four years for visas for temporary foreign workers, in a response to years of political argument over people on 457 visas taking Australian jobs.

Foreign investors will pay higher capital gains tax on their property purchases in a move to raise $581m over four years and show Australians the government is acting on housing affordability.

One year after relying heavily on a company tax cut to promise stronger economic growth, the Treasurer pledged a $75bn infrastructure program over a decade to lift growth with a strong focus on the Western Sydney Airport, a vast inland rail project from Melbourne to Brisbane and an expansion of the Snowy River hydro-electric power scheme.

The $75bn figure included annual spending, contingent loans and grants to local councils. It was not broken down year-by-year in the accounts, leaving the government room to negotiate with the states on their demands for project funding.

At about $1.5bn a year, the levy will be about 5 per cent of the after-tax profits at ANZ Group, Commonwealth Bank, National Australia Bank, Westpac and Macquarie Group.

Other banks are expected to fall below the threshold for the levy — liabilities of $100bn — and the government will argue that smaller lenders will be able to pick up customers if the major banks try to pass the levy on to their customers.

The revenue measures are fundamental to the government’s ambition to scale back the deficits over the next four years and post a $7.4bn surplus in 2020-21 — with about $4bn of that surplus coming from Future Fund earnings in that year.

The Treasurer described the budget as a “responsible” document while arguing it would reduce the pressures on the cost of living despite the increase in the effective rate of income tax for millions of workers.

“It sets out a credible and affordable plan based on the principles of fairness, security and opportunity,” he told parliament in his budget speech.

“Above all this is an honest budget. It is honest about our challenges and opportunities. It does not pretend to do things with money we do not have.”

Wealthier workers will bear the greatest burden from the increase in the Medicare levy, which see a worker on average earnings of $80,000 a year paying $400 more each year.

The levy will raise more revenue in a single year than the deficit levy that sparked a storm of protest from the government’s own supporters when the May 2014 budget imposed an additional 2 per cent tax on earnings over $180,000.

While the deficit levy applied to earnings above $180,000, the increase in the Medicare levy from 2 per cent to 2.5 per cent applies to all of a worker’s earnings.

As a result, a worker on $200,000 a year is likely to pay $1000 more in Medicare levies from 2019 — outweighing the $400 benefit he or she will receive from the end of the temporary deficit levy.

Australians earning less than $21,655 will not pay the levy, which will scale up between that level and a threshold of about $50,000 in order to shield the most vulnerable workers from the higher tax.

The government will seek to stare down objections from Coalition supporters by arguing the Medicare levy will fill a funding gap in the National Disability Insurance Scheme — and that all Australians should help with the task.

Property investors will lose concessions worth $1bn over four years — such as the ability to deduct travel expenses for trips to inspect their rental property — but the government has rejected wider changes to negative gearing or capital gains tax rules on investment properties.

Mr Morrison avoided any pledge tonight to deliver the $7.4bn surplus, calling it a projection rather than a promise, but he said the budget should be “well received” by ratings agencies that have put the government on notice over its AAA credit rating.

The deficit for this financial year will be $37.6bn, slightly deeper than the $36.5bn outlined in the midyear update last December, but total deficits over the four years of the budget forward estimates will be smaller.

While the December update assumed deficits of $94.9bn over the four years to June 2020, this falls to $90.7bn in tonight’s document. It shrinks to deficits of $45.9bn over the four years to June 2021 assuming the path to a surplus.

The government will rely on a $75bn infrastructure program over the coming decade to claim a pathway to a stronger economy, with Mr Morrison promising “better days ahead” from the improving conditions.

“This budget is about making the right choices to secure the better days ahead,” Mr Morrison said. “Our choices are based on the principles of fairness, security and opportunity.”

Treasury has trimmed this year’s growth forecast from 3 per cent to 2.75 per cent due from the impact of Cyclone Debbie on Queensland, but the growth recovers over the subsequent three years.

In a trend that undercuts the government’s message on jobs and growth, Treasury forecasts an increase in the unemployment from 5.5 per cent to 5.75 per cent this year and next.

The tax increases outlined last night help make up for a $7.3bn deterioration in expected revenue over the forward estimates, in another sign of a weakness in traditional company tax revenue.

Two new initiatives — a crackdown on the black economy and stronger anti-avoidance rules on multinational companies — try to help offset this decline.

The big commitments to new infrastructure projects, combined with a decision to avoid drawing down on the Future Fund, will see net debt climb to $355bn in 2017-18, about $12bn more than forecast last year.

Net debt is now expected to peak at $375bn in 2018-19, up from $359bn estimated last December.

Total interest bearing liabilities, also called gross debt, will climb to $663.8bn by June 2020 before falling to $658.6bn the following year.

The interest expense on the gross debt will climb to $19.2bn next year.

While the government raises new revenue, it is keeping taxation below 23.9 per cent of economic output, the average of the Howard government years.

Taxation will rise above that crucial self-imposed benchmark from around 2023, raising the prospect of tax cuts in some form after the election if the Coalition seeks to honour its commitments.