While the federal budget is set to announce further income tax cuts tomorrow, tax experts have warned that the government should consider balancing short term approaches with long term structural tax reform ahead of a possible economic downturn.
Government warned on delicate balancing act ahead of federal budget sweeteners
With $9 billion parked as “decisions taken but not yet announced” in its mid-year budget update, the government is set to deliver a range of sweeteners for individuals and small businesses ahead of a looming federal election in May.
Speaking to Accountants Daily, BDO national tax director Lance Cunningham said that a reduction of marginal rates or an increase in the marginal rate thresholds were the most likely routes the government would take.
The potential cuts will come on top of tax cuts announced last year – a three-stage process that will run to 2024.
“While individual tax cuts could be seen as being election sweeteners, there are also good reasons to give individual tax cuts right now. These reasons include the reversal of bracket creep caused by inflation,” said Mr Cunningham.
“There is a good argument that the reduction of individual taxes could give a boost to GDP as it would provide more disposal income for households to spend. The alternative to increase GDP is to promote the increase of wages but unless there is a corresponding increase in productivity, this could be counterproductive by increasing inflation. Therefore, the reduction of the individual tax rates may be the better option.
“However, any tax cuts have to be implemented carefully because, while the federal budget is expected to be in surplus for the first time in over a decade, it is not expected to be a strong deficit for a few years yet and there may be some international economic problems coming over the next few years so we need the budget to be sound to counter the possibility of rough economic seas ahead.”
Likewise, PwC chief economist Jeremy Thorpe believes that while the government should commit to personal tax cuts to address bracket creep and help raise effective wages, there is a need to balance it with prudent savings ahead of a potential major downturn.
“The concern is that, in an election year, both sides of politics will have an incentive to spend this windfall. But the projected surpluses are so small as to be mere rounding errors in the context of the total budget,” said Mr Thorpe.
“In a time when there is a real concern about oncoming headwinds, squirelling some additional funds away becomes increasingly important.”