Prime Minister Kevin Rudd.
Prime Minister Kevin Rudd.

Figures show income tax cuts the secret to budget deficits

A SERIES of personal income tax cuts during the Howard and Rudd government years was a key driver in successive structural deficits in the federal budget between 2002-03 and 2011-12, a new analysis has found.

The analysis, by the Parliamentary Budget Office, has also found the Commonwealth will remain in structural deficit until 2016-17, a year later than the 2012-13 budget estimated.

It has revealed the successive structural deficits were more a result of the income tax cuts and abolition of indexed excise on petrol, not primarily due to falls in company tax receipts.

Under its rules, the PBO analysis is independent of political intervention and reflects on budget decisions by successive governments of both stripes since 2002-03.

It found the structural budget balance fell by about five percentage points of GDP between the last peak in 2002-03 to 2011-12, at the same time government payments rose by about 1 percentage point of GDP in the same period, causing a fall into several years of deficits.

"Over the period 2011-12 to 2016-17 the structural level of receipts is expected to increase by approximately 1.75 percentage points of GDP while the structural level of payments is expected to decline by around 1 percentage point of GDP leading to the expected reduction in the structural deficit over the period of the 2013-14 budget and forward estimates years," the report found.

It said more than two-thirds of the decline in structural receipts over 2002-03 was due to the "cumulative effect of the successive personal income tax cuts granted between 2003-04 and 2008-09".

The PBO also cited declines in excise and customs duties, the abolition of petrol excise indexation and falls in the consumption of tobacco and cigarettes contributed to the falls in receipts.

"In contrast, the structural level of company tax receipts as a proportion of GDP remained relatively stable over the period," the report reads.

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