Treasury calls on Labor to ‘plug our leaky tax system’

Treasury secretary Steven Kennedy has called on the Albanese government to repair the tax system and create a new era of spending restraint.

Steven Kennedy says inflation, war in Ukraine and China’s hard-line Covid ­response present ‘the most complex international environment in 70 years’. Picture: Gary Ramage

Treasury secretary Steven Kennedy has called on the Albanese government to repair a leaky tax system and for a new era of spending restraint, while dismissing as “unusual” the risky approach to debt management the major ­political parties presented to ­voters in May.

In a blunt speech on Wednesday, Dr Kennedy rebuffed pleas from the business lobby for further cuts to company tax, while zeroing in on costly tax concessions, including superannuation, and tax minimisation ploys, such as family trusts, as areas ripe for reform.

The Treasury chief provided a sobering assessment of the ­nation’s woeful productivity performance and urged Labor to free up the economy’s supply side to spur innovation and raise living standards.

He said improving the design of expensive but life-changing ­social policy was vital to ensure wage and salary earners were not hit by punishing tax rates.

Dr Kennedy said rampant ­inflation, Russia’s war on Ukraine and China’s hard-line Covid ­response were threats to growth, and presented “the most complex international environment in 70 years”.

In a preliminary outlook ­released on Wednesday evening (AEST), the OECD revised down sharply its global growth forecast for this year to 3 per cent, from 4.5 per cent in December.

The Paris-based body said this year’s inflation projections stand at nearly 9 per cent in its member countries, twice what it was previously forecasting. “The world is already paying the price for Russia’s aggression,” OECD chief economist Laurence Boone said.

Dr Kennedy, a member of the Reserve Bank board that raised the cash rate to 0.85 per cent on Tuesday, said further interest rate rises would keep wage demands in check, even with unemployment at a near 50-year low.

“With inflation expectations remaining well-anchored, we do not see a significant risk of a wage price spiral, but policymakers must always remain vigilant,” Dr Kennedy said ahead of the Fair Work Commission’s annual wage review decision expected this month.

Former RBA governor Ian Macfarlane on Wednesday said inflation was unlikely to get back to the 2 to 3 per cent monetary ­policy target range in Australia or the US, and was more likely to ­settle as high as 5 per cent.

Fears are rising that central banks’ large rate hikes could send their economies into reverse, but Jim Chalmers said a recession was “not on my list of fears for our domestic economy”.

“I genuinely believe we have, certainly in the medium term, more opportunities than challenges, but the challenges we have right now are incredibly serious and incredibly significant,” the Treasurer told The Australian/Sky News Economic Outlook conference.

Dr Kennedy said the budget and tax systems were under siege, implying remedial work needed to begin in Labor’s first term.

Despite the withdrawal of temporary stimulus, he said the previous government had baked into the budget large ongoing commitments, including for aged care and the National Disability Insurance Scheme. “Significant medium-term spending pressures have emerged over the past two years, and this will see spending remain at a higher level than pre-Covid,” he said.

“Economic downturns have tended to occur roughly every 10 years. Australia needs to rebuild fiscal buffers to ensure the government can respond effectively to future crises. This will help to keep debt on a sustainable path over the longer term.”

Dr Kennedy said providing higher quality aged care and disability services was within our control “while reducing pressures arising from poorly designed ­policies …We will need a tax ­system fit for purpose to pay for these ser­vices, that appropriately balances fairness and efficiency. This is achievable”.

Dr Kennedy said inflation and real wages growth would lead to higher average personal tax rates over time, from the current 23 per cent to almost 27 per cent in 2033.

“Unless other taxes or revenues increase, there is little prospect of having sufficient fiscal space to give this back to tax­payers in the form of tax cuts. This would see average personal tax rates increase towards record ­levels, increasing the fiscal burden on wage and salary earners.

“In the light of spending pressures and the pressure on income tax arrangements, there seems to be little case to lower taxes elsewhere, including company taxes”.

With gross debt on track to reach $1 trillion in the current four-year budget period, Dr Kennedy said the current projected reduction in debt to GDP “is unusual in that it is relying solely on favourable growth and interest rate dynamics to reduce the ratio”.

“A more prudent course would be for the budget to assist more over time,” he said.

“This would especially be the case if growth and interest rate ­dynamics become less favourable. Since (the March) budget, there has been a significant increase in the interest rate on government debt, with the 10-year yield rising around 120 basis points.”

Dr Kennedy said “by improving the quality and efficiency of government services and steadily improving our regulatory systems, we can contribute substantially to productivity growth”.

“If we were able to lift productivity growth and move closer to the global frontier, that would lead to a permanent lift in the level of income and higher living standards,” he said. “There is a limit to the extent to which Australian productivity could grow more ­rapidly than comparable countries, but my guess is that we are not near that limit.”

In its report on Australia’s prospects, the OECD forecast GDP would grow by 4.2 per cent this year and said tax reform should be a medium-term priority.

Reducing “the heavy reliance on taxation of personal incomes would help decrease the vulnerability of public finances to an ageing population,” it said.

At The Australian/Sky News event, Business Council chief executive Jennifer Westacott said “budget repair is important ­because we’ve got to remember that having a strong budget ­allowed us to respond to Covid”.