The Coalition’s lucrative income tax cuts have removed the “buffer” against revenue shocks, creating significant risk to the government’s budget projections in the years ahead, the Parliamentary Budget Office has warned.
The caution is contained in the PBO’s medium-term fiscal projections, released on Thursday, which also show that while spending restraint and lower debt repayments have improved the state of the budget, there are major risks to the government being able to achieve the surpluses it has forecast over the next decade.
According to the PBO’s analysis, the projected surpluses could be at risk over the medium term because they are predicated on above-trend economic growth for much of the period and a return to close-to-trend wages growth by the end of 2022–23.
“Weaker than-projected economic circumstances, such as lower-than-assumed commodity prices, would deteriorate the budget position,” the PBO says.
“On the other hand, stronger-than-expected economic activity would improve the budget position.”
The PBO also estimates that despite the Coalition’s $158bn tax cut package coming into full effect by 2024, the tax take from middle-income earners is projected to continue to grow, largely driven by bracket creep.
Individual tax receipts are estimated to grow from $223bn in 2018-19 to $393bn by 2029-30, reflecting annual growth of about 3%.
Low- to middle-income earners (those with a taxable income in the range of $20,000 to $58,000) are likely to see their tax rates grow in line with income, compared with those in the top 20% of income earners – those with a taxable income above $90,000 – who are expected to see little change to their tax rate.
“Until recently, tax receipts were projected to exceed the government’s tax cap, so the budget position was partly shielded from the risk of adverse economic shocks,” the PBO says.
“That is, there was an inbuilt allowance for unspecified tax cuts that could be adjusted depending on how economic conditions evolved.
“The effect of the government’s personal income tax cuts has been to remove this buffer, so any weakness in tax receipts before 2029–30 would directly affect the budget balance.”
The argument that it was economically “irresponsible” to pass the Coalition’s tax cuts in the face of global economic uncertainty was one that had been prosecuted by Labor before they opted to support the tax cut package in full in July.
On the spending front, the PBO warns that the spending restraint seen over the past few years may be increasingly difficult to maintain over coming years given the length of time over which restraint has been applied, the pressures emerging in some spending areas, and the potential need for fiscal stimulus.
Spending on the NDIS is expected to increase 7.2% a year over the next decade, growing from $11bn to $32bn by 2029-30, contributing the most to forecast spending increases.
The next largest contributor to growth is defence spending, followed by spending on aged care and Medicare.
The biggest decrease in spending over the next decade is public debt interest payments, which are projected to fall by 0.5% of GDP over the period 2018–19 to 2029–30 due to the projected improvement in the budget balance and a reduction in government debt.
In the April budget, the government projected a surplus of $7.1bn in 2019-20, building to a surplus of 0.4% of GDP ($9.2bn) by 2022–23. The PBO says its forecast is broadly consistent with the government’s, estimating the surplus will reach 1.6% of GDP ($53.7bn) by 2029–30.
Last week the government posted a better than expected budget outcome for 2018-19 based on higher iron ore prices and a $4.6bn underspend on the NDIS, posting a deficit of $700m – $13.8bn better than forecast in the budget.
