Budget targets $13.4 billion tax savings for Australians

Matthew Elmas

9th May 2018

The Turnbull Government will look to throw back around $13.4 billion to the hip pockets of Australian consumers over the forward estimates under tax reforms outlined in the Federal Budget on Tuesday night.

More than four million low and middle-income earners will save up to $530 per annum under the plan, which will begin to be phased in by 1 July 2018 and has bipartisan support.

Employer groups say the policy will likely provide a much-needed shot in the arm to retail spending across the country combined with a retention in the Medicare levy at two per cent, saving taxpayers a further $12.8 billion over the forward estimates.

The Government has also doubled down on its plan to cut the company tax rate for large businesses, but it does not yet have the numbers to pass the measures in the Senate.

GST will also be applied to imported goods valued at below $1,000 from 1 July 2018, the government confirmed.

The income tax cut will be rolled out as a lump sum payment through the non-refundable tax offset program, meaning it will be received after Australians lodge their tax returns.

The tax reform will deliver a benefit of up to $200 for Australians with taxable incomes of $37,000 or less, in addition to the existing low-income tax offset, while those earning between $37,000 and $48,000 will see the benefit increase at a rate of three cents per dollar to $530.

The offset will phase out at a rate of 1.5 cents per dollar for those earning between $90,001 to $125,333 per year.

Shot in the arm for retail

Treasurer Scott Morrison had around $34 million in additional revenue to spend on Tuesday night as a result of a strengthening economy.

“Our national economy is strengthening but it is also true that the benefits are yet to reach everyone,” Morrison said in his Budget speech.

“It’s not spending, it’s their money, it’s not a giveaway, it’s their money … everyone pays the price of higher takes, it weakens the economy and costs jobs.”

Australian Retailers Association executive director Russell Zimmerman said the budget was “fairly good” and stands to stimulate spending.

“It will stimulate the economy a little bit, hopefully that will increase spending,” he said. “Bigger tax cuts would have been better but it is what’s affordable.”

Zimmerman also supported a crackdown on illicit tobacco sales, which are expected to gift more than $3.5 billion to the Budget bottom line over the forward estimates and a continued commitment to the $75 billion rolling infrastructure program, most of which was outlaid in last year’s budget.

ANZ Bank economists Cherelle Murphy and Jack Chambers said the Government spent less of its revenue windfall than was previously expected, allowing for a return to surplus in 2019-20 (one year earlier than was previously forecast).

“Fiscal prudence has come at the ‘cost’ of fewer giveaways than might have been the case ahead of an election. We expect the Government to gain favourable comment for banking some of the revenue gains with enough left over for a variety of measures, include personal income tax cuts,” Murphy and Chambers said.

National Retailers Association chief executive Dominique Lamb welcomed the tax cuts.

“The more money that ordinary Australians have in their back pocket the more money they have to spend on items ranging from groceries to personal accessories and clothing,” she said.

However, St Vincent de Paul Society has criticised the tax cuts, claiming it locks in future spending cuts and leaves those earning the least worse off.

“If you’re locked out of a job or in an insecure job, this Budget doesn’t even bring home the two-minute noodles,” said John Falzon, chief executive of the St Vincent de Paul Society National Council.

Falzon said the tax cuts erode Australia’s progressive taxation system and punch a hole in government revenue, leaving low income earners vulnerable to spending more on essential services.

While political pressure is building for an increase to the Newstart allowance, there was no mention of an increase to to Australia’s safety net on Tuesday night.

Australian Youth Affairs Coalition chairperson Katie Acheson also criticised the tax cut, saying the Budget had effectively “locked out” young people.

“Investing in jobs for young people today will ensure we can continue to pay for our ageing population,” she said.

“Instead the government is trying to buy off the middle class with an extra $10 a week.”

Bracket creep addressed

Other measures that the Treasurer said will eliminate bracket creep for a large portion of Australian taxpayers have also been included in the tax plan as the Government looks to take advantage of around $34 billion in additional revenue created by a strengthening economy.

The Government plans to bump up the 32.5 per cent tax bracket from $87,000 to $90,000 from 1 July 2018.

It will also increase the low-income tax offset from $445 to $645 and broaden the 18 per cent income tax bracket from $37,000 to $41,000 in a bid to support low income Australians.

From 1 July 2022 the Government plans to further increase the top of the 32.5 per cent tax bracket from $90,000 to $120,000.

In the longer term, the Treasurer said that the 37 per cent tax bracket will be removed entirely.

Unlike the short-term personal income tax cuts, Labor has not yet backed longer term tax measures in 2023 and 2024.

Rosy wage growth outlook

Treasury left wage growth and inflation projections unchanged from its downwards revision in the mid-year budget update last December.

Wage growth of 2 per cent is expected in 2017-18, increasing to 2.25 per cent in 2018-19 before increasing again to 3.25 per cent in 2019-20, where it is projected to stabilise over the remainder of the forward estimates.

Treasury has a track record of providing overly optimistic wage growth projections though and many economists remain sceptical that annual wage growth of over two per cent is realistic in the near term.

That could create headwinds for the Treasurer’s surplus plans, which is forecasted to be delivered in 2019-20, a year earlier than previously planed to the tune of $2.2 billion.

Real GDP is forecast to grow by 2.75 per cent in 2017-18 before increasing to three per cent each year over the remainder of the forward estimates.