For a government that hates nothing more than “debt and deficit”, the upcoming budget presents a near-insoluble conundrum.
Last financial year the Commonwealth racked up a deficit of $48 billion. In simple language, that means it spent $48 billion more than it took in tax revenue.
Plummeting iron ore prices and worsening economic conditions mean the 2014/15 financial year is likely to see an even bigger deficit, as the government continues to borrow to fund its legislated spending commitments.
Treasurer Joe Hockey’s preferred method of “budget repair” – massive spending cuts – has failed. Last year’s budget proved that Australians will not accept savage cuts to social services.
Meanwhile, his inability to coax businesses into investing more and consumers into spending more means he is left with two options: keep on borrowing money and racking up that hated debt; or increase taxes.
The easy option is to carry on borrowing. Australia still has a triple A credit rating, meaning we can borrow at incredibly low rates of interest, and pretty much anyone will lend to us.
Increasing taxes is more difficult because it will upset voters. But given how much the Abbott government hates debt, upsetting the electorate may be its only option.
With this in mind, we took six key ways the government could increase its tax revenue, and looked at how much they would save … and exactly whom they would upset.
This is what we found.
1. Cut superannuation tax concessions
Status quo: Superannuation is taxed at a flat rate of 15 per cent, regardless of income.
How much do concessions cost? $30 billion a year and rising.
How much could be saved? $5 billion a year increasing taxes on super for wealthier Australians, according to a plan put forward by the Greens.
Who would pay? Those in the top tax brackets.
Who would complain? Wealthy retirees, in particular lobby groups for self-managed superannuation funds, as well as right-wing lobby groups.
Quote: “The reason why I’m cautious is because it’s their money. I’m always cautious about taking people’s money off them” – Treasurer Joe Hockey.
2. Raise or broaden the GST
Status quo: 10 per cent tax on most goods and services, excluding things like fresh food, education and health.
How much does it raise? $53 billion in 2013, according to Treasury.
How much could be saved? If the GST was raised to 15 per cent, it would raise around $80 billion – a saving of $28 billion. While a GST of 15 per cent is common around the world (in the UK it is 20 per cent), it is unlikely the government would hike it by that much. However, the Grattan Institute has estimated that simply broadening the GST to education, fresh food and health would raise $13 billion a year.
Who would pay? Consumers. While in dollar terms the wealthy consumers would pay more, in real terms poorer Australians would bear the brunt of it, as it would make up a bigger portion of their income.
Who would complain? Unions, consumer advocates, left-wing lobby groups.
Quote: “In order to change the GST you need the agreement of all the states … and clearly that’s just not happening” – Treasurer Joe Hockey.
3. Abolish negative gearing
Status quo: If you own an investment property, and the cost of the mortgage interest and maintenance exceeds the income you receive through rent, you can claim tax back on the difference.
How much does it cost? Up to $4 billion a year, according to the Grattan Institute.
How much could be saved? $4 billion in the short-term, $2 billion in the longer term, according to the Grattan Institute and the Australian Council of Social Services (ACOSS).
Who would pay? According to ACOSS, 50 per cent of negative gearers earn more than $100,000 a year. So while this would affect many more people than reducing super tax concessions, the burden would still be borne by wealthier Australians.
Who would complain? Wealthier Australians, the real estate industry, right wing media.
Quote: “We haven’t done what our predecessors did and started ruling things out” – Treasurer Joe Hockey.
4. Include the family home in the Age Pension asset test
Status quo: The value of a retiree’s home is not included in the Age Pension eligibility test. This means, in theory, someone can live in a $5 million house and still claim the full Age Pension.
How much could be saved? Between $5 and $7 billion a year, according to the Grattan Institute.
Who would pay? Middle income earners – that is, the majority of Australians. However, the Grattan Institute estimates the bottom 20 per cent of income earners would feel no effect.
Who would complain? This reform would probably be the most unpopular, as people are understandable emotionally attached to their homes. While Tanya Plibersek’s recent comment that “you can’t eat the family home” is incorrect – there are many ways to unlock the capital in your home without moving out of it – it would be a brave politician who tackled this issue.
Quote: “The idea that this Government would put the family home in the assets test for the pension is just not under consideration … this story is a complete furphy” – Social Services Minister Scott Morrison.
5. Abolish capital gains tax concessions
Status quo: When you sell your house or other assets (e.g shares, a racehorse), assuming it has risen in value, you must pay capital gains tax. However, the tax is levied at a 50 per cent discount – i.e. if your house increased in value by $100,000, you will only pay tax on $50,000.
How much could be saved? $5 billion a year, according to the Grattan Institute and ACOSS.
Who would pay? Everyone who sells a property or other asset for a higher price than they bought it for. Wealthy Australians would pay the most.
Who would complain? The same groups who oppose the abolition of negative gearing. All lobby groups representing speculative investors.
Quote: “We need innovation, we need people to take a risk and I don’t want to do anything that would discourage risk-taking” – Treasurer Joe Hockey.
6. Abolish franking credits
Status quo: Brace yourself, because this one is hard to get your head around. Franking credits, or ‘dividend imputations’ as they’re formally known, are a form of tax rebate paid to retirees and superannuation funds on earnings through company dividends. Imagine you’re a retiree on 0 per cent rate of tax, who owns some shares in Commonwealth Bank. Commonwealth Bank pays you a dividend of $70. That $70 comes out of the company’s profits. Because Commonwealth Bank is a corporation, it has already paid 30 per cent corporation tax on that dividend. That means that amount was originally $100, but the Tax Office took $30 of it. But because your rate of taxation is 0 per cent, you qualify for a total refund of that corporation tax. So you can apply to the Tax Office to pay you an extra $30.
How much would it save? $4.6 billion a year, according to Treasury.
Who would pay? Retirees who own shares, everyone who is a member of a superannuation fund. The more shares you own, the more you pay.
Who would complain? National Seniors Australia, some but not all financial services lobby groups (bond fund managers, for example, hate franking credits), some superannuation funds and charities.
Quote: “I’d rather have lower company taxes, and in that case there will be changes for franking credit availability” – Treasurer Joe Hockey.