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The head of the treasury believes that the easy days of high economic growth are over and that Australia will need big personal income tax cuts to remain competitive.
“In all the circumstances this wasn’t a bad budget.”
Treasury secretary John Fraser
John Fraser says while he supports the budget forecast of an acceleration in economic growth, the days of “supercharged” growth are behind us and we will need to be “sensible in what we can afford to pay ourselves”.
Asked at Grattan Institute function in Melbourne on Friday what he thought of the budget he said: “In all the circumstances this wasn’t a bad budget. Quite the contrary, it was quite a good one in all the circumstances.”
A little recognised achievement was that real spending growth had been kept to 1.1 per cent in the year ahead. Although that was due to accelerate in future years, he regarded forecasts and projections with suspicion because so much could go wrong.
The iron ore price used in the budget was $US48 ($60) a tonne, which was the average in the preceding month. But the price had since risen to $US58 ($72). Mr Fraser said if it stayed there the budget would gain an extra $2.1 billion in revenue. If it climbed to $US68 ($84), which he was not predicting, the budget would gain an extra $4 billion – a “massive impact” that showed how difficult forecasting could be.
He was “unashamedly” of the view that Australia’s high tax rates were holding back economic growth.
Fiscal drag was set take $25 billion from workers over the next four years as inflation pushed them into higher tax brackets.
Mr Fraser said Australia’s tax competition was no longer just Singapore, Hong Kong and Shanghai. “You’ve now got in the George Osborne in the United Kingdom talking about cutting the top rate from 45 per cent plus insurance to 40 per cent, and we’ve got the Kiwi’s with a top rate of 33 per cent. New Zealand is now getting net immigration from Australia, he said.
“Our top marginal rate now cuts in at 2.3 times average earnings. In the United Kingdom it’s 4.3 times average earnings, in Canada it’s 8.6 times average earnings. If you think that doesn’t have an impact on economic growth, that’s fine, you’re entitled to that view, but I think it’s counter-intuitive. ”
“We’ve got to be conscious of tax competition because like it or not disproportionately it’s the upper income groups that pay the vast bulk of tax.”
Low interest rates also worried the treasury secretary.
“I have got to be very careful what I say about interest rates, and I am talking about the world here, but I worry about the losers,” he said.
“All my parents wanted to do in their retirement was put some money on deposit at 4 to 5 per cent. These days in London the best you can get is 1 per cent. It is not as bad here, but it’s unfair. We have broken the social contract with a large group of people.”
Low rates had helped push Sydney and Melbourne house prices out of the reach of young people.
“I see it with my own children, although they have an old man who helps them. I see other young people pushed into a life that doesn’t automatically reward hard work. I am extremely worried by what’s happening with housing. The growing divide is a real economic drag.”
Mr Fraser said he already moved some of the treasury out of Canberra to Sydney and was in the process of setting up an office in Melbourne. He wanted to get much closer to business groups and groups such as the Australian Council of Social Service.
He spoke at the Grattan Institute in place of the traditional post-budget address to business economists in Sydney. It will be the first time in more than 20 years that the treasury secretary hasn’t defended the budget before an audience of economists. Mr Fraser asked that no private recordings be made of the Melbourne event, although the Grattan Institute says it will publish a recording on its website on Monday.
