Why tax policy’s effect on economy shapes as a 2025 election battleground

Jim Chalmers appears on the ABC’s Insiders program earlier this year. Picture: ABC

Wednesday’s mid-year economic forecast, which predicts a $22bn blowout in the federal deficit over the next four years and highlights deep structural problems in the federal budget, paves the way for a stark debate on tax policy in 2025.

While the government struggles to keep spending under control – with projections of a $58bn spending surge this financial year alone – it is clear that if Labor is re-elected, or governs with the help of independents, it will be looking across the board at ways to claw in revenue by increasing taxes.

The budget update confirms the worrying reliance on income taxes to pay for government spending blowouts that will mean an increased focus on other taxes.

The first term of the Albanese government saw it examine ­potential changes to negative gearing and capital gains but put them aside, while pushing for higher taxes on superannuation balances above $3m.

Jim Chalmers has made it clear this week that even if he doesn’t get his proposed 30 per cent tax on superannuation balances above $3m through parliament before the next election, which is due by May 17, he will try again if he is Treasurer in a new government.

Wednesday’s worsening budget picture – with the receding tide from the Chinese economy revealing who is wearing what clothing – shows how much the windfall revenue from Chinese economic growth has been papering over the cost of the federal spending blowouts in recent years, particularly from the NDIS.

Unless work can be done in cutting back or even reining in the growth of government spending (federal spending as a share of GDP is now expected to hit 27.2 per cent in 2025-26, the highest since 1986-87 excluding the pandemic years), the next Labor government will be looking at how much it can raise in new forms of revenue outside income tax.

The proposed tax on super balances above $3m will be the thin edge of the wedge for a review of other taxes, from capital gains, to negative gearing and other taxes, with some analysts also arguing that an increase in the GST should be on the table.

While there may well be an argument about the need to cap the total amount allowed in the tax-attractive superannuation vehicle, the lower taxes on super are not a tax leakage but the quid pro quo for forcing people to keep 11.5 per cent (increasing to 12 per cent in July) of their income locked up until they retire.

The government’s proposal on super balances above $3m had two disturbing elements.

The first was not to index the proposed $3m threshold, which meant it would continue to squeeze people saving via super as inflation eroded the value of $3m, penalising younger people seeking to put money in super.

The second was the more worrying, radical approach of taxing unrealised gains.

The proposal was to levy taxes on any increase in the value of ­assets in super above $3m – not when they were sold and had delivered a profit, or if they produced a dividend or other income, but simply if the value of the assets had risen over the year. It set alarm bells ringing among small business people and farmers who had put properties in their super funds and could have been forced to sell them by the end of June.

If the proposal to tax unrealised gains within super were accepted, it would have set an alarm­ing precedent for future tax policy.

It could pave the way for taxes on unrealised gains on a broader suite of investments, including property and shares.

The proposed super tax increase, which was due to come into force in just over six months’ time, was estimated to raise about $2bn in its first full year.

But while this would be good to help with budget forecasting, it is doubtful it could have raised anywhere near it as people affected by the move would have acted to get their balances below $3m.

They would have either spent the money or invested it elsewhere, potentially through trusts.

The 2019 federal poll proved to be an election on proposed increases on dividends with fund manager Geoff Wilson, who has become a champion of the small investor, running a surprisingly successful scare campaign against the proposals of then Labor leader Bill Shorten to cut back the franking credits on dividends.

Wilson, who dubbed the proposed tax a “retiree tax”, mobilised his extensive small investor supporter base to the point where it was seen as playing a role in Shorten losing the election.

In the 2022 election, Anthony Albanese as then opposition leader backed away from Shorten’s proposals on franking credits and assured voters there would be no new negative taxes on super during his first term of office.

This did not stop his Treasurer moving early on in the term of the new government to introduce new budget measures to cut back on imputation credits in some circumstances and announce the proposed increased tax on super balances over $3m early last year.

While technically Albanese could argue he had kept his promise on super as the new tax regime was not set to come into operation until July 1 next year – after the federal election – the government still moved with as much muster as it could to get it through parliament in its current term so it would become effective within weeks of its first term expiring.

Wilson has been a strong opponent of the proposed tax on super balances above $3m, calling the government “reckless” for introducing legislation that “disrespects young people, treats farmers unfairly and hurts small business owners”.

It will be interesting to see what Wilson does in the 2025 campaign. But it should not be left to one person to bell the cat on any proposed tax increases to be considered in a new government.

There are genuine grounds for having a mature debate on tax reform, and in looking for trade-offs from sensible proposed changes that are properly debated and phased in over time.

But it is not good for the country nor its reputation as a place to save and invest for governments to push ahead with smash-and-grab ideas such as the proposed tax on super balances above $3m.

As we move into the pre-election mode from January, and take in the implications of the budget blowout, voters should put all major parties to the test and get them to spell out their proposals on taxes.