Government coffers flush with cash as households feel the squeeze
It seems incongruous that at a time when the cost of living is rising fast due to rampant inflation that the Federal Government is running a strong and surprising Budget surplus.
Indeed, the 2022-23 Budget was initially forecast to be a $78 billion deficit but then sprung a surprise to hit a revised surplus of more than $4 billion, with the most recent figures showing the surplus might come in as high as $19 billion.
The two big factors that led to such a large turnaround were high commodity prices and record low unemployment.
Strong employment boosts the surplus
Strong employment and wages growth have a double benefit because it reduces Government outlays through welfare payments and increases the personal tax take while higher commodity prices – some of which was caused by the war in Ukraine – pushes up taxes on commodities.
So, while the average household budget is really feeling the squeeze, the Federal coffers are in a very healthy state and are likely to stay that way for some time yet despite more spending promises and the stage three tax cuts coming online next year.
The dark side of this very healthy Budget position was recently highlighted by the independent Parliamentary Budget Office (PBO), which pointed out that the growing reliance on personal income tax could see the country facing a trade-off between providing services to older Australians and hurting the finances of young people.
Tax cuts will be quickly wiped out
As the PBO pointed out, even with the significant Stage Three tax cuts which arrive from July 1 next year, the tax hit on workers is still increasing over time and more tax relief will be needed to just keep the tax take at the same level of the economy.
As we all know, bracket creep and inflation/fiscal drag have a nasty habit of swelling the proportion of income workers pay in tax.
With a growing demand for spending, such a heavy reliance on personal taxation is dangerous and can result in a dampening of demand in the economy.
You can add to this issue the burgeoning number of older Australians who are increasing their call on costly government services at the same time as the number of workers is falling.
Average tax rates still rising
Even allowing for the stage three tax cuts, the average tax rate across all Australians is now on track to hit an all-time high of 27.1% early next decade and is this year expected to reach 25.5%, the highest level since 2000 when tax cuts were put in place by the Howard government to offset the impact of the goods and services tax.
The PBO estimate that the Stage Three tax cuts will be entirely wiped out by the end of the decade, and by early next decade, the personal income tax will account for more than half of all government revenue, with an additional $238 billion a year in tax expected to be collected from workers.
Illustrating the increasing reliance on personal taxation, company tax collections are expected to climb by $59 billion but as a share of government revenue, they will shrink from 19.3 cents in the dollar to 17.8 cents.
Costs of care rising
At the same time, the combined cost of aged care, the age pension and the NDIS is expected to climb from 21% of all government spending to more than 23%.
To be sustainable and cope with these changes, the tax system would need to reduce its high dependence on personal taxation and more tax cuts would be required over time.
“For the current tax mix, with its high dependence on personal income tax, there is a trade-off between providing sufficient support for the ageing population and maintaining intergenerational fairness for younger Australians whose primary income is wages.”
“Intergenerational considerations, together with projections of increasing expenditure pressures to meet the needs of the ageing population, suggest that Australia’s concentrated tax mix may pose a risk to the long-term sustainability of the tax system.”
The PBO said that the last time Australians went more than four years without personal tax cuts was in the 1960s.