The 2018 Federal Budget has been launched at a time of greater economic certainty largely due to an improving global outlook and a sharp rise in revenue. Over the next four years, the budget predicts an average growth in revenue of 6.2%. To put this into historical perspective; that is almost double the average revenue growth experienced by the Labour governments of Kevin Rudd and Julia Gillard and the Abbott government. It is noteworthy that Treasury did not predict this spectacular turn in fortune just five months ago when it conducted the mid-year economic and fiscal outlook (Myefo). Political scientists and commentators all over Australia will question why economists continue to get these forecasts so wrong. Budgets provide the evidence-base to inform the key decisions of government. They frame the nature of the public policy agenda, and scope what is possible in policy terms. Poor forecasting diminishes the quality of economic decision-making.
So where has the revenue come from? The largest contribution comes from income tax due to employment growth and higher than expected prices for commodities. In addition, company tax is anticipated to grow by $15 billion over the year; an increase of 22%. Personal income tax is also expected to increase by 6.3% over the next four years despite tax cuts and wage growth is expected to rise to 3.5% by June 2021.
However, the 2018 Federal Budget has also proved wholly predictable in the sense that the Treasurer continued with the populist turn established in the last budget in the run-up to the next federal election. Sweeteners have been provided to Middle Australia with an increase in the low income tax offset; although the real number of people who will benefit is difficult to ascertain and the biggest cuts will occur with the movement to a flat tax in July 2022. Moreover, strategic investment in public transport projects, home care and pensions could help the government consolidate its voter base.
In short, battlelines between government and opposition have now been clearly drawn for the next election with Bill Shorten sure to focus on the inequity of Australians earning between $41,000 and $200,000 being taxed at the same rate of just 32%. Moreover, the move towards a flat tax will inevitably be a painful process and is likely to attract significant critical attention in the coming months.