‘Tax cuts key’ as economy struggles

Two of the nation’s top economists have urged the government to make more ambitious tax cuts in the April budget.

Commonwealth Bank Australia chief economist Michael Blythe: “There is scope and need to top up these tax cuts in the budget.” Picture: Hollie Adams

Two of the nation’s top economists have urged the government to make more ambitious tax cuts in the April budget amid signs the economy continues to slow on the back of lacklustre credit growth and falling business confidence.

The chief economists of the Commonwealth Bank and AMP, Michael Blythe and Shane Oliver, have canvassed bringing forward the government’s $144 billion tax cut plan, currently to be phased in over seven years, and doubling the tax cuts factored into the latest budget update.

Josh Frydenberg said yesterday the government was considering further tax cuts beyond those legis­lated following last year’s budget.

“We’ll continue to consider the opportunities in the tax space — we’re the party of lower taxes,” the Treasurer said.

He said the legislated tax cuts would ensure 94 per cent of taxpayers lost no more than 32.5 per cent of their income to tax.

“There is scope and need to top up these tax cuts in the budget,” Mr Blythe said, referring to the $9.2bn available in the December budget update for tax cuts over the next three years.

“It will take some pressure off the RBA on the rates front,” added Dr Oliver, who recommended $6bn a year in tax cuts targeted at low- to middle-income earners.

The NAB business survey yesterday revealed business confidence and conditions fell last month, dashing hopes a modest improvement in January would be sustained.

The number of home-loan approvals fell by a seasonally adjusted 2.6 per cent in January from December.

The value of loans for investment housing fell by 4.1 per cent from December, the ABS said in its monthly lending update.

Mr Blythe downplayed talk of a “per capita’’ recession, which emerged last week after the final set of national accounts for 2018 revealed two consecutive quarters of negative GDP growth when ­adjusted for population. The economy grew 2.3 per cent last year, below the Reserve Bank’s forecast of 3 per cent.

“If this is a recession, then it is one of the strangest I’ve seen in my 36 years following the Australia economy,” he said. “No recession I have seen comes with positive jobs growth, an unemployment rate at the full employment level of 5 per cent, a (near) budget surplus, upgraded business capex plans, above average consumer sentiment and rising terms of trade.”

The iron ore price, at above $80 a tonne, is far above the December budget assumption of $55.

“Every $10 above that level is around $3bn or $4bn a year in extra revenue,” Dr Oliver said.

“The budget looks to be running ahead of schedule to the tune of $3bn a year, which would suggest those tax cuts could be doubled in size without affecting the path to surplus.”

UBS chief economist George Tharenou told The Australian last week he expected tax cuts of $8bn-$10bn a year.

“Commodity price gains in the past year mean the budget is tracking well ahead of expectations and that money, I think, will be returned to households via tax cuts,” he said.

Mr Blythe said while GDP — the “catch-all for living standards” — plunged last year, real net nat­ional disposable income per capita grew by 2.1 per cent during 2018.