Deliver tax cut cash by Christmas to boost the economy

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Delivering budget tax cuts to Australians in time for Christmas will achieve the Morrison government's goal of boosting the economy, with tax watchers optimistic backdated cuts will help business and generate spending.

KPMG tax partner Hayley Lock said Josh Frydenberg's plans to deliver $17.8 billion in personal income tax cuts, including backdating changes to tax rates, would help spur Australia's COVID-19 recovery.

Prime Minister Scott Morrison and Treasurer Josh Frydenberg leave Parliament House to conduct interviews about the 2020 federal budget in Canberra.  Dominic Lorrimer

"In terms of delivering cuts at levels where we would expect the money to be spent and come back into the economy and create demand, I think that's the right thing to do," she said.

"If we can get them in before Christmas, I think we've got a good chance of getting some stimulus happening."

Former Treasury secretary Ken Henry, who led the Rudd and Gillard response to the global financial crisis, said the savings ratio had increased considerably in the wake of the GFC and there was a risk some of the cuts would also be saved this time.

 

 But Dr Henry, the former National Australia Bank chairman, said the cuts were good policy anyway because they mainly returned "fiscal drag" – or the increase in average taxes on taxpayers' wages due solely to inflation carrying a greater proportion of the wages into higher tax brackets – rather than actually cutting taxes.

 

"Of course there is a risk that some of the tax cuts will be saved but there is another reason for implementing tax cuts, which is that the budget even before COVID was relying on fiscal drag to a much greater extent than is sustainable."

"We cannot be relying on fiscal drag as a major budget strategy. If we have a revenue problem we have to do something that does less economic damage than fiscal drag."

More reforms needed

After Labor offered support for the cuts, the Tax Office began work to apply the changes to tax and payroll systems. The total amount of extra withholding is not yet clear.

Institute of Public Accountants chief Andrew Conway said earlier cuts would reach cash registers.

“Tax cuts will always be a true sweetener but there is no point having the sugar if we are not addressing the cavity that is left behind by ignoring the need for holistic tax reform," he said.

CPA Australia's Jane Rennie welcomed the income tax cut plan.

“Many small businesses operate as sole traders and these tax cuts will help them with cash flow and put money back into their business," Dr Rennie said.

"Of course, tax cuts only provide effective stimulus to the extent that they translate to increased consumer spending.”

Tax & Super Australia tax counsel John Jeffreys said more reform work was needed from Mr Frydenberg.

"Those earning $40,000 will pay 20 per cent less tax and those earning $80,000 will pay around 11 per cent less. And then there are those who will benefit from the lower- and middle-income tax offset being extended for another year.”

Tax Institute director of tax policy Andrew Mills said bringing forward the stage two cuts would "put cash in pockets".

"The government has been generous in keeping the low- and middle-income tax offset for the current year, which will be payable next year on lodging tax returns.

 

Macquarie Business School's Tom Smith said the cuts would almost certainly result in consumer spending.

"The tax cuts to the higher income earners, however, are not as well targeted as they are more likely to save these funds rather than consume.

"Consumer spending accounts for 70 per cent of the economy so it is important that any measures are properly targeted to achieve optimum bang for the buck," Professor Smith said.