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Here's why the political debate over tax is getting hot

Just about all economists agree with the general principal of budget management that the Federal budget should be in balance over the course of the business cycle and that the level of net government debt should be low enough to ensure the maintenance of Australia’s triple-A credit rating.

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These big picture fiscal themes even have bipartisan support with both the Coalition and Labor arguing that they will both deliver a sound budget position when in government.

But like someone planning to travel from Dublin to Cork, there are different routes that can be taken to get there. What is the best policy mix that will meet the end point of budget management of balanced budgets and low government debt?

In broad terms, there are two paths that the government can take to balance the budget and contain government debt.

One is to spend less money by cutting government funded services on education, health, roads, pensions and the like while keeping the tax base lower than it would otherwise be. Such a strategy can comfortably balance the budget as fiscal austerity trims the spending side.

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The other way is to have tax laws to ensure there is enough revenue in the government coffers so that services can be provided to a large number of people at a high quality. If the tax system is progressive, the much of the revenue raise will be through fair means.

Some very basic accounting shows that if taxes are cut and therefore revenue to government falls, government services will need to be further curtailed if the budget is to be repaired and debt is to stabilise.

Which is where the current political debate over tax is getting hot.

The Coalition government is planning to deliver cuts to company tax cut that will cost the budget $65 billion over the next 10 years. In addition to this, it has indicated that the budget in May will include plans to cut personal income tax rates, the cost of which will be determined on budget night.

For those cuts to be much more than the price of one sandwich a week to the average tax payer, the cost to the budget is likely to be a further $50 billion over the next decade.

The opposition Labor Party, conversely, is planning a range of tax measures that will boost revenue collections. Negative gearing rule changes, a scaling back of capital gains tax concessions and the change in dividend imputation tax payments to wealthy shareholders will raise substantial revenue that could be used to not only ensure a budget surplus and lowering of government debt, but will also allow for an expansion of funding for schools, universities, health care and the like.

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Before these issues move front and centre in the election campaign, the government has the budget to deliver in May.

On budget night, the government will still almost certainly maintain its forecast for a budget surplus in 2020-21.  A sharp lift in iron ore and coal prices is delivering a revenue boost.

At face value, this will seem like a great outlook, which makes it all the more challenging for Labor to sell its tax plans to the electorate.

The risk from the Coalition’s strategy, conversely, is linked to the fickleness of commodity prices.  While they are strong, the budget numbers will look sound. But as we saw in the period from 2012 through to 2015, a shortfall in prices can cost the budget dearly. A slow down in Chinese economic growth, an escalation of the Trump tariff wars could easily undermine the commodity price outlook.

The budget and policy plans on tax will dominate the economic debate over the next year, which may also be categorised by which services will be cut to allow for taxes to be cut versus which services will receive a spending boost from the extra tax revenue.