AMP economist urges government to undertake ‘serious tax reform’ this budget

AMP economist Shane Oliver (pictured) has called on the government to embark on “serious tax reform” in this year’s budget, due to be handed down on 12 May.

The government is considering a number of tax changes in the upcoming tax budget, many of which Oliver said he supported.

Possible ideas have included reducing the CGT discount, limiting negative gearing, introducing a minimum tax on trusts, introducing a gas export levy and moving to a road user charge for electric vehicles.

While Oliver said that each of these ideas had merit – paring back generous concessions and reducing market distortions – he said they would likely fail to address the government’s long-term economic goals.

“Just fiddling with a few tax concessions in the budget will amount to nothing more than a tax hike, will likely make the tax system even more progressive, working against incentives, and do little to relieve housing affordability,” he said.

Instead, the economist proposed that the government should focus on “real tax reform” – to Oliver, this would mean lowering personal income and corporate tax rates, raising and broadening the GST, alongside compensation for welfare recipients and lower-income earners, indexing tax brackets to inflation, and replacing stamp duty with land tax.

“The shift in reliance from income tax to GST is the best way to improve intergenerational equity. This would take political courage, but it is the direction we should be moving in,” he said.

“Income tax is highly distortionary – as it impacts decisions to work and invest – whereas a GST levied at the same rate on all items is far less distortionary. So, a GST is a far more “efficient” tax than income tax and a greater reliance on it versus income tax will boost productivity.”

Oliver added that shifting Australia’s tax system to rely less on income tax and more on GST would help the government achieve its stated goal of improving intergenerational equity, especially as Australia’s population ages.

“The high reliance on income tax also creates equity issues as the ageing population will see an increasing burden placed on younger workers to foot rising health and aged care bills whereas self-funded retirees are taxed lightly,” he said.

Outside of tax reform, Oliver also called on the government to rein in its spending, warning that public spending was crowding out private investment and hampering productivity.

In the aftermath of the pandemic, public spending surged from a 40-year average of 22.5 per cent of GDP to 28 per cent of GDP. He called on policymakers to pare this back to approximately 25 per cent of GDP, which would entail cutting federal spending by $102 billion over the four years to 2029–30.

“This would require cuts to the NDIS (with the Government looking like it might move in this direction), more aggressive cuts to the public service and more means testing of welfare,” he said.

Oliver also anticipated that the government would offer some cost-of-living relief amid the Middle East conflict and related fuel disruptions.

He urged the government to limit this relief where possible, suggesting it should make direct transfers to impacted households and businesses instead of utilising broader measures such as fuel tax cuts, which he said blunted price signals to cut back on fuel use.

“Any fiscal easing [should] be timely such that it impacts when needed, targeted to those who really need it, temporary such that it cuts out as soon as the threat is passed and calibrated to the size of the threat,” he said.

Oliver also called on the government to embark on significant productivity-enhancing reforms, and to alter the charter of budget honesty in response to the growing use of “off budget” spending.