Spending cuts not deep enough: economists

Spending cuts recommended by the audit commission not considered unduly tough.

Spending cuts recommended by the audit commission are not unduly tough and any temporary deficit levy will still damage the incentive to work, economists say.

Deutsche Bank chief econo­mist Adam Boyton said the commission’s 86 recommendations, due for release tomorrow, would still allow per-person, inflation-adjusted spending to rise by about 0.75 per cent a year.

“While there seems to be a lot of scare mongering about the National Commission of Audit, the reality is that even under the commission’s ‘reform’ scenario government spending will continue to grow in real terms” he said.

Joe Hockey said in a speech last week the government would need to keep average real spending growth — which averaged about 4.5 per cent a year since Labor won office — at 1.75 per cent a year over the next decade to reach a surplus of 1 per cent of GDP by 2023.

Mr Boyton said the government’s main challenge would be to curb the “very large” acceleration in spending in the 2017-18 ­financial year owing to sudden growth in pensions, defence and the ramp up of Labor ’s disability and school spending schemes.

“The commission’s reform scenario simply proposes to reduce the rate of growth in government spending; the bulk doesn’t even start until 2017-18,” he said, suggesting any changes to tax should be part of a comprehensive reform package.

“One-off levies that run the risk of being permanent should not be a high priority” he said.

The government’s refusal to rule out a deficit levy on higher-income earners — mooted to be an extra 1 per cent at least for workers earnings above $80,000 — this week has prompted a backlash from policy advisers.

John Freebairn, professor of economics at Melbourne University, said the consequent rise in ­effective marginal tax rates from any levy would reduce ­labour supply, distort decisions about saving and investment and artificially affect how businesses organise themselves.

“The current budget has to be a tricky battle between a longer- term objective of reducing a ballooning structural deficit and the short-term macroeconomic challenge of a weak economy, particularly in the labour market,” he said.

Chris Evans, a professor of taxation at University of NSW, said: “It’s ludicrous not to phase an extra levy in — because the mooted 1 per cent will apply to all income, no worker will want to be paid between $79,999 and $80,800.

Professor Evans said any lift in marginal tax rates from July would come on top of the scheduled increase in the Medicare Levy by 0.5 percentage points to 2 per cent. “The bigger issue, however, is that the tax increase would be compounded by the impact of bracket creep, which every year in effect taxes workers at higher rates” he said.

“Virtually all of the income tax reductions given in the Howard and Rudd-Gillard years would now be clawed back if the deficit levy were to be imposed,” he said.

Workers in the top two income tax brackets (above $80,000) have not enjoyed inflation-­adjustment to thresholds since 2008.

Grant Wardell-Johnson, a tax partner at KPMG, said lifting ­income tax rates would encourage workers to shift income to this financial year and push deductions in to the future.

“Levies also hit people with volatile incomes especially hard because they typically cut in at relatively high income levels” he said.