Check your pay slip and check your receipts; the Morrison Government is poised to be the highest taxing Government in Australia’s history.
The amount of tax it is collecting is booming.
When this happens, it will make a mockery of the claims of the Prime Minister and his Treasurer Josh Frydenberg that the Coalition parties deliver lower taxes for the Australian community.
They certainly do not.
This surging tax take is not just in dollar terms, but the ratio of tax to GDP is set to exceed 24.5 per cent for the first time ever.
This means that around a quarter of all output will flow to the Federal Government in tax we all have to pay. The previous record high tax to GDP ratio was under the Howard Government when it reached 24.3 per cent in 2004/05 and 2005/06.
According to the most recent data from the Department of Finance, which covers the first two months of financial year 2021/22, tax revenue is running a thumping 18.4 per cent ahead of the estimate for tax collections at budget time.
Back then, Treasurer Frydenberg was forecasting tax receipts of $445.6 billion in 2021/22.
Assuming the factors that saw the tax surge in the early part of the year follow through over the remainder of the year, the tax take will be around $527.5 billion. This will be above 24 per cent of the current estimate for GDP, and will be hovering around a record high.
A comprehensive update of the budget numbers will be included in the Mid Year Economic and Fiscal Update (MYEFU) which is set to be released in the middle of December.
This will include more up to date tax revenue data and updated economic forecasts that feed into GDP.
If this confirms that the tax to GDP ratio is above 24 per cent, it will present a problem for the Coalition Government which has promised to keep that ratio at or below 23.9 per cent.
The tax cap
The Coalition introduced this cap on tax as a means to restricting government spending.
When he was Treasurer, Morrison committed to “a speed limit on taxes in our budgets, that requires that taxes do not grow beyond 23.9 per cent of our economy”.
This policy was reinforced by Frydenberg who in September last year said: “Our commitment to strong fiscal discipline and containing the size of government — which comes from controlling growth in spending and maintaining the tax-to-GDP ratio below 23.9 per cent.” Adding, “Our 23.9 per cent cap on the tax to GDP ratio will be retained.”
The 23.9 per cent has no logic or meaning in economics or public policy. It is an arbitrary figure plucked out of the air at a time of lower Government spending and a move favourable budget bottom line than we are seeing today.
With the economy set to recover strongly over the medium term, the tax take of the Federal Government is certain to increase beyond the current financial year and will hit 25 per cent of GDP in 2022/23 and beyond.
This suggests the Government will flag a series of tax cuts to lower this tax take, fortuitously in the lead into the 2022 election campaign. This will be despite the budget still being in substantial deficit.
This would be a misguided policy move.
The budget deficit
The budget deficit is likely to be around a still massive $75 billion in 2021/22 and will be substantial over the forward estimates. Government debt is still on track to hit $1 trillion.
If the Government has any desire to return the budget to balance and retain the tax cap at 23.9 per cent of GDP, there will have to be draconian spending cuts.
Rather than this, the Government would be wise to use its good luck that revenue is rising as global commodity prices surge and the economy performs better than expectations to ‘bank’ the money and start repairing the budget.
In other words, it should use the tax windfall to get the budget back to surplus as quickly as possible and to start on the long, long road of fixing the budget and lowering the growth in Government debt.