Editorial - Hoarding our surpluses

The Howard Government‘s policy of returning budget surpluses as tax cuts may be a thing of the past. New Treasurer Wayne Swan has indicated his Government’s intention not to hand back surpluses in the form of tax cuts.

The previous Government had a target of maintaining a surplus of at least 1% of GDP. If surpluses came in at a higher rate, this would initiate more handouts. In addition, if the Government considered the surpluses to be sustainable above its 1% target, it would introduce another round of tax cuts. The handouts in the last budget included bonuses for carers, doubling of the superannuation co-contribution and other one-off payments. The rest of the surplus was directed in the form of tax cuts as a result of upward revisions to its future budgets.

Given the current international financial turbulence, it is uncertain whether the Labor Government will be able to revise the budget upwards. And if the Treasurer does find himself in the enviable position of having collected excess taxes, it is most likely that he will  prefer to bank that surplus.

This is a major shift in policy which the electorate will need to get used to. It is a fairly emotive issue which comes down to who should be able to use those surplus funds.

If the Government raises more money than it needs to fund its expenditure programs, why should it not hand back the excess to taxpayers? The Federal Government has eliminated most of its debt so it should allow taxpayers the option to reduce their own personal debt - or to do as they please.

The Treasurer’s main justification for hoarding surpluses is to keep inflationary pressures at bay. Does handing back cash to taxpayers result in more spending? If the answer is ‘yes’ then there is a strong case that allowing the Government to save it on our behalf will be less inflationary. On the other hand, tax cuts can play their part in increasing the pool of labour by improving financial incentives for second income earners and those on welfare benefits to make the transition into the workforce. They can also act as a counter balance against the need for wage increases. However, there are alternatives which are less inflationary than simply handing back cash to taxpayers. One is to direct such surpluses into people’s superannuation accounts. After all, the Labor Government has a policy of raising the SGC rate to 15%. Another alternative is to improve the tax treatment of interest on savings to motivate taxpayers to save more.

In a recent statement the Reserve Bank made its position clear on this issue. Rising employment, rising wages and tax cuts are fuelling household income growth which in turn leads to rising inflation.

If healthy surpluses continue to be the order of the day, the Government must communicate what it intends to do with the surpluses if choosing not to pass them back to taxpayers. Taxpayers are more likely to be sympathetic to worthwhile spending on infrastructure than to politically motivated handouts.

The Government has honoured its election pledge to introduce legislation to implement its $31 billion of tax cuts over the next three years (see page 246), despite calls to have them axed. In an effort to negate the inflationary consequences of these tax cuts, all efforts are being made to reduce Government expenditure. If spending is cut in the right areas, no one will begrudge this action.

If it is the policy of the new Government to hoard surpluses it should at least index the tax tables to remove the inflationary impact that rising incomes will have on the tax dollars collected. No Government to date has addressed bracket creep in a meaningful way.