From a forecasting perspective it is a poor show when a Government gets the surplus so badly wrong just three months after the budget, but they are serial offenders on this front, so none of us are surprised.

But what to do with the surplus? You can spend it or repay it. Both need to have permanent not transitory effects. The only responsible way to spend it is on productivity, and essential infrastructure is a good call. If you are going to repay it, equity and/or efficiency should dictate the method.

The Coalition refuses to raise the income-tax-free threshold of $6,000, unchanged since 2000. If it had been indexed since 2000, it would now be well over $7000. Had the 1980 personal threshold of $4,041 kept pace with earnings, the tax-free threshold would now be well over $15,000.

The tax-free threshold should be increased on a phased basis to at least $20,000. Why phased? Because this is costly to do. It will need to be partly funded by base-broadening, which has the added advantage of getting rid of numerous distorting tax exemptions, concessions and deductions.

For starters, you should not have income tax below the subsistence rate.

Australia’s minimum income required for basic subsistence is around $13,000. There is no justification for income taxing someone earning less than this value. By continuing to tax individuals at an absolute rather than indexed value, this social inequality is magnified each year.

From the perspective of a liveable wage, a viable tax-free threshold is $20,000, preferably indexed to retain its real value. The average income tax on all income for someone earning $20,000 a year is presently over $2,000. There are over two million Australians paid less than $20,000 a year.

They could all be taken out of the tax system. Many of these are casual and part-time workers, particularly women, who need not pay income tax at all if the tax-free threshold were at a higher rate. Taking millions of Australians out of the income tax system provides some revenue savings opportunities. Tax deductions cannot be claimed if your total income is below the threshold. Over 60% of taxpayers earning less than $20,000 claim well over a billion dollars in work-related expenses.

This is another example of churning within the Australian taxation system, an effect beloved by the Coalition.

It makes no sense to tax low income earners into poverty, and then to pull them out of it by giving them welfare benefits and/or tax credits.

It makes a lot more sense to allow people to keep more of what they earn so that they are not enmeshed in the welfare transfer system.

Raising the income-tax-free threshold to $20,000 over time would enable tax cuts to flow right up through every income level so all Australians would still get a regular tax cut.

In his budget speech, the Treasurer stated that the tax offset: …

means that low income earners eligible for the offset will not pay tax until their annual income exceeds $11,000.

He thereby attempted to say that this was a virtual increase in the tax-free threshold. This is misleading and technically incorrect. It ignores the effect of churning since individuals will still pay tax for annual incomes in excess of $6,000 through the PAYE system, which they can only get back a year to 18 months later when they put in their tax returns. Moreover the offset functions so that it can only reduce tax paid to zero as opposed to a rebate which holds greater value.

Perhaps a more accurate description of the offset might be that low-income taxpayers will continue to pay tax on incomes over $6,000 per annum but for incomes up to $30,000 the first $750 of tax paid can then be offset.

By the way, in June I moved an amendment which opposed moving the top tax threshold from $150,000 to $180,000 and proposed using the saving so generated to help afford indexation of the tax-free threshold. It was defeated.