After the disaster of the UK Tory government’s abandoned tax cuts, critics of the 2024 tax cuts here have seized on the humiliation of Liz Truss to argue Labor should abandon ours too — after all, they too are unfunded and they too are primarily aimed at high-income earners. There are media reports the government is preparing options to amend or dump them.
The similarities can be deceiving, however. The government’s net debt is 22.5% of GDP. In the UK, it’s nearly 100% of GDP. The UK economy has been hammered by Brexit, inflation and surging energy prices; the Australian economy has experienced substantially lower inflation and is a major energy exporter benefiting from the same energy prices.
That helped drive the budget deficit for 2021-22 down from an expected $80 billion to around $30 billion, along with lower spending. And the tax cuts here have been factored into budgets since 2019.
Bear in mind also that Labor has promised over and over to stick with the tax cuts, while Truss and Kwarteng sprang theirs on markets by surprise. They have a credibility problem with markets as a result of the tax cuts decision; Jim Chalmers will have a credibility problem if he announces Labor is breaking its commitment to them. It will make both markets and voters wonder if his word can be relied on.
In short, there are unfunded tax cuts, and unfunded tax cuts. Truss and the hapless “Kami-Kwasi” Kwarteng had the bad type.
That doesn’t mean the situation will still apply in 2024. A recession next year — the fate that awaits much of the developed world, including the US (the UK is already in recession) — will see the budget deficit rise again as corporate and personal tax revenue falls. As Labor found when it was last in government — Chalmers will remember it well — slowdowns can have huge effects on company tax revenue. The 2024 tax cuts might look a lot more like fiscal recklessness in 18 months. The government’s standing with financial markets might be quite different by then as well.
All of which is to say that, putting aside the politics of dumping the tax cuts, for policy reasons, dumping the tax cuts now is a bad idea. At the very least, the government should wait until the 2023-24 budget in May. At that stage, the economic and fiscal outlook for 2024 will be a little clearer — especially if there’s a global recession.
The other reason not to get too hung up on the comparison with the UK is that ultimately “tax cuts” is distracting from the more important policy issue: what is the best use of the total cost of the tax cuts?
What that cost is is less than clear — it’s certainly much less than the quarter of a trillion dollars the Greens claim. But it’s substantial. It’s money that could be used for other spending — to fund the growing areas of budget pressure like health, NDIS, aged care, defence — or to offset tax expenditures elsewhere, or as straight tax cuts.
The government’s responsibility is to ensure that that sum of money — maybe it’s $100 billion, or $150 billion, between now and the mid-2030s — is the most effective use of that money. There are certain core requirements of that term “effective” — it needs to deliver as much impact as possible in the public interest, and it shouldn’t be used to exacerbate inequality — but the effectiveness will vary depending on the circumstances. What’s effective in a recession is very different from what would be effective during a period of strong growth. A decision now might prove to be exactly the wrong decision in late 2024.
At the moment the money required for the tax cuts doesn’t appear to be being put to good use: it will worsen inequality, and have limited stimulatory effect, because high-income earners spend less and more of their spending goes offshore.
There might be different ways of “dumping” the tax cuts — delaying them until the budget is back in surplus (which was the expectation when they were legislated), proceeding with them but imposing a deficit levy on high-income earners, retargeting them at low- and middle-income earners, or reducing but not eliminating them.
But any decision now would be too early, and that’s nothing to do with politics.
Should Labor just go ahead and ditch the tax cuts? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
There may be no compelling reason to abandon these particular tax cuts for the well-off right now, Bernard, but there’s no compelling reason why they should be thought appropriate at any time; in fact, it’s hard to see the world in a better place two years from now. The logic of wait and see implies the cuts might become appropriate, but if that is so then the same logic would mean there are times when taxes should be increased, and we know there’s a fat chance of that ever happening, even if needed. The legislated tax cuts also have the nefarious purpose of reducing the progressivity of the income tax scales – in the guise of ‘simpler’ – a large step towards a flat tax system as desired by the rich and their media fans. A progressive tax scale should be regarded as being equally vital to Australian democracy as truthful, informative media and compulsory voting. At the moment we still have two of those, and both are under threat.
