Income tax cuts no match for spending on services in the Budget

Former Reserve Bank officials and senior bureaucrats are among a group demanding Treasurer Josh Frydenberg look towards more social spending rather than bringing forward legislated income tax cuts.

The Federal Budget is due to be handed down on October 6, with the nation staring down its largest deficit on record and the Federal Government considering a spending program of a scale not seen since the end of the World War II.

Mr Frydenberg has floated the idea of bringing forward planned income tax cuts by two years, in a bid to kickstart spending by putting “more money into people’s pockets”.

Bernie Fraser, who served as Reserve Bank governor in the early 1990s, and Michael Keating, former secretary of the Department of Prime Minister and Cabinet, argued such a plan would not stimulate the economy as hoped because most of the beneficiaries would simply keep the money in the bank.

“Because they’re so biased in favour of high income earners, the proceeds are very likely to be heavily saved, much more heavily saved than usual.”

The Coalition has locked in three stages of income tax cuts. The first round delivered around $1,080 in tax relief for average income earners last year.

Stage two is due to come into effect from 2022, and would cut taxes for people earning between $90,000 and $120,000 a year, as well as raising the threshold on the lowest tax rate.

The final stage kicks in two years later, and will result in people earning less than $200,000 a year paying no more than 30 cents for every dollar they earn.

Mr Keating believed the only legitimate reason for bringing forward the tax cuts would be that they were already legislated.

“If you’re going to do it anyway, in a couple of years’ time, there’s an argument that it does less damage to the budget in the long run if you do it now, rather than wait two years,” he said.

“But on the other hand, I don’t think they’ll achieve much out of it, in terms of their immediate objective, which is to increase demand and create jobs.”

Mr Keating and Mr Fraser are among 40 political, economic and social policy luminaries backing a campaign by progressive think tank The Australia Institute.

“Those demanding tax cuts today will be demanding service cuts tomorrow,” an advertising campaign rolling out from Monday said.

Nobel Laureate Professor Peter Doherty and Australian Council of Social Service chief executive Cassandra Goldie are also part of the campaign.

IncomeTax cut from 2018-19Tax cut from 2022-23Tax cut from 2024-25
$30,000$255 per year$255 per year$255 per year
$60,000$1,080 per year$1,080 per year$1,455 per year
$90,000$1,215 per year$1,215 per year$2,340 per year
$120,000$315 per year$2,565 per year$4,440 per year
$150,000$135 per year$2,565 per year$6,540 per year
$180,000$135 per year$2,565 per year$8,640 per year

Mr Frydenberg said Australians would have to tune in to his budget night speech on October 6 to learn what the Coalition’s tax policy would be.

“But certainly we are focusing on lowering the tax burden for Australians,” the Treasurer said.

Budget should have a strong focus on social spending

Mr Fraser told the ABC he was hoping Mr Frydenberg’s second budget would have a strong social conscience.

“Pensioners aren’t getting any pension increase from the usual adjustment mechanism — pensioners are a pretty deserving people, and spend the money they get,” he said.

Mr Fraser is wearing an open necked shirt and looking to the right of frame. He has a lanyard around his neck saying "visitor".
Former Reserve Bank governor Bernie Fraser said the Federal Government should focus on social infrastructure in the Budget.(ABC News: Ian Cutmore)

On Saturday, Social Services Minister Anne Ruston said there would be more support for pensioners announced in coming weeks.

Mr Fraser said spending on infrastructure, other than roads and transport projects, should be a priority.

“I was interested the other day when the Prime Minister was saying that ‘look, if the private sector is not going to jump in and provide a gas-fired power station, the Government’s going to do it’,” he said.

“Well, the private sector’s not providing any social housing either.

“And yet, providing social housing would be a tremendous economic stimulus, and would also do lasting benefit of the social kind, given that it would be occurring in a situation of sharp shortages of social housing and increasing homelessness throughout the whole community.”

The Federal Opposition has said Labor would consider any proposals to bring forward the tax cuts, but has argued the October Budget would need to clearly spell out a plan for job creation.