Federal budget 2018: Coalition stays true to script on surplus and tax

This budget is an appeal to stick with a long-run Coalition plan: a return to surplus combined with a $140 billion personal income tax reform package over a decade that far exceeds the corporate tax agenda. The budget enshrines people and taxpayers as the priority, not companies. It does something unusual for this government; it brings down a popular tax package ­aspiring to change overall the ­atmospherics of the tax debate.

Scott Morrison proposes to eliminate bracket creep for the middle class across the $41,000-$200,000 income range, offers 4.4 million taxpayers a gain of $530 a year from 2019-20 and has personal tax cuts worth four times the quantum of the ­remaining $36bn corporate tax cut package.

The government will put the three stages of the seven-year personal income tax cut package to the parliament immediately.

It wants to legislate before the end of next month. This budget seeks to invest the government with a more ­viable election agenda and sharpen the difference with Labor by entrenching a Coalition limit on total taxation at 23.9 per cent of GDP.

The Treasurer aims for a much flatter tax system to assist the ­middle class with a greatly expanded 32.5 per cent marginal rate from 2024-25 for 94 per cent of taxpayers. There is an immediate tax offset — a lump sum on 2018-19 assessments after people lodge tax returns — to assist more than 10 million low and middle-­income earners. Morrison says the changes will be put as a “complete package”.

The absolute heart of the strategy is faith in budget repair. The pivotal assumption is sustained growth at 3 per cent driving incomes, profits and revenue. The big play and risk for the government is to legislate now for tax cuts out to 2024-25 on the basis of strong surpluses that do not yet exist. Labor is certain to attack the assumptions and viability of the surplus figures.

The Turnbull/Morrison game plan is to redistribute mounting surplus to taxpayers without Labor’s selected tax increases on companies, investors and high-­income earners. The government will offer modest winners now, bigger winners later and no losers. It will challenge the parliament to lock in the medium-term tax ­reform plan, creating a dilemma for Labor and the Senate.

As expected, the bigger tax cuts come down the track. The tax package costs $13.4bn across the four years of forward estimates but $140bn across the decade. The government hopes its company tax package will be seen in a revised context. The Turnbull-­Morrison election strategy is writ large — delivering higher growth to fund both a responsible surplus and hefty medium-term personal and corporate tax cuts to drive the economy.

The budget says the surplus is within striking distance and ­arrives in 2019-20 with a razor-thin $2.2bn building over the forward estimates to a $15.3bn total. This immediate number must stick — it would constitute a huge embarrassment for the government to bring forward the surplus only to find it disappear in subsequent reviews. The surplus is projected to run at a modest 0.8 per cent of GDP by 2021-22.

On the budget numbers, the case for personal income tax cuts during the 2020s is irresistible. In political terms, introducing the tax cuts now is a “no-brainer” and ditching this option would have been an act of electoral suicide. Improved revenue numbers facilitated the job.

Over the medium term, the ­surplus is projected to reach 1 per cent of GDP from 2026-27, an improvement on previous estimates, a figure that includes the tax cuts. Net debt is projected to fall to about 5.2 per cent of GDP by 2027-28 after peaking in 2017-18.

The government hopes it will win approval from the ratings agencies.

Morrison has been assisted by far higher than expected tax receipts, yet the government’s ongoing commitment to spending restraint will see spending as a proportion of GDP fall to 24.7 per cent at the end of the forward estimates.

This brings it below the 30-year average — evidence the government’s technique of spending restraint, not cuts, is working without destroying its political fortunes. Indeed, average annual spending in real terms will be 1.6 per cent across the forward estimates, the lowest since the Hawke government in the late 1980s.

Morrison’s attack on Labor is that it wants to increase the overall tax burden significantly in order to generate its surpluses. This penetrates to the competing values beneath the competing tax policies. The Coalition, by enshrining the 23.9 per cent cap as a limit on how much taxes should rise in the return to budget balance, is saying Australia must not repair the budget exclusively on the tax side.

Its further argument is that having a tax cap is the essential step in restraining spending.

The government’s strategy with this budget is to win back the confidence of the over-55s and persuade the middle class. Its pitch is to the traditional Liberal vote while telling higher-income ­earners they need to wait for ­benefits. It gives the Turnbull ­government a policy circuit-breaker; the issue is whether the government can convert it into a political circuit-breaker.

Finally, the budget reminds that politics is now dominated by long-run or 10-year budget projections — a process that increases uncertainty and the risk that revenues may not materialise to meet the commitments made.