ALP tax policy ‘to shrink economy but fairer’

Labor’s tax rises would leave the economy 0.3 per cent smaller than under the Coalition’s, Deloitte Access says.

Labor’s tax policy would result in a smaller economy but fairer society, an analysis shows.

Labor’s tax rises would eventually leave the economy 0.3 per cent smaller than under the Coalition’s tax cuts, but would provide offsetting benefits in fairness, an analysis by Deloitte Access Economics shows.

The firm’s latest review of the economic outlook says there is a much larger gap between the budget and economic impact of the policies of the two parties than is usual in Australian elections as Labor attacks tax concessions while the Coalition offers a long-term series of personal income tax cuts.

By the time the Coalition’s seven-year plan of personal ­income tax cuts was implemented or Labor had legislated its elimination of tax concessions such as negative gearing, the annual difference would be equivalent to about $30 billion a year in today’s dollars.

“The extra taxes would eventually leave the economy about a third of a percentage point smaller than it would otherwise be,” ­Deloitte partner Chris Richardson said. “But that loss to prosperity would also come with some offsetting benefits. Greater spending on health and education, for example, would help to generate a fairer ­society.”

Mr Richardson said that in a typical election, the two major parties proposed policies that would change less than 2 per cent of the federal budget, although they would claim the difference was huge. “This time we’ll decide between policy differences that — when fully implemented — would account for around 6 per cent of the budget,” he said.

In addition to the long-term ­effects of higher taxation, which Deloitte calculated over a decade, the firm said there could also be “transition costs” to the economy from a change in government.

It said the effect of Labor’s changes to negative gearing and capital gains tax on the housing ­industry would be an example of these costs, but it said that even with a falling housing market, it did not expect a big impact.

“This suggests a change of government may see weaker near-term growth, but perhaps not to a marked extent,’’ the firm said.

“People routinely overestimate the power of politicians. That’s why any retired politician will tell you they had less influence than they thought they would.”

Deloitte forecasts that whoever wins the election will face a softer economy, but not a serious downturn.

“This is a slowdown rather than something deeper and nastier,” the report says, predicting growth will average only 2.2 per cent this year, rising to 2.8 per cent in 2020.

Deloitte says falling house prices are reducing consumer confidence and construction activity, however it says the biggest price falls are in the strongest parts of the economy, with unemployment rates in much of Sydney at only 3 per cent.

The firm predicts that consumer spending will be supported by the immediate tax cuts, which are supported by both political parties, which will hand more than $8bn to low- to middle-income earners, which is equivalent to a 2 per cent boost to median taxable income.

With about five million income-earners receiving refunds of more than $1000, Deloitte anticipates this money is likely to be spent. It suggests that the improved budget position, which is making the tax cuts possible, may not be maintained.

“Both sides of politics have taken a China-fuelled temporary revenue boom and promised permanent tax cuts off the back of that,’’ the report says.

“While the recently promised rounds of personal tax cuts may have been politically expedient, we’d have preferred that politicians waited until we had recorded a surplus or two — let alone used the budget (and budget reply) to promise still more tax cuts.”