The release of the December mid-year economic and fiscal outlook (MYEFO) report is a comforting tradition for Canberra wonks and policy nerds. Supposedly a budget update to let citizens know about the evolving state of Commonwealth taxation and spending, it has become a ready-made media opportunity, allowing a struggling government some precious clear air.
This year’s report showered Treasurer Jim Chalmers in extra budget revenue, showing a federal budget in balance, largely due to cancelled infrastructure spending and a huge inflow of taxation revenue in recent months from wage earners.
Tax receipts have been revised up by a whopping $64 billion. A lot of that is simply a forecast out to 2027, of course, which could easily reverse if the economy gets into trouble. But there has also been a big inflow of cash to Treasury in recent months, with tax receipts up $16.4 billion in the six months since the budget — mostly in the form of higher personal income tax payments.
On the other hand, household consumption is weak. Somewhat burying the lede, the MYEFO report notes that “growth in household consumption has softened in recent quarters”, adding that “many households are facing acute budget pressures and spending has been weaker than expected to date”.
Chalmers is not spending the tax windfall, in part because he keeps pushing Labor’s talking points about “responsible economic management”. Labor’s fiscal policy is moving in line with the Reserve Bank’s monetary signals — subtracting income from households and socking it away in government coffers, even as higher interest rates bite.
That’s good politics for Labor on the surface: it can claim to be a cautious and prudent economic manager, spending wisely and cutting future debt repayments. But look closer at the MYEFO statement and you can see flashing red warning signs for a government already in poll trouble.
A lot of that extra tax is being paid by low- and middle-income earners. That’s because Labor abolished the Scott Morrison-era “low- and middle-income tax offset”, abbreviated to the clumsy acronym of “LMITO”.
A classic Morrison quick fix, the LMITO was a special tax concession worth $1,080 (eventually increased to $1,500) for eligible taxpayers. It was never a particularly elegant tax policy, and distorted marginal tax rates in a way that helped deliver larger tax returns for up to 10 million Australians. With the income threshold set at $120,000, it also stretched the definition of a “middle-income” earner well above the median.
That’s not to say the LMITO didn’t work. It did provide significant tax relief for middle-income earners, particularly in income brackets between $48,000 and $90,000. Jason Murphy called it a “clever” measure because it targeted tax relief to those middle brackets.
Labor’s decision to phase out the LMITO was fiscally conservative, obviously, but the political calculus was always fuzzy. Perhaps Chalmers hoped Opposition Leader Peter Dutton would back the decision (after all, phasing out the LMITO had been Coalition policy in government). Predictably, that didn’t happen. Shadow treasurer Angus Taylor and Dutton instead took the opportunity to attack Labor for getting rid of the tax break.
Now the decision to abolish the LMITO is starting to bite. For a taxpayer earning $50,000, the end of the LMITO equated to a nominal tax increase of 3% (although other offsets and concessions were still available). With the phase-out this year, taxpayers started noticing significantly smaller tax returns. Tax agents and accountants also reported that clients were surprised at their sudden tax bills.
The hard evidence of the LMITO abolition’s bite came in this month’s national accounts figure. The September GDP figures from the Australian Bureau of Statistics showed a huge ramp-up in income tax. According to the green visors at KPMG, “the latest national accounts show nominal income tax paid per capita increased by nearly 7% in the September quarter alone and was 20.5% higher than the same quarter in 2022”.
Some tax relief is coming next year. While Labor axed the LMITO, the Albanese government has notoriously committed to retaining the so-called stage three tax cuts that will deliver massive tax reductions to high-income earners, beginning on July 1 next year.
The design of the stage three tax cuts has been heavily criticised for its likely effects on inequality. Because the tax cuts represent a radical flattening of tax rates, the vast bulk of the value of the tax reduction will accrue to high-income earners. Once the abolition of the LMITO is factored in, those on middle incomes will be worse off — losing the offset but gaining only a small tax cut. The Conversation’s Peter Martin points out that a taxpayer earning $50,000 “will lose $1,500 in order to gain $125”.
