Treasurer open to tax cuts while delivering nation’s biggest deficit

Treasurer Josh Frydenberg has opened the door to future personal income tax cuts despite delivering the largest budget deficit in history with risks growing it could be eclipsed this year due to billions in extra spending to deal with Delta outbreaks.

Confirming the 2020-21 deficit was $134.2 billion, the largest in dollar terms in Australian fiscal history and the largest as a share of GDP since World War Two, Mr Frydenberg said looking for more tax cuts was in the government’s DNA.

Minister for Finance Simon Birmingham and Treasurer Josh Frydenberg deliver the 2020-21 final budget outcome on Thursday. Credit: Alex Ellinghausen

The deficit follows an $85.3 billion shortfall in the 2019-20 financial year while this year the deficit is forecast to hit $106.6 billion. That is now expected to widen due to current COVID lockdowns.

Net debt jumped by more than $100 billion in 2020-21 to reach a record $592.2 billion. Gross debt is currently at $840 billion.

This week, the independent Parliamentary Budget Office released research showing that if the government abandoned planned tax cuts for middle and high income earners due to start in mid-2024, net debt would be $276 billion lower by the end of the decade.

It also revealed the tax cuts would not end bracket creep, saying governments would effectively have to continue cutting income taxes to prevent people facing higher average tax rates.

Mr Frydenberg, who revealed the current assistance to locked down states would cost this year’s budget at least $20 billion, said further tax cuts were always a possibility.

“I would say to you that cutting taxes is a never-ending journey. We’re always looking for opportunities to cut taxes in our DNA. It’s been our track record,” he said.

“We continue to look for opportunities to reduce bracket creep, and to ensure that people can keep more of what they earn.”

Ahead of the COVID outbreak, the government had been forecasting modest budget surpluses. As late as December 2019, Mr Frydenberg was forecasting a surplus in 2020-21 of $6.1 billion.

Since then, the country has gone through its deepest economic downturn since the 1930s before recording its strongest recovery since the 1950s.

The final budget deficit was ultimately driven by government spending.

Total revenue was just $4.3 billion or less than one per cent down on what Mr Frydenberg forecast for 2020-21 in his mid-year budget update delivered in December 2019.

Company tax, almost solely due to the surge in iron ore prices that hit more than $US222 a tonne in May, was actually higher than had been predicted ahead of the pandemic. GST collections were $4.9 billion or 9 per cent better than forecast.

There was a significant fall in personal income tax collections, which were $12 billion or 4.8 per cent down on expectations, while the large drop was in tobacco excise – the Commonwealth’s fourth-largest tax – which was $1.3 billion or 8.3 per cent down on the 2019 forecast.

Government expenditure, however, is almost $136 billion or 26.3 per cent up on what Mr Frydenberg was expecting before the advent of COVID.

Spending on social security and welfare reached a record $220 billion last financial year, $35 billion more than had been expected in late 2019.

The single largest growth was in “other” government spending, which includes the $88 billion JobKeeper program.

Shadow finance minister Katy Gallagher said while there had been a $20 billion improvement in the budget since May, this had been wiped out by the extra spending necessary to deal with the Delta outbreak.

She said whichever party won next year’s election faced tough choices given the state of the budget.

“It makes it even more important that every dollar spent, supporting the economic recovery, supporting families, supporting businesses through this time is focused on doing just that,” she said.

“We have to make sure that every public dollar spent delivers an outcome, whether it be for households doing tasks for creating jobs for growing the economy and new areas, that has to be the focus.”