Labor’s tax take to breach Coalition cap, economists caution

The warning comes after Treasurer Jim Chalmers heralded an additional improvement in the surplus recorded last financial year.

Treasurer Jim Chalmers. Picture: NewsWire / Glenn Campbell

Australia’s soaring tax take, fuelled by a still-tight labour market and elevated commodity ­prices, likely puts Labor on a path to breaching the former Coalition government’s 23.9 per cent tax-to-GDP cap, economists say.

The warning comes after Jim Chalmers on Monday said he expected further upgrades to the budget bottom line when the final figures for the 2023-24 financial year were released in September, marking an improvement on the $9.3bn surplus projected in May.

“The surplus is coming in a bit bigger … We expect a surplus in the middle-teens of billions,” the Treasurer said.

While May’s budget papers showed the federal tax take relative to the size of the economy was forecast to hit an 18-year high of 23.8 per cent, AMP chief economist Shane Oliver said a surplus in the “mid-teens” would push the measure beyond the Coalition’s cap. “The bulk of the surprise would be on the revenue side, not the expenditure side. Therefore, if we’ve already hit 23.8 per cent, then the odds are we’ve moved above that,” Dr Oliver said.

The former Coalition government’s 23.9 per cent cap on tax receipts, which is based on the average during the Howard government, was dismissed by Labor ahead of the last election.

KPMG chief economist Brendan Rynne agreed that the final tax-to-GDP ratio would push “slightly higher”, and argued that the improved surplus would not be due to reduced spending.

“There could be some savings on the expenditure side, but it’s more likely those are going to be eaten up anyway by things like the NDIS,” Dr Rynne said.

Asked if the tax-to-GDP ratio would push higher, a spokesman for Dr Chalmers pointed to the Howard government when the tax-to-GDP ratio peaked at 24.2 per cent in 2004-05.

“The five highest taxing years of the last 30 were all under Liberal governments, led by the highest taxing treasurer and the highest taxing prime minister of the last three decades – Peter Costello and John Howard,” he said.

Opposition Treasury spokesman Angus Taylor said a future Coalition would introduce “fiscal guardrails”, including the former tax-to-GDP cap.

“This will secure Australia’s future prosperity,” he said.

While personal income tax cuts and lower forecast commodity prices are expected to cut receipts from July and reduce the GDP-to-tax ratio to 23.3 per cent or less over the four-year forward estimates period, Dr Oliver expected the Coalition’s cap could be breached again “within a few years”.

“If we continue to see upside surprises in terms of corporate tax revenue associated with higher commodity prices, that could kick us back up there,” he said, adding that higher inflation could also add fuel bracket creep.

“Budget projections didn’t have it occurring until another five or six years, but the risk is we may see it occurring a little bit ­earlier.”

Despite repeated warnings by Dr Chalmers that Treasury coffers wouldn’t benefit from revenue upgrades befalling previous budgets, prices for key commodities have remained remarkably resilient, and well above budget forecasts.

Similarly, Australia’s still-hot jobs market has helped boost personal income tax receipts, with employment growth of 2.7 per cent in the 12 months to May well outpacing budget assumptions of 2.25 per cent last financial year.

Economist Chris Richardson said the budget’s better-than-forecast result was “entirely to be expected”.

“The outperformance relative to the official expectations were, yet again, in company tax, and yet again, in the main that is due to commodity prices outperforming,” he said.