Budget falls short on vital tax reform, productivity

Six days before the budget, Jim Chalmers said it would have an “emphasis” on tax reform. The tax system had a role to play, he said, “in the service of our big national objectives” and “there’ll be some other tax changes as well”. After 24 years without significant structural tax reform, since the Howard government introduced the GST in 2000, we were doubtful about the Treasurer’s surprising promise. Our scepticism was justified.

Aside from implementing Labor’s altered version of the Coalition’s stage three personal income tax cuts, the budget provided no real tax reform. That is despite the fact the stage three measures, to start on July 1, will return only about half of the bracket creep that smashed workers’ take-home pay last year. Company tax also was ignored despite the fact Australia’s rate is one of the most uncompetitive among OECD nations and a deterrent to investment. In the absence of reform, the nation is becoming ever more reliant on the personal income tax take. A day after the budget, The Australian’s analysis shows personal income tax take will account for 48 per cent of the estimated $692bn total government revenue this financial year, before rising to 49 per cent by 2027-28. It is higher than before the Coalition’s sweeping three-stage personal tax changes and much higher than the 42 per cent personal tax contribution to revenue in 2008.

Regardless of Dr Chalmers’ rhetoric at the National Press Club about judging the budget on setting up the nation’s economic future, the pattern of an ever-rising personal tax take – now amounting to almost half of government revenue, underwriting ever increasing cradle-to-the grave social spending – is a dubious blueprint for prosperity and growth, especially in a nation facing the economic challenges of an ageing population. It is no surprise that Labor’s third budget, which some analysts believe could be its last before the next election, due in 12 months – on Wednesday Anthony Albanese refused to rule out an early election – has been roundly criticised by economists for its lack of tax and productivity-enhancing reforms. Mondelez Australia chief executive Darren O’Brien summed up the issue when he said: “Productivity must be our primary focus. To thrive in today’s competitive landscape, we must drive more output at lower costs with strategic investments in capital, automation and infrastructure. Unfortunately, there has been a concerning lack of attention to these critical areas, with little evidence of long-term planning to unlock productivity gains over the next decade.” Without such gains, Mr O’Brien said, the cost of manufacturing in Australia would grow increasingly expensive, leading to continual price escalations or offshoring manufacturing to lower-cost environments. “We can’t operate in budget or election cycles, we need to plan for the long term,” he said. Committee for Economic Development of Australia chief economist Cassandra Winzar told The Australian the nation had seen a long-term decline in productivity and she did not see any budget measures that would reverse it.

Centre for Independent Studies adjunct fellow Gene Tunny told The Australian the government would ultimately need to address the structural deficit in the budget, amid significant spending pressures, including the National Disability Insurance Scheme and welfare. Reining in spending would be preferred over raising tax revenue, he said. But it would be “incredibly unpopular” to slash childcare or family benefits. Once baked in and particular groups come to rely on it, government support is hard to reverse. The same could apply, in time, to the Albanese government subsidising the wages of aged-care, childcare and other workers, such as building apprentices, outside the public sector. The subsidies have been put in place to overcome serious labour shortages in essential sectors. But if a future government needed to wind them back, the outcry would be deafening, leaving employers, probably, to foot the bill if they could afford it.

If not in his budget reply on Thursday, Peter Dutton must set out his views, soon, on tax and productivity reform and reducing inflation to facilitate interest rate cuts.