The two words that upended the federal budget just weeks before it drops
By Shane Wright
Growing global concerns about the war in the Middle East, protectionist moves by the US government and worries over China’s economy have forced Treasurer Jim Chalmers to change tack on next month’s federal budget with a new focus on “economic security”.
Following a string of meetings with world finance ministers and central bankers in Washington over recent days, Chalmers on Saturday said the budget – to be released on May 14 – would align Australia’s national security interests with its economic security challenges.
Treasurer Jim Chalmers with Ukraine’s Minister of Finance, Sergii Marchenko. Chalmers says the budget will have an economic security focus.Credit: X/Twitter
It’s a departure from Chalmers’ commentary about the budget, which the treasurer had been arguing would focus on cost-of-living issues, including the government’s revamped stage 3 tax cuts, and boosting economic growth.
Chalmers was in Washington for the annual meeting of the International Monetary Fund, which used its economic outlook to warn that growth across the globe was continuing to slow.
During the meeting, Israel retaliated against Iran’s missile attack in a development that pushed up prices for gold and oil. US President Joe Biden also announced a sharp increase in American tariffs on Chinese steel – a move that has some analysts worried about the economies of both nations.
Chalmers, who met his Ukraine counterpart, Sergii Marchenko, said global factors were going to factor in his final budget deliberations, but the events of recent days meant a new focus on economic security issues.
“Our budget will put a premium on responsibility and an emphasis on security. You will see a much bigger emphasis in the budget, not just in investment, not just on growth, but also in economic security as well,” he said.
“We want to align our national security and our economic security interests, this is how we help relieve cost-of-living pressures, repair our budget and reform our economy as an antidote to the kinds of risks that we see escalating around the world.”
But shadow treasurer Angus Taylor, while conceding geopolitical conflicts were challenging, said the government had to accept its responsibility for the pressures on ordinary Australians.
“Over the last two years, we’ve seen price hikes, interest rate hikes, and they’re paying more tax than ever, and we need their standard of living restored,” he said.
“The government should take responsibility for this, don’t blame others, get on with the job, bring inflation down, get that standard of living back to where it should be.”
A key element of next month’s budget will be the stage 3 tax cuts that were first promised by Scott Morrison as treasurer in 2018 and will start from July 1, although in a revamped form.
When first announced, concerns were raised the cuts – worth about $23 billion in the coming financial year – would add to inflationary pressures across the economy.
But EY chief economist Cherelle Murphy said given the sharp increase in total tax paid by all Australians over the past year, the cuts were unlikely to drive up inflation.
“Given the personal income tax take has been increasing substantially in line with population growth, employment, hours worked and wages growth, it is only giving back some of what has recently been taken,” she said.
EY chief economist Cherelle Murphy says tax reform has to be on the government’s agenda even after the stage 3 tax cuts.Credit: Alex Ellinghausen
“In 2023, the household sector paid nearly $47 billion more income tax than in 2022; $19 billion doesn’t look so substantial against that backdrop. On the upside, the tax cuts shouldn’t therefore be particularly inflationary, all else equal.”
When first announced, the then Turnbull government said the overall tax plan would end bracket creep, which is the process by which a person’s average tax rate increases as a larger proportion of their wage is taxed at a higher rate.
But independent analysis, including from the Parliamentary Budget Office, suggests average tax rates will start to increase within two to three years due in part to a lift in overall income growth. That has prompted calls for a new round of tax reform.
Murphy said it was unlikely the government would undertake further changes in the near term because any reforms would have to be significant.
“Reform is difficult, especially if it comprehensively addresses some of the outdated taxes we have across the Commonwealth and states, and is genuinely aimed at increasing the size of the economic pie,” she said.
AMP deputy chief economist Diana Mousina said the government should be talking tax reform.
“It should really be reforming the tax system now,” she said.
“Australia is way too reliant on personal income tax as a share of tax revenue relative to other countries. Lower personal income taxes should be replaced with a lift in the GST.”
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