MYEFO 2018: There’s a big risk to pre-election tax cuts

MYEFO 2018: There’s a big risk to pre-election tax cuts

Hence, nominal GDP, which factors in the terms of trade and is a big driver of tax revenues, was upgraded to a robust 4.75 per cent in 2018-19, trumping the edge down in real – inflation adjusted – GDP.

The No. 1 risk is China

The big unknown going forward is whether the good times from offshore can continue to deliver strong revenue.

Deloitte’s Richardson said the No.1 risk was the ongoing slowdown in China – evidenced by softer Chinese retail sales and fixed asset investment – and the risk that local politicians entering the federal election lock in permanent spending against a temporary revenue windfall.

“Part of the budget strength that is strong at the moment is not because China is strong, it is because China is weak,” Richardson said.

“It’s responding to that with stimulus on infrastructure and construction which is steel intensive and means Australian coal and iron ore businesses make profits off the back of that.”

“There is a risk that $30 billion gift from economic conditions could disappear and you don’t need much to go wrong.”

An upbeat Treasurer Josh Frydenberg said the government has been conservative in its forecasts, such as allowing for a gentle slowing of China’s economy to 6 per cent from 2019 onwards and the United States slowing towards 2 per cent.

The budget assumes an iron ore spot price of US$55 a tonne (versus $US70 today), the metallurgical coal spot price falling from around $US220 a tonne recently to US$120 tonne by mid-2019 and a thermal coal spot price of US$93 tonne

“There’s disappointing wages but ‘yee-haw’ profits,” Deloitte Access Economics partner Chris Richardson said. Alex Ellinghausen / Fairfax Media

If those prices remain above the forecasts, the budget could be billions better off.

With an election next year looming, there is a risk both sides of politics seize on the potentially-temporary revenue boost and lock in permanent spending.

The Coalition government argues it has restrained average real spending growth at a 50-year low of 1.9 per cent, despite a 4.8 per cent blow out in 2018-19 due to a delay in infrastructure payments to the states that were originally slated for last year.

Since 2013, the Coalition has demonstrated reasonable spending discipline through ongoing nips and tucks, complemented by the strong international and domestic economy naturally lowering welfare spending as more people move into work and become taxpayers.

Revenue windfall

The government has dropped one of its original fiscal rules to bank all revenue upgrades from a stronger economy.

Because the surging corporate revenues would have eclipsed the government’s tax-to-GDP cap of 23.9 per cent, the government will not automatically keep all the revenue windfall and instead use some of the money for tax cuts such as $9.2 billion socked away for the election.

Finance Minister Mathias Cormann clarified the fiscal rule tweak means the government will seek to offset all spending increases – not necessarily tax cuts – with savings, generously including $2.3 billion of budget repair measures blocked by the Senate.

“Our commitment to keep taxes as a share of GDP below the 23.9 per cent cap is reflected in these numbers and that was the reason why we had to make the adjustment,” Cormann said.

Labor has no such cap, opting for up to $280 billion in tax increases over a decade, to help fund personal tax cuts for lower-to-middle income earners, health, education and and a promise by shadow treasurer Chris Bowen to deliver bigger surpluses to shield the economy from China potentially tripping up.

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