Middle income Australians face a tax hit over next decade
The federal government will be forced to offer low and middle income earners another tax cut or workers will have to fork out thousands of dollars extra in tax by the middle of the next decade.
The Parliamentary Budget Office has found the 6 million Australians earning between $23,000 and $64,000 a year will be pushed into higher tax brackets at five times the rate of the 2.6 million earning more than $100,000 by 2027.
Even after the Coalition's decade long $144 billion tax cut plan was passed by Parliament in June, an adult full-time median salary earner currently on $66,000 a year would be handing over up to $1000 a year extra to the Tax Office by 2026.
"The second and third quintiles are projected to experience the largest increases in average tax rates over this period," the independent parliamentary body found, rising 5 percentage points, compared to only 1 percentage point for the highest earners or fifth quintile.
Prime Minister Scott Morrison Treasurer Josh Frydenberg.
Photo: Dominic LorrimerThe findings will heap pressure on new Treasurer Josh Frydenberg to offer further tax relief to workers battling historically low wage growth in an expected mini-budget before the next federal election. Deloitte figures show the top 20 per cent of taxpayers pay up to 80 per cent of Australia’s tax bill, while middle income earners cover most of the remaining 20 per cent.
Mr Frydenberg set the ground for an even earlier return to budget balance on Thursday, following Wednesday's bumper economic growth figures after almost a decade of budget deficits since the global financial crisis.
"That [3.4 per cent GDP growth] will flow through in the final budget outcome," he told Channel Nine.
Prime Minister Scott Morrison joked Mr Frydenberg had "only been Treasurer for two weeks and he's already smashed my growth records," at a Liberal Party rally in Albury on Thursday.
But the PBO sounded a warning over plans to use the $35.6 billion saved from the Coalition’s shelved company tax cuts, telling government they could help save the economy if it suffers an unexpected shock.
The Reserve Bank has been raising concerns for months about the long-term threat to global growth of an escalating trade dispute between the United States and China and elevated levels of debt.
The PBO advice comes a day after Mr Frydenberg confirmed the signature economic policy of the Turnbull government - reducing the tax rate for all companies from 30 to 25 per cent - would not be revived under a Morrison administration.
Instead, the government is preparing to accelerate billions of dollars in a tax cuts for small businesses earning under $50 million that have already been legislated in a bid to paint Labor as anti-business ahead of the next federal election.
That plan is expected to cost $3.6 billion over the next four years, leaving Mr Morrison with a tempting election war-chest that could be used to offer further income tax cuts or blunt Labor's attacks on schools and hospital funding.
"The recent government decision not to proceed with un-legislated reductions in company tax rates will improve the budget balance over the period 2018‐19 to 2026‐27 if not offset by other measures," the PBO said.
"These stronger projections could provide a more significant buffer against weaker economic circumstances, were they to eventuate, unless alternative measures are announced."
The budget office found the projections in Scott Morrison's final budget as treasurer were broadly consistent with their own calculations and that it should return to a relatively healthy surplus of 1.3 per cent of GDP in the next decade.
But the PBO warned there were risks to that optimism including an ongoing decline in GST-eligible payments such as fuel, alcohol and tobacco because of the rising costs of essential services including schools and hospitals and social and technological changes.
It cautioned "spending restraint seen over the past few years may be increasingly difficult to maintain with an improving budget outlook."
Those spending priorities are expected to change significantly over the next decade, with a plunge in the number of people receiving the disability support payment due to tightening restrictions at the same time as spending on the National Disability Insurance Scheme surges from $7 billion to $31 billion by 2028.
Aged care will also increase as a proportion of GDP from 1 to 1.3 per cent, while defence will jump from 1.9 to 2.2 per cent pf GDP, or $33 billion over 10 years.
Eryk Bagshaw is an economics reporter for the Sydney Morning Herald and The Age, based in Parliament House
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