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IMF says copy Abbott’s budget repair levy, warns against big spending cuts

“Taxes on ‘excess’ profits, either in addition to or instead of the regular corporate income tax, can assure a contribution from businesses that prosper during the crisis (such as some pharmaceutical and highly digitalised businesses) and not affect companies (and their workers) otherwise earning minimal profits or incurring losses,” it said.

The fund warned trying to repair budgets by cutting expenditure on services or support to those left behind by growing inequality could lead to substantial political problems.

Soaring iron ore prices coupled with better than expected economic conditions are helping repair the budget deficit.

Soaring iron ore prices coupled with better than expected economic conditions are helping repair the budget deficit.Credit:Getty

“Governments need to provide everyone with a fair shot — enabling all individuals to reach their potential — and to strengthen vulnerable households’ resilience, preserving social stability and, in turn, macroeconomic stability,” it said.

”The risk is high that trust in government could deteriorate after COVID-19, especially if a government’s response to the epidemic — including support to people and firms, as well as vaccination — is perceived to be inadequate or marred by favouritism or corruption.”

The Morrison government has pledged not to increase taxes, as the Abbott government pledged ahead of the 2013 election.

Very high iron ore prices, strong GST returns and a better-than-expected economy are already reducing the budget deficit.

Deutsche Bank economist Phil Odonaghoe said it was not inconceivable the deficit could be half of what had been predicted in the mid-year update.

He cautioned everything would have to go right for that to occur, which would result in a deficit of about $100 billion. Even that would still be a record budget shortfall.

Mr Odonaghoe said a deficit of about $150 billion was more likely, which would set up the budget for future years.

“The better starting point in 2020-21 also means smaller deficits across the forward projection period. On our revised profile, the federal budget could conceivably return to balance by 2025-26,” he said.

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ANZ economists Hayden Dimes and David Plank said the deficit would be as low as $155 billion because of the better expected economic conditions facing the government.

But they cautioned some of this improvement was due to GST receipts. Due to the way the GST is refunded to the states and territories, the better revenue this financial year could end up a shortfall in 2021-22.

“GST currently makes up a little over 25 per cent of the improvement in the deficit since the mid-year update. If that continues to hold and the deficit keeps improving, it will potentially have a meaningful negative impact on next year’s underlying cash balance,” they said.

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