Aye aye, Cap’n. Well said.
? Cap’n. ???
Apologies for my previous post, Cap’n – I didn’t realise emojis were deemed unacceptable when commenting.
What I was attempting to convey was that I wholeheartedly agree with your terrific post – you nailed it!
Which two do we still have?
I really do not see why there is so much angst over the issue of the Stage 3 tax changes. Sure it would be ‘good’ if everyone always kept their promises but sometimes this is not possible or desirable. The ALP was blackmailed into accepting the stage 3 changes, in other words the low-life previous excuse of a government was prepared to deny and use the threat of no tax relief to lower income households as a club to batter the ALP into submission on stage 3.
I tend to view this in the same manner as a forced confession from an innocent suspect in a criminal case.
.However, the stage 3 tax cuts are an occasion when repealing them is doing more overall ‘good’ for more Australians than doing bad but more importantly it is the ‘right’ thing to do as well. Social justice as ‘fairness’ means looking after the interests/well being of the least advantaged before giving even further advantages to those already quite well off.
This is the key consideration and renders Bernard Keane’s point in this article an irrelevance. From the point of view of justice as fairness with a key aim to bring about greater equality stage 3 is simply not the ‘right’ thing to do.
As to Keane/s second point regarding a wait and see attitude what a weak sop that is. Its either right or wrong now or in two years time it doesn’t matter.
Jar better that the ALP strike now while the Australian public are quite favorably predisposed to them and maybe more likely to cut them some slack rather than attempt such a change when the shine has gone off them. The question is are the ALP up for it? Can they make the case for change and make it stick? This is their window but can they see it or will it simply pass them by?
Of course this will provide the primates like Dutton and his intellectually limited fellow cave dwellers a chance to do what hey do best lie, deceive and divide. The big plus is that Dutton is an intellectual midget, a moral bankrupt and people see him as Morrison version 2.
No one currently pushing Labor to abandon its commitment stands to suffer any electoral pain at all.
Probably half of those currently pushing have “Broken Promise!!!” pieces ready to go.
The reason that this is an issue in some quarters of the media (especially News Ltd & it’s ABC proxies) is that it is a wedge issue. They would like nothing more than the ALP arguing about it internally so as to distract them from the tasks of good government. For many of these pundits things are going too smoothly and they rely on chaos & disruption to hold their audiences . It’s a non sequitur topic and should be clearly kicked down the road until the time is right.
Better to do it now while well ahead. Too tempting to do the small target thing again closer to the next elections. Polls show even the wealthy dont want the cuts. As Been Around said, voters despise this slippery stuff. What is the harm in saying conditions have changed, we will review the tax cuts?
Agree – see my comment to Been Around.
So it is more political damaging to admit that a previous promise to keep dumb policy and dump that dumb policy than it is identify dumb policy and dump it. The is over-analysed to death. Dropping the tax cuts for high income earners will be overwhelmingly popular, as will a windfall profits tax back-date to the point at which energy prices starting climbing. And a windfall profits tax would not be restricted to sellers of energy. Good policy is just that. Manipulation of political perception is worthless and increasingly despised by voters.
Yes. From an Australia Institute poll in early September:
41% overall (and 35% of Coalition voters) supported repeal of the tax cuts (22% opposed).
When asked what they thought was better for the nation’s long-term interests, 60% chose ‘increased spending on government services like health and education’, compared to 15% who selected proceeding with the tax cuts.
I suggest your writers and respondents should declare if they stand to gain from the proposed tax cuts. We know that all in Parliament will gain but I am sure this never affects their judgemnt.
George Stewart
Agree, but I would suggest that Bernard may also be a beneficiary, possibly affecting his judgement.
Agreed, this reads like the author and his mates have a vested interest in supporting tax cuts that are not a need just a greedy want.