You can see what’s going on here: upward redistribution. The abolition of the LMITO socks middle-income earners, but retaining the stage three tax cuts will richly reward the top end.
This shouldn’t surprise us. This is what happens when a Labor government adopts tax policies from the government of Malcolm Turnbull, first announced by a treasurer named Scott Morrison.
Ooooooh – comments section.
Dead on Ben. I was shook to see BK spruiking the neo-lib flat tax change based on the myefo.
Missing from BK’s analysis was who was paying all that extra tax. Quick hint, it isn’t the people that are going to benefit from S3. It’s wage earners who are slugged an extra $1.5k with the axing of LMITO, and the low income earners who bracket creep actually does impact (those moving from 100% tax free, and those moving up from first bracket to second).
Very welcome article. TYVM.
Moreover was disappointed to see BK endorsing the ALP’s political agenda – being do what it takes to get re-elected, and nothing else. What is the point of getting re-elected if you’re not going to implement the platform? If the voters wanted more LNP they would’ve voted for them.
Exactly. Not much point saving for a car if you’re never going to drive it.
Taxation, defence, climate change, fossil fuel expansion etc. Apart from a little picking of low hanging fruit, it’s pretty much a Liberal government.
“ Once the abolition of the LMITO is factored in, those on middle incomes will be worse off — losing the offset but gaining only a small tax cut”
Nope. Those on middle incomes are gaining a tax increase, Ben. Let’s call a spade a spade. Gaining $125 and losing $1500 is an increase in tax – not a cut. You can argue the semantics of an offset all you like but that’s the reality. Those who used to receive the LMITO are effectively financing Stage 3.
That was the entire thrust of the article I’m pretty sure.
Could someone clarify something for me please. Say if I’m earning, hypothetically, $45,000 and I got a tax cut of $1,000 or whatever from the LMITO, wouldn’t someone on $1,000,000 also get that same amount of tax cut on their first $45,000 of income? In other words, tax cuts benefit everyone who is earning more than the lower threshold of any tax cut.
$1000 is obviously worth a lot more to someone earning 45 grand than a million.
Best tax cut is to raise the tax-free threshold.
But my point is, no matter how high you raise the tax-free threshold, everyone benefits. The way I see it, there is no such thing as low or middle income tax cuts. As long as you earn more than the lower threshold for the tax-cut, you win, whether you need it a lot or not so much. The gov’t cons people into thinking they’re only helping the less well off
What ?
The point is a $1000 (or whatever) tax cut is worth far more to those on low incomes than high incomes. So a tax cut that deliver the same benefits to low income earners as high income earners is relatively better for low income earners.
I’m not sure how I can explain this better if it’s not obvious.
That’s why the stage three tax cuts are so important: the well off won’t notice this small benefit and require the much larger stage three cuts to make a difference to them!
Could not agree more! So why is this never mentioned??? Chalmers could raise the tax-Free threshold to say, $20.000 and give everyone a modest tax cut without a huge cost to the Budget. It is really another type of ‘bracket creep’ ; each year more tax payers exceed the TF threshold. Seems obvious- any answers??
No you wouldn’t. The LMITO was paid in full up to $90,000 per person then phased out after you earned $120,000. Clue: Lower and Middle Income Tax Offset. No Lower, Middle and High Income earner.
In the wake of our unexpected inflationary environment, something not foreseen pre-2022 to a real extent, it is economic irresponsibility to proceed with anywhere near the full Stage 3 tax cuts. The well-off will just spend it on overseas trips like drunken sailors. This is the equivalent of the unnecessary and undeserved superphosphate bounty of modern times. The better off tax payers will spend now that they were denied doing so during the pandemic. The world has a lot to catch up on in terms of lost spending and post opportunity costs.