Economists have urged the federal government not to squander the chance for tax reform, after the prime minister hosed down speculation about possible changes to the legislated stage-three cuts in this month’s budget.
The chief executive of the Grattan Institute, Danielle Wood, said she would be “sad” if “we lost the moment” for a substantial discussion about tax changes and hoped a broader debate was still possible before the next budget in May.
Richard Denniss, of the Australia Institute, said leaders should not “blindly stick to promises that are unpopular, unnecessary and unfunded”.
But there are growing expectations that the government will leave the stage-three tax cuts unchanged in the 25 October budget, despite a week of debate led by the treasurer, Jim Chalmers, about the need to make difficult decisions to suit the economic times.
The prime minister, Anthony Albanese, reiterated on Sunday that the government’s position had not changed – meaning it had not shifted from its pre-election pledge to keep the tax cuts.
“Our position hasn’t changed, so it’s very clear,” Albanese told reporters in Perth.
He noted that the tax cuts were only due to come into effect in July 2024. “We are producing a budget in October 2022,” he said, arguing that the public was not particularly engaged in the current debate.
The stage-three cuts, introduced by the Morrison government and passed with Labor’s support, create a 30% flat tax rate for any income between $45,000 and $200,000. Flattening the tax scales is estimated to cost the budget $243bn over 10 years, with the benefits flowing predominantly to higher-income earners.
Both Sky News and the ABC reported earlier on Sunday that the government was highly unlikely to pare back the tax cuts in the 25 October economic statement.
A lack of changes in the forthcoming budget does not preclude an internal discussion about the package in the next budget, due in May.
But there is heightened sensitivity within government ranks about the political risks of breaking election promises, particularly among MPs who hold marginal seats.
Wood urged politicians not to be “gun-shy around tax”, saying she believed “political parties can make the case and change people’s minds”.
A rethink was needed because the stage-three cuts were unaffordable in their current form, she said. The package had been devised “in a period where we were expecting to see budget surpluses for a decade”.
“Instead, we’ve had a pandemic, a recession, very significant levels of government debt, and sizeable structural budget deficits as far as the eye can see,” Wood said.
“Frankly, there are some pretty reasonable calls for more spending in certain areas and we haven’t had really any discussion about how we pay for it. Significantly undermining the income tax base in that world doesn’t seem to be a very smart idea.”
Wood said one option would be to trim the tax cuts to leave the 37% tax bracket in place. That would reduce the size of the cut for people earning over $120,000, while leaving the tax cuts unchanged for those on $45,000 to $120,000.
Another, more substantial tax reform option would be to leave stage-three cuts in place “but package them up with some reforms that address leakages to the income tax”. These leaks include superannuation tax concessions, family trusts, negative gearing and the capital gains tax discount, Wood said. “All of which are making it increasingly hard to collect tax, particularly from high income earners.”
Wood said she did not mind the government putting off the issue until next year, but only if reform was still on the table.
“I would be sad, though, if this was kind of the only opportunity and we lost the moment,” she said.
Denniss said it was “obvious that Scott Morrison’s tax plan needs to be radically revised” but it was not obvious when the best time to make those changes.
He urged the government to take “a once in a century opportunity to spend $250 billion rebuilding our economy and our society” rather than spending its political capital implementing the Coalition’s tax plan.
“The sooner the government scraps the $9,000 per year tax cuts for those earning over $200,000 per year the sooner the public will take the government’s claims that there are structural problems with the budget seriously,” Denniss said.
Denniss said governments should not break election commitments lightly, but nor should they blindly stick to unfunded, unpopular promises.
New polling released by the Australia Institute has shown declining public support for the stage-three tax cuts.
The opposition leader, Peter Dutton, said the issue was “not about tax cuts but whether you can trust Anthony Albanese and the Labor party”.
Dutton said any decision to scrap the stage-three tax cuts would be “an unforgivable and ridiculous mistake” and said the government was still keeping changes “in their back pocket”.
“I want to see the prime minister honour his commitment and not lie to the Australian people,” Dutton told the ABC’s Insiders program.
But some Liberals have backed the need for a rethink of the policy. They include Liberal moderate Bridget Archer, who told Guardian Australia governments have “got to have an open mind if circumstances change”.
The resources minister, Madeleine King, told Sky News on Sunday the government had no plans to change the stage-three tax cuts but it was “okay to have an open discussion” about the issue.
