When LP Hartley wrote “the past is a foreign country: they do things differently there”, as the first line of his novel The Go-Between, he was on about nostalgia, rather than regret or recrimination.
Leo Colston had come across a diary written when he was 13, at the bottom of a red cardboard collar box, and it stirred up memories he had long suppressed.
I’ve just come across then treasurer Scott Morrison’s 2018 budget speech which has stirred up long-suppressed memories – nostalgia washed over me, but that was tinged with regret and, to be honest, a little recrimination.
May 2018 was an optimistic time; we were oblivious to the approaching storm. The budget that Morrison brought down that month forecast a return to surplus the following year and endless surpluses thereafter, including $16.6 billion in 2021-22, the year we’ve just had.
Scott Morrison and his boss Malcolm Turnbull celebrated these forecasts from Treasury with three stages of tax cuts. The last of them, also the biggest and most egregiously beneficial to rich people, was to happen in the distant future of July 2024, when Morrison and Turnbull would have known they were long odds to still be around.
It was the announcement that mattered, 12 months before the next election, as it was.
Fast forward to the budget of October 2020 and with the country in lockdown Treasury was forecasting a deficit of $112 billion for 2021-22. Last week we learnt that the outcome for that year was a deficit of $32 billion – $80 billion less than forecast in 2020, $48.6 billion worse than forecast in 2018.
But while pre-pandemic 2018 is a foreign country, they don’t do everything differently there: The third stage of Morrison’s tax cuts is still happening, and is now fast approaching, except that the money for them will have to be borrowed now.
A cautionary tax tale
Meanwhile, a week ago the UK’s new Prime Minister, Liz Truss, announced her own tax cuts, also with borrowed money and also egregiously beneficial to the already rich. It didn’t go well.
The pound and bond market unexpectedly collapsed and the Bank of England had to rescue the nation’s pension funds from insolvency.
That’s because they had been playing around with derivatives to boost their returns, and the 20 per cent fall in the value of bonds was threatening to spiral out of control as the funds desperately sold them to raise cash to meet margin calls (which is where the counterparty in a derivatives trade demands a cash top up to secure the bet).
So a fortnight after he started as Liz Truss’s new chancellor of the exchequer, Kwasi Kwarteng’s first budget was either fiscal stimulus at odds with the Bank of England’s tightening efforts, or an attempt to revive the discredited “trickle-down” economics of Reagan and Thatcher, or both.
Either way, it was an ill-timed cock-up and Britain’s economic managers are an international laughing stock.
So let this be a lesson to you, Treasurer Jim Chalmers – cutting taxes for the rich with borrowed money is no longer the way to a global capitalist’s heart, especially when central banks are trying to slow things down; these days financial markets punish reckless ideology.
Tax cuts – who needs them?
Economically, tax cuts of any sort in Australia right now would be a bit like getting a pay cut when your kids are about to start private school.
As everyone and Jim Chalmers know, taxes will have to rise, not fall, to pay the ballooning cost of the NDIS, aged care, health care and defence. Either that, or the deficits will never end and government debt will never come down.
So if financial markets and economics don’t want the stage three tax cuts, devised in the foreign country of past budget surpluses, who does?
Apparently, politics does.
Well, it’s fear really. The ALP is terrified of appearing to be a big taxing party so they went to the recent election promising to implement them, having earlier promised to “roll back” the most expensive elements.
But just as 2018 is a foreign country now, 2022 could be just as foreign in 2024.
In fact, there’s a fair chance the world, and Australia, will be in recession, with the Reserve Bank cutting interest rates to rescue the economy and reduce unemployment. Tax cuts then would not be fighting against monetary policy, as the UK’s effort a week ago fought against the Bank of England’s rate hikes, but complementing it.
So Jim Chalmers should not just abandon the stage three tax cuts, assuming he could find the courage.
Instead, he should simply say they’ll only happen if the budget is in surplus, which it won’t be, and will be refocused on the less well-off if they happen, which they won’t.
Liz Truss and Kwasi Kwarteng have shown that the traditional tax-cut politics of conservatives is not what it used to be.
