Tax breaks for electric vehicles will be significantly curtailed in a move expected to save the budget $1.7 billion as Treasurer Jim Chalmers says large cuts across the board will help reduce demand in the economy while inflation is running hot.
The tax break has proven vastly more popular than the Government anticipated since it came into affect in mid-2022, meaning the cost to the Budget has blown out from an estimated $90 million a year to $1.4 billion this year.
Dr Chalmers and Energy Minister Chris Bowen said there had now been a “dramatic increase” in the availability of affordable EVs in the Australian market, so the tax break was less important to encourage take up.
“The electric car market has rapidly matured since we came to Government, and these changes will ensure our tax settings are still suitable,” they said.
The fringe benefits tax exemption for leased electric cars will be wound back in stages over the coming years.
The 100 per cent discount will still apply to leases until the end of March 2027, after which it will only apply to cars that cost under $75,000. Those costing between $75,000 and about $91,400 (the luxury car tax threshold) will only receive a 25 per cent discount.
From April 2029, the 25 per cent discount will apply to everyone.
The Treasurer has pledged to deliver a net saving in the bottom line, and he and Finance Minister Katy Gallagher have been on the hunt for cuts across the board.
Dr Chalmers on Monday revealed that savings will have more of an impact in dollar terms than proposed tax changes, and again hosed down expectations of large windfall revenues on the back of the war in Iran.
Some years will see more revenue than previously thought — which he’s promised to bank — but others will have falls.
Inflation jumped almost a whole percentage point in March, up to 4.7 per cent, on the back of soaring fuel prices after the US-Israel-Iran war started and the Strait of Hormuz closed.
But it was already starting to tick upwards late last year as private activity rebounded.
Dr Chalmers acknowledged that government spending “is obviously part of aggregate demand” and said that was part of the thinking behind pursuing a net saving this year.
“Where we can play a helpful role, rather than a harmful role, in the amount of aggregate demand in the economy, obviously, we look for ways to do that,” he said.
“What you will see in the Budget is, in gross terms, there will be more dollars in savings than dollars in revenue upgrades. There will also be more dollars in savings than dollars in tax reform.”
The Budget is widely expected to cut capital gains tax discounts and negative gearing, used by property investors, with a variety of possible changes floated.
There has also been speculation about raising taxes on trusts in line with company tax rates.
Dr Chalmers welcomed debate about tax reforms but cautioned that no one should assume everything speculated about would be in the Budget.
“The election began a year of delivery, and the budget will begin a year of more ambitious reform,” he said.
“Delivering those commitments is the foundation of what we want to achieve, not the destination of what we want to achieve.”
Intergenerational fairness has become the shorthand for the budget strategy, in particular, the housing measures that will be at its centre.
Shadow treasurer Tim Wilson used a speech to business leaders on Monday to accuse the Government of seeking to pit family members against each other and undermining national resilience with its plans.
“Menzies warned 80 years ago that any war — a class war, a culture war, a rhetorical war — that sets Australian against Australian is a false war,” he said.
“The day is coming when those groups will unite — against a government presiding over a weakening economy and a loss of confidence.”
Dr Chalmers said the Government never intended to set one group of Australians against another and everyone was concerned about the housing situation.
The Government has so far identified $42.4 billion in cuts to the NDIS, health insurance rebates, and further public service cutbacks in spending on consultants, travel and hospitality.
Senator Gallagher said unspent money in departmental budgets would also be returned to the bottom line.
“There will be savings across every portfolio. We’ve looked everywhere for savings,” she said.
But it has also laid out at least $65 billion in new spending, including on hospitals, Defence, inflation-driven increases in welfare payments and the age pension, the cut to the fuel excise, and natural disaster support.
Dr Chalmers has promised to keep spending below 27 per cent of GDP.
Last year’s Budget forecast payments at 27 per cent of GDP in the current financial year — a 40-year high outside of the pandemic years — and showed them dropping to 26.4 per cent over coming years.
The mid-year update in December had payments slightly lower, at 26.9 per cent, for the current year but only dropping to 26.5 per cent.
