Anticipation tax cuts will be brought forward in economic update

Treasurer Josh Frydenberg. Picture: Dion Georgopoulos
Treasurer Josh Frydenberg. Picture: Dion Georgopoulos

The government will unveil the country's biggest deficit since World War II when it hands down an economic statement on Thursday, but will not lay out the budget numbers beyond the current financial year.

Economists are preparing for the possibility that Treasurer Josh Frydenberg will bring forward tax cuts.

If he brings forward the stage 2 tax cuts, which were not scheduled for another two years, that would see anyone earning up to $120,000 paying no more than 32.5 cents in the dollar in tax, instead of the 37 cents paid over $90,000 at the moment.

At the bottom end of the earning scale, the stage 2 tax cuts would put an extra $1100 in the pockets of people earning $45,000.

The possibility that tax cuts will be brought forward remains speculation, unconfirmed by the government. But Mr Frydenberg foreshadowed two weeks ago that it was a possibility.

He referred then not only to the second tranche but to the third tranche of tax cuts, not due until 2024. They would, in Mr Frydenberg's words, create "one big tax bracket" for incomes between $45,000 and $200,000 with a top tax bracket of 30 cents.

"We are looking at that issue and the timing of those tax cuts because we do want to boost aggregate demand, boost consumption, put more money in people's pockets and that is one way to do it," he said on July 8.

Thursday's economic statement will reveal the scale of government debt and the deficit for the 2019-20 year and the current financial year, 2020-21. It will include all of the measures announced since the mid-year update in December, when the government was still predicting a $5 billion surplus. The deficit is now predicted to be in the order of $200 billion.

Citing significant uncertainty, given the coronavirus resurgence, the government has delayed budget forecasts beyond the current financial year until its October 6 budget.

The government says the integrity of the budget has been maintained with virtually all of the stimulus contained to the 2019-20 and 2020-21 financial years - $164 billion in direct spending and $125 billion in "balance sheet support" such as loan guarantees.

This week, the government announced the phasing out of JobKeeper, with about 2.1 million of the 3.5 million workers receiving the subsidy expected to lose it from October, and a lower rate paid to those who remain. The JobSeeker unemployment benefit will also be reduced, but continue at a higher rate than the old unemployment benefit for the moment. The two measures will cost the budget at least $17 billion in 2020-21, but economists are calling for a much bigger spend.

Grattan Institute chief executive Danielle Wood said $70 billion to $90 billion was needed over two years to bring unemployment back to pre-coronavirus levels by the end of next year.

"The bottom line is the only way we're going to emerge from this with a strong economy and more jobs is if the government invests in the economy over the next year and two years," she said.

A poll of 50 top economists this week showed an overwhelming proportion - all but three - want the government to continue spending even if it means a big increase in government debt.

"It's about what you're willing to do," Ms Wood said. "The government can create the jobs. It's whether you're prepared to pay the price for that. We think it's a price worth paying."

The Victorian lockdown will wipe $3.3 billion from the economy in the September quarter, the government says. Company taxes are expected to fall more than $12 billion a year (about 13 per cent). And business investment will be down 12 per cent this year - although mining investment will be positive for the first time in seven years, expected to grow a strong 9.5 per cent in 2020-21.

Mr Frydenberg said the pandemic was a once-in-a-century shock that is placing immense pressure on health systems and economies, but Australia had outperformed nearly every other country on both fronts

This story Anticipation tax cuts will be brought forward in economic update first appeared on The Canberra Times.