The road ahead for Australia’s budget: Balancing economic growth with tax system reform

Balancing economic growth with tax system reform

Treasurer Jim Chalmers referred to the difficulties facing him in producing a balanced Federal Budget 2023 in an opinion piece published in The Australian newspaper in March. He mentioned unrelenting spending pressures, the need to show restraint, high inflation, global uncertainty, and long-term economic success. But he didn’t mention tax reform, even though it’s one of the revenue-adjusting levers available to him, and an area in which the government is being pressured to move in order to stimulate economic growth.

Is our tax system restrictive and unfair?

Australia experienced two decades of economic and taxation reform in the 1980s and 1990s, including a raft of business and company tax initiatives and the introduction of CGT, FBT and GST.

In the last 20 years nothing much has happened. Some financial observers think our current system is both hindering the Australian economy and distributing the tax burden unfairly. Young people in particular, who are far less likely to benefit from CGT, negative gearing and superannuation income concessions, appear to be carrying a disproportionate share of the load.

Tax system reform options

There’s a range of tax lever adjustments available to the treasurer, including some already announced to happen.

• Abolish the $1500 low and middle-income tax offset (LMITO). Dr Chalmers has already said that he will not continue the offset beyond June 2023.
• Amend tax concessions for large superannuation accounts. The government has announced its intention to lift the concessional tax rate on superannuation earnings from 15% to 30% for balances in excess of $3 million.
• Amend and increase the Petroleum Resource Rent Tax (PRRT). The Treasury is already working on PRRT reform options.
• Create a new Resource Rent Tax (RRT) for other minerals. A tax similar to the PRRT could target highly profitable and largely foreign-owned mining companies.
• Increase tax revenue from multinationals. Implementing the two-pillar international agreement would help to discourage global avoidance of taxes.

Some other options, less likely to feature in this budget, include:

• Increase the Major Bank Levy
• Increase GST rate and scope
• Reduce CGT discount
• Wind back negative gearing
• Eliminate franking credit refunds
• Increase corporate tax rate
• Delay or cancel Stage 3 personal tax cuts

Possible economic effects of tax system reform

The removal of the $1500 offset is estimated to add around $6 billion to tax revenue. But it will add to the financial pressures on millions of Australians already grappling with inflation and high-interest rates or escalating rents, especially with the latest decision of the Reserve Bank to again raise interest rates.

Those struggling can, however, anticipate some form of cost-of-living relief in the budget. The government is under pressure to increase the Jobseeker allowance and has already announced additional tax concessions for SME businesses to embrace energy efficiency initiatives and assistance for home buyers and investors in build-to-rent investments to ease housing demand and cost pressures.

The additional tax on superannuation balances is expected to contribute an annual $2 billion to revenue.

The contributions from personal taxpayers could be much less than the revenue which could be generated by a PRRT increase, an RRT, and targeting multinationals. This revenue boost could be used to fund government projects (such as the first stages of the $368 billion nuclear-powered submarine program), eliminate the budget deficit and even go some way towards repaying the nation’s trillion-dollar debt. However, it could have a negative effect of making some mining projects uneconomic and reduce investment in Australian resources.

Further, if corporate tax measures go too far, for example where our corporate tax rate becomes uncompetitive, some major foreign companies may exit Australia altogether with a negative impact on our GDP.

Obstacles to tax system reform

While the Treasurer has defended proposed changes to the tax system as necessary in the light of the national debt, ongoing budget deficits and the increasing cost pressures of programs like the NDIS, any tax reform comes with political risk.

Proposed changes to the PRRT are not guaranteed to pass through parliament. There was a significant backlash in 2010 when the Labor government proposed a new tax on the profits of mining companies. The government also saw backlash, particularly from superannuation funds and retirees, when they proposed removing franking credit refunds.

There are also election promises to consider, and the price to pay for not keeping them. Both Labor and the Coalition promised to raise no new taxes during the 2022 election campaign.

Sleepless nights for the Treasurer

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.