Turnbull Stakes Future on $7-a-Week Tax Cuts in Election Budget

(Bloomberg) -- Prime Minister Malcolm Turnbull is wooing Australians with the promise of tax cuts as stagnant wage growth erodes living standards. Voters will deliver the ultimate verdict on his budget at the ballot box.

With an eye firmly on elections due within a year, the government on Tuesday unveiled immediate tax relief for low and middle income earners, financial perks for baby boomers heading for retirement and modest giveaways for health and science.

Turnbull Stakes Future on $7-a-Week Tax Cuts in Election Budget

At the same time, the Liberal-National coalition underlined its reputation for economic discipline -- forecasting a A$2.2 billion ($1.6 billion) surplus in fiscal 2020, a year ahead of schedule.

But the desired boost in opinion poll ratings may prove elusive for Turnbull, whose government has trailed the main opposition Labor party since narrowly scraping back into office in July 2016. The immediate tax relief will bolster the average worker’s pay packet by about A$10 a week -- which Labor derides as not much more than the price of a hamburger.

“This budget has challenged Turnbull because he needs to loosen the purse strings to win over voters without suddenly appearing frivolous through big spending increases and massive tax cuts,’’ said Jill Sheppard, a political analyst at the Australian National University in Canberra. “It may continue a trend of the government doing just enough to stay in the race for the next election.’’

Key Budget Numbers:

  • Budget deficit forecast at A$14.5b in 2018-19
  • Surplus predicted to increase to A$11b in 2020-21 and to A$16.6b in 2021-22
  • Net debt to peak at 18.6% of GDP in 2017-18 before declining to 18.4% the following year and 14.7% by 2022
  • Wages growth forecast to accelerate to 3.25% in fiscal 2020 and 3.5% a year after that, compared with the current 2.1%

In its path to surplus, the government relies on some heroic assumptions: it’s positioned Australia’s economy as defying the experiences of developed-world peers. The budget projects wages growth will accelerate even while spare capacity remains in the jobs market, in contrast with the U.S. example of the jobless rate falling well below assumed full employment and pay packets still seeing slow gains.

“The return to surplus is built on some of those probably overly-optimistic wage and hence inflation numbers,” said Su-Lin Ong, head of Australian economic and fixed income strategy at Royal Bank of Canada. “You run the risk that some of the forecasts are still a little bit on the optimistic side here, and they underpin the revenue assumptions.”

Treasurer Scott Morrison defended the wage-growth forecasts, telling Bloomberg Television they were “in line with the IMF, the OECD, the Reserve Bank of Australia.”

“We have consistently forecast conservatively,” Morrison said in the interview Tuesday night.

Turnbull Stakes Future on $7-a-Week Tax Cuts in Election Budget

“The budget is built on a very shaky foundation,” Jim Chalmers, Labor’s finance spokesman, said in a Bloomberg Television interview on Wednesday. The 2020 surplus forecast was “based on optimistic assumptions about wages,” he said.

Returning to the black a year earlier than expected is a political boon for Turnbull. Australian voters generally judge a government’s economic performance by whether it manages to deliver a budget surplus.

Morrison, in his speech to parliament, lauded the retention of the nation’s AAA credit rating from the three main agencies. But of the 10 holders of such a distinction, Australia is in the weakest fiscal position -- despite entering its 27th year without a recession.

S&P Global Ratings said the government had shown a commitment to fiscal prudence, but warned there were still significant risks to the government achieving an earlier return to surplus. Moody’s Investors Service noted there was a risk that commodity price forecasts were optimistic and said there was uncertainty over the pick up in wages growth.

Key Budget Policies:

  • A seven-year plan for lower and simpler income taxes
  • A crackdown on tax avoidance, including stopping multinationals loading up on debt to shift profits offshore
  • Extending goods and services tax to hotel bookings made through overseas websites
  • Limits on fees charged by funds overseeing Australia’s pensions savings pool
  • Tighter rules on stapled structures and fewer tax concessions for foreign pension funds and sovereign wealth funds
  • Outlawing cash payments greater than A$10,000 to crack down on the Black Economy

The budget is benefiting from unexpected commodity price strength, due to synchronized global growth that’s also boosted corporate profits. A hiring bonanza last year has also lifted the personal tax take and reduced welfare costs.

Beyond the blueprint’s initial tax relief of A$530 a year for people earning between A$48,000 and A$90,000, the government plans to lift tax brackets in the longer term and increase the threshold for the 45 percent top rate to A$200,000 in 2024.

“It’s a plan to simplify our tax system,” Finance Minister Mathias Cormann said in a Bloomberg Television interview on Wednesday. “It’s affordable, it’s responsible. The reason we’re able to do it is because we have been able to achieve stronger economic growth.”

Turnbull’s administration remains committed to corporate tax cuts that, except for small firms, have been stifled in the upper house of parliament. It’s trying to maintain Australia’s competitiveness in the wake of the Trump administration’s swingeing cuts to U.S. corporate rates.

“The politics are clear here: the fiscal position is stronger, the trajectory’s better,” said RBC’s Ong. “It’s very clear that they’re laying that groundwork and narrative for the next election.”

©2018 Bloomberg L.P.