Cuts way to go, all in good time

The Australian, 2 October 2003

Yes, income tax should be cut, depending on the next outcome, argues Des Moore

Federal Treasurer Peter Costello has dismissed speculation that the $7.5 billion budget surplus for last year – about $3.5 billion higher than the May estimate -would lead to imminent tax cuts of up to $10 a week. But he also indicated that if economic circumstances justified such cuts it would be the Government’s policy to effect them. He’s right.

Suggestions that last year’s budget result itself justifies tax cuts certainly make no sense. Indeed, they are clearly political stirring designed to excite the populist media and further confuse a wrong-footed Opposition which has some spokesmen complaining that tax levels are too high and some wanting to increase them. The case for such cuts depends on the prospective budget and economic outlooks – and on whether the Coalition Government is (finally) prepared to move towards the smaller government role it stands for.

If present estimates are used, there seems little scope to announce tax cuts in next May’s budget, which will presumably form the basis for the Coalition’s election program. The estimated surplus for the current year is a miniscule $2.2 billion and for 2004-05 an even more miniscule $1.3 billion (or about $2 billion allowing for the postponed dividend being paid by the Reserve Bank).

But these estimates are based on forecasts of economic growth of only 3.25-3.5 per cent, which are significantly lower than the 4.5 per cent growth rates Australia experienced in the last half of the 1990s. The recovery from the drought, the improved overseas economic outlook, the continued strong growth in productivity and the high levels of consumer and business confidence could easily see an upgrading of the 2004-05 GDP forecast back to around 4.5 per cent.

That would add another $1.5 billion to that year’s surplus and could also justify increasing the estimated surpluses beyond 2004-05, providing a basis for repeating tax cuts of a somewhat higher magnitude to those implemented in this year’s budget.

It goes almost without saying that the Coalition will not go into an election leaving any substantial surplus for the Opposition to utilize.

Would a program of tax cuts of around, say, $3-4 billion be economically responsible in circumstances where the economy was growing strongly at 4.5 per cent? Assuming that the Reserve Bank would have already raised interest rates to eliminate the existing ‘stimulatory’ stance of monetary policy, it seems highly unlikely that a fiscal stimulus equivalent to around 0.5 per cent of GDP would exert inflationary pressures on prices or wages, particularly as the economy would still be growing below its potential. The imprecision of calculating the Keynesian type effects on demand could not outweigh the general case for reducing the burden of taxation.

With Australian taxes close to their highest ever proportion of GDP, that case is one that the Government should pursue. A good start would be reducing the enormous social security and health benefits provided to middle and upper income groups. It is a national disgrace that income support is being provided to around 20 per cent of working age Australians and that benefits to such income groups – what is sometimes called middle class welfare – cost the budget around 5 per cent of GDP.

A tightening in the eligibility to access such support, with particular emphasis on income and asset testing, would encourage increased participation in the work force and offer scope for significantly reducing the tax burden. Indeed, there is potential for a mutually beneficial trade-off with such income groups – reduced welfare benefits compensated by tax reductions. Is it too much to hope that the refreshed Ministry might now adopt a really exciting economic and social agenda?

Des Moore, a former deputy Treasury secretary, is Director of the Institute for Private Enterprise in Melbourne.