Australia’s outdated tax system is buckling under spending pressure, prompting the Labor government to explore options to boost revenue to pay for programs including a vast defense build up and health care weeks before budget day.
(Bloomberg) — Australia’s outdated tax system is buckling under spending pressure, prompting the Labor government to explore options to boost revenue to pay for programs including a vast defense build up and health care weeks before budget day.
At the heart of the problem are large areas of wealth that are all-but exempt from taxation, leading to an over-reliance on income taxes that are already among the highest in the developed world. At a time when the economy is fully employed and commodity prices are elevated, Australia is forecast to run a budget shortfall equivalent to 2% of gross domestic product in the fiscal year starting July.
That the budget fails to balance even in good times means there is a structural deficit. The challenge for the center-left government in resolving fiscal issues is to first reconcile the stance of Treasurer Jim Chalmers who appears inclined to support unpopular tax reforms with Prime Minister Anthony Albanese who’s well aware of the political havoc that tax changes can wreak.
Chalmers, who’s due to hand down the budget on May 9, had released a list of concessions worth more than A$150 billion ($100 billion) a year in foregone revenues. That would have been enough to fund the health and disability welfare budget for an entire year or pay for the A$368 billion Aukus nuclear submarines in just 30 months.
“There’s a genuine case to do tax reforms,” said Chris Richardson, a former Treasury official and now independent economist. “This is the richest generation Australia’s ever seen. You’d like to see it paying its own way better than it has been.”
The Economic Society of Australia said that increasing resource levies or imposing land taxes could raise billions of dollars while the Grattan Institute estimated more than A$20 billion in savings from ending certain exemptions.
The government is considering changes to the Petroleum Resources Rent Tax to bolster collections but whether that sails through parliament is another thing. Earlier proposals to rein in fossil fuel companies sparked a backlash while suggestions to do away with tax breaks were shot down.
“The Australian tax system is in a parlous state,” said Ken Henry, who authored the last major reform plan in 2010 when he was an economic official. “It is not capable of raising sufficient revenue to fund the activities of government. Certainly not today.”
Thirteen years ago, the then-Labor government cherry-picked a proposed tax on mining industry super profits. That triggered an industry backlash which overwhelmed the government and played a part in the ouster of then-Prime Minister Kevin Rudd.
Albanese had a front-row ticket to that drama — he was a senior minister in Rudd’s government. Now, he appears reluctant to back changes that weren’t put to voters before Labor’s May 2022 election win when he ruled out any major tax measures beyond closing loopholes for multinational firms.
Last year, Chalmers floated the possibility of scrapping tax cuts for high-income earners seen to cost A$254 billion over 10 years. Albanese halted the discussions, according to local media reports. Earlier this year, the treasurer left open the possibility of extending capital gains tax to the family home — as property values in Australia soared in recent years — only for the prime minister to shoot down the idea.
Even small tweaks can rile interest groups. That was seen weeks ago when a political storm followed the government’s move to scale back generous tax breaks for pension contributions by high-income earners.
Independent lawmaker Allegra Spender said she thought Chalmers had been lining up to make tough decisions on tax and was disappointed that he only tweaked the concessions for pension contributions. “I don’t think you’ll see much tax reform out of them in this term,” she said.
No government has sought wholesale reform since the introduction of a goods and services tax that nearly cost then-Prime Minister John Howard the 1998 election.
“I don’t think it’s got any easier since then, and I think the electorate has got more distrustful,” said Michelle Grattan, a professorial fellow at the University of Canberra.
The tension between Albanese and Chalmers follows a pattern which often appeared between an Australian leader and the top economic minister. “The treasurer wants to push the boundaries, the prime minister is more attuned to the politics,” she said.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.