Stage three tax cuts should be on the table: IMF warns on budget costs

Treasurer Jim Chalmers has been given the green light by the International Monetary Fund to overhaul the $254 billion stage three personal income tax cuts as part of broader reforms that could include extending tax to the family home.

Warning the country needs tax reform to pay for higher spending baked into the budget, the IMF has used its annual review of Australia to argue for the first time the government may need to balance the cost of stage three tax cuts against their purported benefits to the economy.

Former prime minister Scott Morrison with former treasurer Josh Frydenberg and former finance minister Mathias Cormann after the then-government’s tax package passed the Senate in 2019.

Dominic Lorrimer

It also urged state governments to change their property taxes, backed a broadening of the GST while arguing the country needs even more policy changes to “reignite” productivity growth.

Ahead of the October budget, Chalmers openly canvassed the future of the stage three tax cuts which will take effect from July 1, 2024. Under the cuts, the 37 per cent marginal tax rate for those earning over $120,000 will be axed and the 32.5 per cent tax rate will be cut to 30 per cent for people earning between $45,000 and $200,000.

Prime Minister Anthony Albanese shut down possible changes to the tax cuts just before the October budget last year, declaring Labor’s position towards them had not changed since they promised during the 2022 election that they would not be scrapped.

The cost of the tax cuts has grown since they were first announced by then treasurer Scott Morrison in 2018. In October, Chalmers revealed the cost to 2032-33 had jumped by $11 billion to $254 billion although the government at the time re-committed to tax cuts.

The IMF said that while the government was focused on budget repair, built-in spending pressures and the stage three tax cut limited the pace at which the nations’ finances could be improved.

The federal budget was expected to remain in deficit over the rest of the decade while costs, including the interest bill on outstanding debt, the National Disability Insurance Scheme, health and aged care were all growing quickly.

According to the fund, the government needs to build on the savings it announced in October’s budget with even more that would in turn take some demand pressure out of the economy and reduce the threat of inflation.

“Comprehensive medium-term tax reforms are needed to meet higher structural spending needs and support economic efficiency and growth,” it said.

“Sizable structural spending pressures limit the degree of consolidation and risk crowding out important spending priorities. Reviewing existing, large spending programs and improving expenditure efficiency will be important to underpin medium-term fiscal consolidation.”

The fund for the first time identified the stage three tax cuts, possibly replacing them with ordinary increases in tax thresholds, as one area of potential saving.

“With the cuts taking effect from 2024-25, there would be time, if needed, to re-assess the parameters to appropriately balance costs on the budget and benefits to the economy,” it said.

“Addressing bracket creep in personal income tax by raising the tax brackets periodically will limit distributional implications, including for low-income households and women.”

The IMF believes the government needs to restrict the tax-free status of the family home.

Peter Rae

Apart from dealing with personal income tax, the IMF urged a review of the tax system including exemptions and concessions, saying this would make tax more efficient and equitable.

It controversially said the exemption of the family home from capital gains tax, worth an estimated $64 billion in 2021, should be restricted. Most countries exclude family homes from capital gain tax.

It also advocated the replacement of state government stamp duties with ongoing land taxes, saying this would promote housing affordability, produce more stable tax bases over the longer term and enable people to move more easily.

The fund said it expects Australia to avoid a recession in 2023, forecasting the economy to expand by 1.6 per cent this year and 1.7 per cent in 2024. These are slightly stronger than the Reserve Bank’s own forecasts which are due to be updated next week.

It expects inflation through 2023 to slow slightly to 5.5 per cent and then 3.2 per cent the following year. Across both 2023 and 2024, inflation is forecast to be higher than average wage growth.

It also believes property prices to fall 16 per cent from their pandemic-period peak in April last year. Data released on Wednesday by CoreLogic showed values have fallen by 8.9 per cent.

”As interest rates increase further, [housing] affordability is expected to continue declining, despite falling house prices,” the fund said.

Treasurer Jim Chalmers said the IMF had delivered a provided a “glowing report card” on the government approach to the budget and economy.

“The report is another reminder that in the face of a challenging international outlook, our economy has a lot going for it: historically low unemployment, good prices for our exports, and the beginnings of wages growth after a decade of stagnant wages,” he said.

“The IMF confirms that – despite a difficult year ahead – Australians have every right to be optimistic about the future of our economy and our country.”

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