Finance

Australian lower and middle income tax offset on the chopping block: Josh Frydenberg won’t rule out

Ten million low and middle income Australians face a possible tax hike being announced in weeks amid growing fears about inflation.

There are ‘increasing concerns’ within the federal government about the huge economic cost of extending its $1,080 tax offset, The Sydney Morning Herald reported on Monday.

Income earners on up to $126,000 have received the lower and middle income tax offset worth up to $1,080 a year each financial year since 2018-19.

Mr Frydenberg declined to weigh in on the offset’s future in an interview with ABC Radio National on Monday morning, but acknowledged the country’s economic circumstances have changed.

‘I’m not going to pre-empt what’s in or not in the budget in just a few weeks’ time,’ Mr Frydenberg said.

Ten million low and middle income Australians face a possible tax hike being announced as treasurer Josh Frydenberg prepares the budget amid growing fears about inflation

‘When we introduced the low and middle income tax offset, it was in response to the particular economic circumstances we faced at the time.’

The economic stimulus was designed to help keep the Australian economy alive during the pandemic, and has been a feature of the last two budgets.

But the measure costs $7billion a year – and now with rising inflation, there are fears that the cost may be too much to justify with the nation now facing a $1trillion debt by 2024/25.

However, the treasurer will also be under political pressure not to raise taxes on families in a budget which will come just a few days – or even hours – before the election is likely announced.

The U-turn on the tax handout comes as the economy bounces back better than predicted after the pandemic, with a 50-year record low unemployment rate now expected in the next figures.

Inflation is also rising globally after years of stagnation, with the Reserve Bank finally tipping interest rates to rise later this year after bottoming out at just 0.1 per cent.

There are 'increasing concerns' within the federal government about the huge economic cost of extending its $1,080 tax offset

There are ‘increasing concerns’ within the federal government about the huge economic cost of extending its $1,080 tax offset

A forecast annual federal government deficit of $84.5billion for 2022/23 is expected to be reduced by the healthier than expected economy, but rising interest rates and their impact on government debt will put increased strain on the budget.

Economists including a former board member of the Reserve Bank have warned Australians could even face four interest rate rises by the end of this year.

While the RBA is predicting interest rates rising in August, other economists believe the RBA has been complacent and those with a mortgage will face higher repayments as soon as May and the first increase in a decade.

Economist John Edwards, a former RBA board member, believed the bank would need to act on ‘evolving’ economic data and lift the rate by August.

‘There is no point in one increase, it will be slow and incremental,’ he told the Wall Street Journal.

Mr Edwards predicts interest rates will end up at about 1 per cent by year’s end, though other futures market analysts believe it could be closer to 1.23 per cent by December.

‘I would expect the RBA would now think a hike in May was perhaps too early to begin tightening by small steps at the short end, but by August on the current economic trajectory, it will have begun to move,’ Mr Edwards said.

One of Australia’s biggest banks, Westpac, forecast a 0.15 per cent rise in the cash rate this August, followed by a further 0.25 per cent increase in October. It predicts the cash rate to reach 1.75 per cent by March 2024.

Philip Lowe, the Reserve Bank Governor, (pictured) says it is 'plausible' interest rates will rise this year

Philip Lowe, the Reserve Bank Governor, (pictured) says it is ‘plausible’ interest rates will rise this year

A rise from the current cash rate of 0.1 per cent to 1.75 per cent would add $427 a month to the costs of a person repaying a mortgage of $500,000.

Reserve Bank Governor Philip Lowe this month said it was a ‘plausible scenario’ the cash rate would rise this year, based on a revised forecast for inflation to reach 3.25 per cent by June.

The bank also predicted economic growth in 2021 would reach 5 per cent, rather than the 3 per cent it forecasted earlier, and the Australian economy would grow by 4.5 per cent this year.

Given the financial data, economists are now warning against further tax cuts.

‘Tax cuts at this point would be like putting more fuel on the fire,’ Grattan Institute economic policy program director Brendan Coates told the SMH.

‘It would be a hard case to make that the economy needs more support.’

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