By Iain SpittalPartner, Sydney
25 March 2022
In this election year, few are expecting the Federal Budget to deliver anything other than moderate cost-of-living relief and some headline spending measures, which (depending on the outcome of the federal election expected in May) may never see the light of day.
Prior to the 2019 election, Treasurer Josh Frydenberg announced, to great fanfare, that the Budget was “back in black”, with the end of net debt and a round of budget surpluses within reach. However, any chance of achieving that outcome has been shattered by the COVID-19 pandemic and associated recovery measures.
Instead of being “back in black” the Budget has given us record back-to-back deficits, including a $134.2 billion deficit in 2020/21, a predicted $99.2 billion deficit for 2021/22, and deficits forecast for the rest of the decade with debt expected to peak at 50% of GDP by 2030 (assuming no other disasters requiring significant spending).
In recent times, the high price achieved for our export commodities and the nation’s economic recovery have reduced the expected deficit. Despite this, we do not expect the Treasurer to announce any major tax increases or spending cuts. A sharp and sudden tightening in the fiscal settings would likely be counter-productive, undermining the economic recovery and ultimately hurting the budget.
There is also a significant change in tack for the Coalition who, instead of promising to eliminate net debt (as they did in 2019) are now focussed on ensuring the economy grows faster than interest rates, and thus: “by growing our economy we can maintain a steady and declining ratio of debt to GDP even without running surpluses”. Future generations will need to continue to fund the annual interest bill of $30 billion (at record low interest rates).
From historical budget papers leaked over the past week we know that Scott Morrison and Malcolm Turnbull were presented with options for meaningful tax reform in 2015, including cutting the top marginal rate of tax to 40%, the bottom rate of tax to 17%, removing the tax-free threshold and replacing it with an earned income tax credit, winding back negative gearing and reducing the capital gains tax discount to 25%, raising the GST and broadening the base, reducing the company tax rate to 25%, and abolishing state stamp duties on conveyancing and insurance whilst doubling council taxes. These proposed policy changes were not adopted by the Coalition and, given that we saw Labour lose the 2019 election (ostensibly due to concerns over the tax reforms it was proposing to enact), we should not expect any discussion of tax reform in this year’s budget.
Instead, as the Treasurer has already acknowledged, we should expect some moderate reliefs from cost of living pressures. This year’s measures are likely to include an extension of the low and middle income tax offset and a probable continuation of the small business tax concessions. The current climate of the increasing oil price, the war in Ukraine, supply chain shortages, and a tight labour market will not allow the Treasurer to offer much more.