In the lead-up to the Federal Budget 2018, there has been a lot of speculation about tax cuts. The company tax cuts in last year’s Budget have stalled in the Senate as the crossbenchers continue to ask whether such cuts are the best use of the nation’s money. But in Budget 2018-19, the last budget before the next federal election, it is widely tipped that there will be income tax cuts for most workers.
The question YourLifeChoices is asking is whether these suggested cuts will be of any real benefit to retirees – or to the wider population?
We spoke with Matt Grudnoff, senior economist at The Australian Institute, to gain a better understanding of who might benefit most from income tax cuts. Mr Grudnoff is the statistician behind the quarterly YourLifeChoices Retirement Affordability Index and has an insight on who is most likely to be affected by the suggested policy changes.
The first point he made was that, while many retirees are required to file tax returns, the overwhelming majority – around 90 per cent – do not pay tax. This percentage is difficult to calculate as tax returns do not show retirement status. However, the landscape of retirement, with 70 per cent on full or part Age Pensions, allows us to ascertain that very few are paying tax.
Mr Grudnoff says: “The overwhelming majority of retirees pay no tax and therefore will receive no benefit from such an income tax cut.
“They may, however, be very concerned that a tax cut reduces the amount of money that governments can spend on health services and the Age Pension – things that retirees depend on.”
We also asked Mr Grudnoff if an income tax cut was sensible policy?
He said: “From what The Australia Institute has heard, this year’s budget revenue position has improved. This, however, is a temporary situation.
“It comes largely from an increase in corporate tax. Are large companies paying their fair share of tax? Not exactly, the increase is because, in recent years, many companies made losses that they offset against their tax.
“This year, these losses can no longer be carried forward. In effect, the tax write-offs have come to an end and this has resulted in a spike in company tax received. However, when viewed in the longer term, this could be described as illusionary. These tax receipts could disappear just as quickly.
“So if you hand out permanent income tax cuts funded by temporary windfall gains, you will create budget shortfalls in the future.
“And government expenditure on basic services including health and education needs to be maintained on an ongoing basis.
“If the windfall gain disappears, then we will be back to the budget ‘debt and deficit crisis’ of 2014 and the Hockey Budget that was proposing GP co-payments and cuts to services, including a change to the indexation of the Age Pension,” Mr Grudnoff said.
Put simply, the tax cuts will benefit only the wealthiest 10 per cent of retirees and have no benefit for the other 90 per cent. And they may set Australians up for serious budget pain further down the track.
YourLifeChoices will have two journalists in Canberra for Federal Budget 2018. Look out for our special Budget night email that will detail the key announcements affecting you and for our comprehensive wrap on Wednesday of all the Budget items that will hurt or help your hip pocket.
What’s your situation? Are you paying tax? Will a tax cut benefit your household? Do you believe this money could be better spent on other services?