According to an exclusive report in the Australian Financial Review, income tax breaks to be announced in the federal budget in May will begin on a small scale and will be implemented in phases over a decade in order not to prevent the budget from returning to surplus.
The strategy could also help government win the next election, as Union party`s re-election ensures long-term tax cuts for voters.
As predicted in the budget and medium-term economic forecasts for the past five years, the government has pledged to keep the budget surplus for 2020-21, and will again forecast a surplus for fiscal year 2021 in the budget for May 8.
The Australian Financial Review newspaper learned that Prime Minister Tam Po`s earlier tax relief would target people earning 86,999 yuan or less a year, and that the initial tax cuts would be relatively modest to avoid damaging the surplus.
Income tax relief is expected to be even more significant from 2022-23, when the government expects to impose a self-regulation that does not allow taxes to exceed the size of the economy by 23.9 percent.
Long-term projections contained in the last federal budget showed that in order for tax revenues to remain within that limit after 2022 to 23 years, the government would have to cut taxes by between 80 billion and 100 billion over the next five years.
In the short term, tax cuts were largely helped by better-than-expected revenue and lower fiscal spending, with the budget floor improving by more than 10 billion in the first few months after the budget update in mid-December.
Government revenues were so strong that it was able to cancel plans to raise Medicare taxes by 0.5 percent, originally to help fund the Australian disability insurance plan.
Richardson (Chris Richardson), a partner at Deloitte`s (Deloitte Access Economics), said this week that improvements in the global and local economies had exposed the federal government to a "rain of money in the sky." The money can be used for tax cuts or budget surpluses.
"No, I don`t think government needs to cut personal income tax from an economic point of view, and the economy is absolutely good," he said. "if you like, you can say, politically, they need to."
The government is likely to combine a 10-year tax break with a plan to reduce all companies` corporate tax rates to 25 percent by fiscal year 2026 / 27 and reintegrate them into tax reform plans.
That could help persuade the neutral South Australian senator, Senoven, who wants broader tax reforms in return for his support for corporate tax cuts.
Politically, the government will be able to claim that it is acting financially responsibly, while providing voters with a reason to stay in power for the Union party: they will receive more tax breaks in the medium term.
Income tax cuts will be a key feature of the pre-election federal budget, which will also focus on infrastructure and population ageing.
As Australia grapples with the economic problems posed by the ageing baby boomers, the new budget is expected to introduce a number of new measures to support older people in their homes.
Infrastructure projects
Infrastructure spending in the new budget is expected to increase by billions from last year, including the 10 billion yuan inland rail link from Melbourne to Brisbane. And federal government recently decided to borrow 6.2 billion yuan to buy stakes in government, New and Victoria, in the Snowy hydroelectric project.
These projects will not widen the budget deficit because they are seen as "cash for assets". While that lessens the pressure on Australia`s AAA-rated national credit rating, it could lead to a further rise in the total debt of countries that already exceed $500 billion.
Before the start of the budget, Turnbull had announced several new extrabudgetary infrastructure projects, including a deficit of $5 billion to build a rail link from Melbourne`s Tullamarine airport to CBD, and an allocation of $1 billion to upgrade the M1 motorway.
Labour is also considering how to outperform the Union party, in income tax relief, but it will not announce its plans until the May budget is around the corner of the election.
