The most shocking thing in the Treasury analysis delivered to Scott Morrison on January 25 isn't the finding that a cut in income tax funded by a lift in the goods and services tax wouldn't boost the economy at all.
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GST would hit poor hardest
Treasury modelling on the GST reveals the most vulnerable could be hit the hardest Fairfax's Peter Martin explains why.
It's what Morrison asked the Treasury to model.
He asked it to model a lift in GST from 10 to 15 per cent and then the handing back of every possible cent in income tax cuts. Because boosting the GST automatically results in extra spending on benefits such as Newstart, family allowances and pensions as prices climb it isn't possible to give all of it back.
But it is possible to hand back $30 billion of the $35 billion as tax cuts, and that's what Morrison asked the Treasury to model in the first instance, not legislated increases in benefits of the kind delivered by his predecessor Peter Costello when introducing the GST.
The impact is horrific.
High earning households do very well. In the top fifth, 81 per cent are better off. In the fifth below that, 80 per cent are better off.
In the bottom fifth, only 9 per cent are better off. Put another way, the change makes 91 per cent of the lowest-earning households worse off.
It makes 79 per cent of the next lowest earning households worse off, and 60 per cent of middle earning households better off.
Morrison had asked the Treasury to model a change that enriched middle and high earners at the expense of the least-well off.
And the results tell us something about the nature of the change. It appears to have been one that cut tax rates or adjusted thresholds at the top more than the bottom. All of the Prime Minister's talk about how any change must be fair appears to not have sunk in.
At his request Treasury and its consultants Econtech and KPMG also did sensitivity analysis. What would happen if, say, $6 billion of the tax cuts were diverted to low earners in extra benefits? They found that the more the tax cuts were diverted to benefits, the worse the economic payoff. Econtech found the payoff turned negative. KPMG found it was positive but got weaker the more low earners were compensated.
Morrison had asked the treasury to model a change that enriched middle and high earners at the expense of the least-well off.
Morrison will make much of the finding in a later Treasury brief that doing nothing and allowing bracket creep to push people into ever higher tax brackets is is set to take 0.35 per cent from GDP over four years. But tax cuts funded by a hike in the GST wouldn't have halted bracket creep, they would have postponed it. And during the time they postponed it, the projected budget deficit would have swelled.
Morrison will be able to deliver income tax cuts, but they will be smaller, funded by a tightening up of superannuation and other tax concessions.
There's no realistic prospect of tax cuts being funded by slashing government spending. Treasury believes that at the moment the economy couldn't stand it. Cabinet ministers believe that spending cuts of the size needed to pay for big tax cuts just aren't possible.
Peter Martin is economics editor of The Age.