Tax cuts are a sideshow, spending is out of control

Treasurer Scott Morrison before an interview with Nine News Political Editor Chris Uhlmann in Parliament House in Canberra. Picture: Kym Smith

Tomorrow Scott Morrison will ­announce with great fanfare a modest part-reversal of years of annual income tax ­increases. How generous.

Forget any serious effort to ­reform tax, spending or the dysfunctional federation; this will be the centrepiece of the Turnbull government’s pre-election budget.

Since 2009, workers’ average tax rates have risen by about 3.5 percentage points, with a further two to three percentage points pencilled in by 2021, according to the latest analysis by the ­independent Parliamentary Budget Office. Who knows how much further they’ll have to rise, as more and more baby boomers check out of paying income tax and the ­National Disability Insurance Scheme really cranks up.

Even after scrapping the 0.5 percentage point increase in the Medicare levy, previously slated to kick in from July next year, middle-income workers still face a seven percentage point increase in their average tax rate by 2021 compared with 2009: for a worker on $75,000 a year, that’s a $101 a week in additional tax.

No wonder some are grumpy about prioritising tax cuts for ­companies, which, facing a flat rate of tax, don’t encounter any ­bracket creep.

The Coalition stopped the boats, it axed the carbon tax. But it has had far less success, putting it mildly, with paying down the debt or even getting spending under control. Its “fiscal strategy”, unveiled in 2014, is failing. It talked about ­reducing the government’s share of the economy to free up resources for private investment evidenced by “the payments to GDP ratio falling”.

Well, the payments to GDP ratio has fallen from 25.5 per cent of GDP in 2014 to 25.2 per cent, and will rise to 25.4 per cent next year, according to the ­December budget update. That’s hardly impressive. Some simple, brutal arithmetic reveals that the Coalition has overseen a higher average payments to GDP ratio than the previous Labor government: 25.3 per cent to 24.6 per cent. It’s the level of payments that matters ultimately because any shortfall in tax now must be made up for in higher tax later.

To be fair, Labor left poison pills — a big increase in the Age Pension in 2009, for instance, and the blow-out-prone NDIS — but the Coalition has been in power for five years, and has deliberately increased spending. Its new childcare subsidy, for instance, which takes effect in July, has accelerated what had already become a torrent of support, ­including to families where one partner wasn’t even working. It would have been more still had Liberal Democrats senator David Leyonhjelm not insisted the largesse peter out at family ­incomes of $351,000.

The fiscal strategy also talked about paying down debt by ­“reducing, then stabilising commonwealth government securities on issue”. Well, federal debt on issue has surged from $310 billion in 2014 to $534bn this year, and is on track for $684bn by 2027, ­according to last year’s budget forecasts. Net debt as a share of GDP has soared from 13.1 per cent in 2013 to 19.2 per cent this year, ­according to the International Monetary Fund’s latest figures. New Zealand, despite a massive earthquake and less fortunate economic circumstances, will pay its debt down from 7.9 per cent to 5.2 in the same period. Most G20 countries are reducing their net debt across this period.

The fiscal strategy promised budget surpluses equivalent of “at least 1 per cent of GDP by 2023-24”. That’s highly unlikely.

Buried in last year’s budget was the frank admission that the rate of real spending growth would jump more than half from 2021 to 2.9 per cent a year, and stay there until 2028. To be sure, all this ­assumes no future government ­introduces any new spending program, an assumption that tends not to age well. The government has failed to tame relentless, ­unsustainable growth in social ­security, health and education.

The 2023 timeframe for a 1 per cent surplus morphed into “as soon as possible” last year. Let’s face it, the “clear path back” to a decent surplus promised in 2014 is a fog-laden rickety bridge.

The idea that the dollar value of government spending can race ahead about 5 per cent a year (factoring in inflation), income taxes can be cut and the federal budget will whirr back to balance, let alone surpluses equivalent to 1 per cent of GDP, is ridiculous. And don’t forget the government’s arm’s-length $49bn “investment” in the National Broadband Network, which could pop back on to the budget, spilling red ink everywhere, when the ­facade that it’s a commercial ­enterprise becomes too difficult to maintain.

No wonder its present chief executive, Bill Morrow, ­recently announced it was the “right time to hand over the reins”.

The Treasurer’s promise to cap the tax haul at 23.9 per cent of GDP will only delay the fiscal reckoning if spending growth continues on its present upward path. Without greater efforts to restrain spending, the tax cuts expected in this week’s budget are just a distracting pit stop.

In any case, the government’s sudden bounty has been made possible because revenues, inherently hard to predict, are being ­revised up thanks to the global economy’s better-than-expected fortunes, especially China’s. While spending is baked into the budget - economic rain, hail or shine, the global upswing bolstering tax revenues is far from assured.

The government’s struggle with debt is part of a global epidemic. Total worldwide debt, government and private, smashed through $US164 trillion in 2016, which is 225 per cent of global ­annual income, according to the IMF. That’s 12 per cent higher than it was in 2009, when a financial ­crisis unfolded, in part from ­excessive debt.

China’s share of that total has increased fivefold to $US25.5 trillion since 2007. Total debt has continued to rise since then, relative to income. It’s hard to see that process continuing forever. If that process slows down or, heaven ­forbid, starts to reverse, it may not be pretty. Unfortunately, the government has less and less ­capacity to deal with a downturn, especially given the monetary authorities have already set interest rates near zero.