The Coalition guarantees essential services and lower taxes. We can’t have both

Amid Labor’s campaign on the Cost of life, the Coalition focused on one of those costs – taxes – and guaranteed to keep them from rising. His Reduced tax guarantee promises:

  • No new taxes on Australian workers.

  • No new taxes on pensioners.

  • No new pension taxes.

  • No new small business taxes.

  • No new housing taxes.

  • No new electricity taxes

In addition, the Coalition promises to continue to meet its fiscal “speed limit” by keeping tax revenues below 23.9% of gross domestic product.

The Labor Party, fearing that its tax policies cost it the last election, does not mention taxation much and supports the Coalition’s already legislated plan Stage 3 tax reductions aimed at Australians with over $90,000 and due to launch in mid-2024.

It turns out that most Australians are set to pay significantly more tax from the middle of next year, when the Coalition’s low- and middle-income tax offset ends.

Thus, taxpayers whose income is between $48,001 and $90,000 will benefit from a reduction in their tax refund of $1,500 during the next fiscal year.

In fact, we will need more taxes

One of the problems with the pledge is that we will probably need more taxes.

Even on optimistic assumptions about productivity growth set out in the budget, the deficit — the extent to which revenue falls short of spending — is expected to be generally high. 3.4% of GDP for the following year, followed by 2.4%, 1.9%, 1.6% and then continuing without disappearing thereafter.

Budget deficits were an appropriate response to the pandemic.

But, as the Coalition keeps reminding us, unemployment is now just below 4% and expected to drop, which means we could be at what the authorities call “full employment”, or so close that the difference does not matter.

The presumption that Australia should now aim for a balanced budget is embedded in the budget budget strategy which aims to “balance the budget, on average, over the duration of the economic cycle”.

Persistent deficits projected by the budget risk causing aggregate demand (private and public spending) to exceed what the economy is capable of producing.

Over the coming year, the budget forecasts an increase in aggregate demand of 4.5%, matched by the increase in gross domestic product of 3.5%.

The result will likely be a budget-induced increase in inflation, at a time when the Reserve Bank is trying to stave off a spike in inflation (largely of foreign origin).

Realistically, good management requires the new government to balance the budget, if not now, at least by 2023-24.

Failure to balance the budget will lead to unacceptable inflation and increasingly severe measures by the Reserve Bank to contain it, with adverse consequences for the standard of living.

Read more: RBA Governor Philip Lowe raises interest rates. In the worst case, this will mean an extra $600 per month on a $500,000 mortgage.

There are only two ways to balance budgets: cut spending or increase revenue, and the biggest source of government revenue – by far – is taxes.

The Morrison government has committed to an arbitrary tax cap that limits total tax revenue to 23.9% of GDP, forever.

Labor is not tied to such a ceiling, nor does it talk much about appropriate levels of taxation.

The reality is that according to the latest projections from the Treasury and the Ministry of Finance, public spending will amount to 27.2% of GDP in ten years, well above the tax ceiling.

Tax pays for services

The government also guarantees essential servicesbut many are grossly underfunded, for example:

  • the promise to fully implement the recommendations of the Royal Commissions on Services for the Aged and the Disabled

  • higher education, which will be funded less in 2024-25 than it was before the pandemic in 2018-19

  • health financing – excluding the impact of the pandemic, the rate of increase in health financing is expected to be less than half of the pre-pandemic increase

  • the defence, diplomacy and foreign aid spending that will be needed to fill a huge capability gap over the next 20 years

To be sure, there are opportunities for budget savings, starting with voter giveaways and dodgy infrastructure projects that have no business case. But realistically, these savings will be well below what is needed to finance the additional expenses we are going to have to make.

In short, the guarantees of both the provision of essential services and lower taxation are incompatible. No party can credibly promise both.

Read more: Among the 4 economic wild cards by the day of the vote, the first is the CPI

What this election needs is a debate on how best to generate the necessary revenue, followed by a comprehensive post-election tax review.

The starting point should be to determine how much additional revenue is needed.

A rough estimate is an additional 4% of GDP. While that might sound like a lot, it would leave Australia among the lowest-taxed countries in the OECD. This has not hurt the outlook for the OECD.

Michelle J. Kelley