A Coalition pledge to keep taxes lower will inevitably lead to either budget blowouts, cuts to services or a broken promise, a leading economist has warned.
But Prime Minister Scott Morrison has doubled down on a Coalition commitment to limit tax revenue by pledging taxes would not rise during the next Parliament if the government is re-elected.
“Lower taxes are at the heart of our economic plan,” Mr Morrison said on Sunday.
“Today I give the Australian people my government’s lower tax guarantee.”
Mr Morrison reaffirmed a pledge to limit taxation revenue to 23.9 per cent of the Gross Domestic Product and challenged Labor to adopt the same pledge, something the Opposition has declined to do.
The government’s stage three tax cuts will forgo billions of dollars in revenue, while further, temporary cuts were extended in this year’s budget.
But Steven Hamilton, an Assistant Professor of Economics at George Washington University, said the Prime Minister’s promise would leave the government facing some invidious choices.
“The government’s own budget forecasts structural deficits, more or less forever, for the whole decade,” he said.
“The only way to repair that structural deficit is either to raise taxes or allow them to rise, or to cut spending, or both.
“If the government wants to take one of those things off the table, then that either means they keep deficits forever, which doesn’t sound very Liberal to me, or it means cutting spending, and then they’re not being upfront with people about how they’re going to do that.
“They don’t want to talk about either cutting spending or raising taxes, which is kind of the inevitable conversation we’re going to have to have after the election.”
A structural deficit is when spending commitments outweigh expected tax revenue when the economy performs to expectations.
But the government’s budget position is under much greater pressure than official estimates suggest, Dr Hamilton said, making its choices all the starker.
“The interest rate is going to be a lot higher than what the budget is currently accounting for, which means that interest payments [on government debt] are going to be a lot higher,” he said.
Government spending on the National Disability Insurance Scheme is “exploding”, taking outlays far above long-term calculations based on historical averages used to set budget assumptions, Dr Hamilton said.
At the same time, extra spending on aged care and defence also seems inevitable, while it’s also more than likely that average economic productivity will fall away from the high watermark set by the mining boom and technological advances in the 1990s before it.
‘It’s not rocket science’
“The budget is extremely optimistic, but even then we’re forecasting structural deficits forever,” Dr Hamilton said.
“Either you let the deficit get even bigger than it’s forecast to be, or you cut other spending to make room.
“Or three, you raise taxes.
“It’s not rocket science.”
Richard Denniss, chief economist at The Australia Institute, said Mr Morrison’s latest pledge suggested a willingness to forgo options in government.
“Having just gone through the last three years of one of the most unexpected and tumultuous times in Australian politics, the idea that you would rule out anything rather than keep all options open, might make for good election campaign messaging, but it makes good economic management a lot harder,” he said.
“If Google and Facebook come up with new techniques for minimising tax in Australia, is the Morison government promising that it won’t implement solutions?
“Unless the Prime Minister is also pledging to have very significant spending cuts, then today, he’s announced a commitment to very big, permanent budget deficits.”