Tax cuts that broke the budget

Policy Economics Australia

This report argues that the government would have had an additional $38 billion for last year's federal government budget had it not been for unsustainable income tax cuts that were made in the lead up to the global financial coverage.

Had the income tax cuts not been made, the current budget would not be in deficit and we would be having a very different discussion about funding priorities.

Budget difficulties are not something high income earners are likely to have been concerned with over the past seven years as they were the biggest beneficiaries of these tax cuts. Of the $169 billion in tax cuts, 42 per cent of them or $71 billion went to the top 10 per cent of income earners. The top 10 per cent got more in tax cuts than the bottom 80 per cent.

This sheds an entirely new light on the current debate about whether we can afford things like the NDIS or Gonski reforms. If the budget is in deficit because of income tax cuts that primarily benefited the highest income earners and that is being used as a reason not to give more money or support to the poor and disadvantaged, then political debate in Australia has reached a new low.

Using NATSEM modelling, the full extent of the tax cuts was determined by calculating the amount of revenue the government would have collected had the income tax cuts from 2005-06 to 2011-12 not taken place. These tax cuts represent a major structural change to the federal budget. In 2011-12 they slashed the amount of income tax the federal government was able to collect by a quarter.

The income tax cuts undermined the ability of the budget to generate sufficient income during more normal economic conditions. It drove the budget into structural deficit. The boom times in the lead up to the GFC increased income, spending and profit and generated large increases in revenue for the federal government.

This increase in revenue was a temporary windfall gain driven in part by the mining boom, but it was used to fund permanent cuts to income tax. The argument for the sustainability of the tax cuts at the time was that even with the cuts the budget was still in surplus. This of course ignores the fact that the boom time was hiding the long term sustainability of the budget.

Now that the economy is growing more closely to its long run average, the structural hole left by the income tax cuts by previous governments has been exposed and has resulted in the government struggling to bring the budget into surplus.

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