Ahead of the Federal Budget on 6 October 2020, Deloitte Access Economics has forecast an underlying cash deficit at $198.5bn for 2020-21, “just” $14bn worse than the $184.5bn Treasury forecast in the July Fiscal Update.
|“All in all, that’s a pretty good outcome”, said Chris Richardson, Partner at Deloitte Access Economics. |
Deloitte expects better news than Treasury on personal taxes, partly because Deloitte is a little less pessimistic on both wages and jobs, while profit taxes may also outperform the low bar set in the official forecasts.
The main difference between the two forecasts comes down to Treasury’s conservative view that iron ore prices will drop to US$55 a tonne by year end.
Relative to official forecasts released in late 2019, Deloitte expects to see massive ongoing shortfalls in personal taxes. There’ll be fewer jobs, and wages will be lower too, with that latter factor also limiting the usual tailwind for taxes of pushing people into higher tax brackets, said Mr Richardson. Looking further ahead, Deloitte has forecast deficits of $45bn in 2021-22 and $26bn in 2022-23.
On a positive note, Mr Richardson said PAYG collections this year are very close to where they’d be if the 2014-15 tax thresholds had simply been indexed. And the arrival of the second phase of the tax cuts in 2022-23 will leave families paying $7.7bn less in taxes than if the 2014-15 tax system had been indexed. Or, in other words, tax cuts designed to combat bracket creep look like overachieving, as the collapse in wage growth has slowed bracket creep, Mr Richardson said.
Bringing forward personal tax cuts
Deloitte expects the Government to announce in the Budget the bringing forward of the personal tax cuts already legislated in 2018.
From 1 July 2022, the top threshold of the 19% personal income tax bracket is set to increase from $41,000, as previously legislated, to $45,000. Also from 1 July 2022, the low income tax offset (LITO) will increase from $645, as previously legislated, to $700.
From 2024-25, the 32.5% marginal tax rate is legislated to be cut to 30% for one big tax bracket between $45,000 and $200,000. That is, there will only be 3 personal income tax rates – 19%, 30% and 45%.
Mr Richardson said the third tranche of the tax cuts from 2024-25 has had “a very bad rep” that is entirely undeserved. For what it’s worth, modelling by Treasury and Deloitte shows that by the time the legislated cuts to personal income taxes are fully implemented in 2024-25, they will have made little change to the share of wage and salary income paid as personal taxes by different income quintiles, including at the top end of the income scale.
Even once all 3 stages of the tax plan are in place, Mr Richardson said the shares of tax paid by the top 1% and the top 5% of taxpayers will go up a little, while the share paid by the top 10% and top 20% will go down a little.
While the personal tax cuts are not as effective as stimulus as some alternatives, bringing forward these tax cuts would “pump a lot of gas into the economy” and should be welcomed “with open arms”, Mr Richardson said.