One of Australia’s most respected economists has questioned the Turnbull government’s ability to balance the budget, saying the budget is projecting large tax increases to close the deficit but the government hasn’t admitted that yet.
Prof Bob Gregory from the Australian National University says the current budget’s projections show the deficit closing after 2021 thanks to personal income taxes hitting levels higher than the Costello years, and company taxes rebounding significantly.
But he warns that path to budget repair is unrealistic because the public won’t accept personal income tax rates hitting the highest level in two decades, and the government is pursuing multibillion-dollar company tax cuts anyway.
It means Australia’s budgetary problems will likely persist for years, because the Turnbull government won’t be able to cut spending sufficiently as a percentage of gross domestic product, despite its rhetoric.
Gregory says Australia needs to hold a national tax summit to break the cycle, where all taxes would be on the table for wide-scale comprehensive reform. That would make it harder for individual industries to reject specific tax reforms.
The economist will deliver his warning at the annual Freebairn lecture in public policy at Melbourne University on Wednesday evening. His speech, entitled Fiscal outcomes in a time of increasing political spin and unanticipated economic change, has been seen by Guardian Australia.
With just six days before the federal budget, Gregory says governments need to start taking long-run fiscal planning seriously again.
The modern practice of governments saying “all taxes are on the table” in their pursuit of tax reform, before subsequently ruling out individual taxes from the discussion one by one, has put consecutive governments in a policy straitjacket, he says.
“You can’t do tax reform one at a time, because every time you do them one at a time you rule them out,” he told Guardian Australia. “If you look at the GST, that got ruled out. If you say you want to do something about mining taxes, the mining sector rolls you.
“They need to do a big tax summit, where all the taxes are on the table, and move forward that way. Unless that happens, we’ll just muddle on in the way I’ve described, with budget’s projections showing personal income taxes rising to Costello-era levels.”
Where we are now owes a lot to what Costello did in the end, and that’s not widely recognisedBob Gregory
Gregory says Australia’s entrenched budget problems were not the fault of the former Labor treasurer Wayne Swan, having originated before the global financial crisis with the multiple tax cuts of Peter Costello.
“When you look at how we got into this trouble, it really wasn’t the GFC,” he told Guardian Australia. “The Costello personal income tax cuts from 2003-04 to 2007-08 were huge, they were so huge they set up the preconditions for nine years of deficits.
“When he did that, I think he was of the view that company taxes would still stay high, which they didn’t, and that indirect taxes wouldn’t fall, which they did.
“But I also think he wanted to create pressure on government. Having used a lot of tax revenue for good things, like getting down debt and creating the future fund, I think he decided to put pressure on future governments [to reduce their size].
“Where we are now owes a lot to what Costello did in the end, and that’s not widely recognised.”
Gregory says he is not trying to attack the Coalition government because Labor governments have made their own mistakes.
He says when Swan realised the GFC wouldn’t be as deep as he thought, he assumed tax revenues would return to pre-GFC levels almost immediately, which they didn’t. “His over-forecasting was amazing,” Gregory says. “The current over-forecasting is not as dramatic as when he was treasurer.”
But he says the Treasury’s consistent over-estimations of tax revenue have distracted consecutive governments from the budget’s underlying problems and those problems have become entrenched.
“Government has been too optimistic for nine years and this probably diverted their attention,” he will say on Wednesday evening.
A report from Deloitte Access Economics this week warned the government’s budget deficit for the 2016-17 financial year is likely to be $38.3bn, nearly $2bn more than estimated five months ago.
Chris Richardson, a director of Deloitte Access Economics, said despite attempts by the Coalition government to reduce spending, it had not been successful.
“The maths are inexorable, if spending won’t go much smaller than 26% of national income, then taxes need to lift from today’s 23.5%,” he said.