IMF warns political parties against pre-election spending binge

It said the recent run-up in revenues, off the back of much higher than expected prices for key commodities, could evaporate just as quickly as they appeared.

«The projected surpluses under the baseline outlook should not be cut short prematurely through permanent tax cuts or increases in current spending,» it said.

«Some of the recent revenue strength may well turn out to be more temporary than expected.»

The government has set itself a tax-to-GDP cap of 23.9 per cent in a move that effectively caps the size of future surpluses.

The IMF said a «rigid» interpretation of the cap may «not be consistent with the principle of running sustained budget surpluses in good times».

It argues bigger surpluses could act as a buffer for the broader economy if circumstances were to deteriorate.

This week Treasury secretary Phil Gaetjens noted that despite the improvement in the budget bottom line, gross debt would remain close to 15 per cent of GDP by 2028-29 based on current projections.

The IMF said a medium-term debt «anchor», against which government policies and revenue flows could be measured, would be one way to put the budget on a solid footing.

Improvements in tax would also assist, the fund argued, backing a reduction in the capital gains tax concession and reducing the extent of negative gearing in the property market. Both are current Labor Party policy.

It also believes the GST should be broadened and possibly increased, saying the impact on low income earners of such a move could be offset by introducing a tax rebate scheme.

«Such a scheme could be funded in part by a reduction in overly generous tax concessions. Shifting from land transfer stamp duties to a general land tax is also advisable on efficiency grounds,» it said.

The warnings about pre-election spending came as figures from the Finance Department released on Friday afternoon point to a possible slowdown in revenues flowing into Canberra’s coffers.

The budget deficit stood at $21.9 billion at the end of January, almost $3 billion better on a pro-rata basis compared to what Treasurer Josh Frydenberg predicted in the mid-year update released in December.

Treasurer Josh Frydenberg has forecast a surplus when he hands down the budget in April

Treasurer Josh Frydenberg has forecast a surplus when he hands down the budget in AprilCredit:AAP

This year’s deficit is expected to fall to $5.2 billion before returning to surplus, its first in a decade, in 2019-20 at $4.1 billion.

But there have been concerns that in spite of a strong jobs market there has been an overall softening in the economy since late last year.

In December, total revenues were $1.6 billion better than had been predicted in the mid-year update. Last month, revenues were $1.1 billion better.

A surge in company tax receipts, which along with the strong jobs market have been the driving force in the improvement in the budget, slowed with the start of the year.

Last year, GST revenues increased by $3.4 billion through the peak retail period between December and January. This year the increase was $3 billion.

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

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