PM to protect company tax cut

The Abbott government has ­cemented a $4 billion company tax cut in next week’s federal budget despite a renewed search for savings to offset a “deficit tax” that is set to be scaled back or scrapped.

Firewalling one of its flagship pledges, the government will proceed with the tax cut for employers as part of a “growth agenda” to counter fears that deep spending cuts will weaken the economy.

Fears over the deficit tax have triggered a new look at other major commitments, however, as cabinet ministers meet today to canvass changes to the tax increase to prevent a voter backlash. Dumping the personal tax hike will force ministers to find other ways to raise $10bn over four years, the revenue forecast from a 1 per cent levy on earnings over $80,000 and a 2 per cent levy on earnings over $180,000 a year.

Putting risky alternatives on the agenda, the government is weighing up whether to postpone expensive commitments in order to make up for the revenue foregone. Federal cabinet will thrash out the matter in Canberra today but final decisions may not be made until Tony Abbott and Joe Hockey sign off on the budget tomorrow.

Ministers are privately warning that Tuesday’s budget will ­reveal far more unpopular measures than the tax increase on high-income earners, but add that the greatest political danger would be to step back from substantial action on the deficit.

While the government may be forced to postpone election policies that cost too much when the nation’s finances are in the red, the cut to the company tax cut has been fenced off from change.

The government’s policy to cut the company tax rate from 30 to 28.5 per cent will sacrifice about $4bn in 2016-17 but the idea was put forward when the budget ­papers showed a small surplus in that year.

Mr Hockey’s budget update last December revised the forecast to a $17.7bn deficit in that year, raising the prospect of delaying the corporate tax relief as well as any other measures that added to the deficit. The cost of the company tax cut mounts in later years as the economy grows.

Revising the company tax change would trigger a delay to Mr Abbott’s signature paid parental leave scheme because it is partly funded by a 1.5 per cent levy on 3000 big employers. The certainty around the company tax cut is another sign the contentious PPL scheme is going ahead on its original schedule, paying benefits to new parents from July next year.

Rejecting criticism of the parental leave plan yesterday, the government insisted that new parents would receive the minimum wage or their salary, whichever was higher, up to a threshold of $100,000. New mothers on the lowest incomes would receive $16,200 over 26 weeks under Mr Abbott’s plan compared with $11,200 over 18 weeks under the existing Labor policy. The maximum payout would be $50,000.

All companies benefit from the corporate tax cut but only the largest will pay the PPL levy, leading the government to predict the net impact will help create jobs.

There will also be $5bn in new spending on infrastructure in Tuesday’s budget — part of an overall investment of about $40bn including previous commitments — to support the message on growth.

The Australian was told yesterday the deficit levy would go ahead despite criticism from Labor and warnings from former Liberal treasurer Peter Costello that it could hurt the economy.

Options to adjust the tax increase include limiting it to a 2 per cent impost on those earning more than $180,000. This option would raise about $5bn, according to government sources.

Deloitte Access Economics ­director Chris Richardson estimated that another option being aired, to apply a 1 per cent levy on earnings over $150,000 and 2 per cent over $180,000, would raise $6.2bn over four years. An alternative approach, to increase the top marginal tax rate from 45 to 47 per cent and apply it to all earnings over $150,000 rather than the existing threshold of $180,000 would raise $8.1bn over four years, Mr Richardson said.

Labor stepped up its claims that the government was “confecting” a crisis over debt and deficits, noting that last December’s budget update had sharply increased the funds set aside in the budget’s secretive contingency reserve. The mid-year fiscal and economic outlook showed that the funds set aside in the reserve jumped by $10bn over four years, adding to the budget deficits.