Jim Chalmers has a once-in-a-century opportunity to spend a quarter of a trillion dollars on nation building without going into a cent of debt. In fact, if he chooses his public investments well, he could drive growth up, cost of living down, and pay down the government’s debt faster than currently expected. Or he can keep the stage-three tax cuts.
But despite the clear evidence that the overwhelming share of the stage-three tax cuts will go to the highest income earners, the attempts to muddy those waters never stops.
According to the Australian, scrapping the cuts would mean “2.5 million middle income Australians will pay thousands of dollars in additional tax”. It then goes on to describe those middle income Australians as individuals earning between $120,000 and $160,000 a year.
The most inconvenient truth of Australian economic debate is that those earning $120,000 per year are nothing like “middle income” Australians. The average earning of a fulltime worker in Australia is $92,000 and of course that average is skewed upwards by CEOs like Macquarie Bank’s Shemara Wikramanayake, who takes home $14.6m a year. The median income was just $62,868 last year.
While it may help win votes and sell papers to pretend that those earning $120,000-$160,000 are “middle income earners”, such deception does nothing to help Australians understand the country they live in or the likely impact of policy change.
The other dubious argument used by those trying to rescue the stage-three tax cuts is to argue that they are simply a solution to the “bracket creep” caused by rising nominal wages pushing people into higher tax brackets. The first problem with that argument is that while all taxpayers, including low income earners, experience bracket creep, the lowest income earners get absolutely nothing from these tax cuts, while the highest income earners get overcompensated. And the second problem is that while CEO pay is rising at 17%, low income earners are seeing their real wages fall. The idea that the tax system need to focus on the pain experienced by those at the top is simply bizarre.
But back to Chalmers’ opportunity. The tax cuts, released in the Morrison government’s 2018 budget, are one of the most expensive budget announcements ever made in Australia. They were announced with no modelling, no costing and no offsetting spending cuts. If they go ahead, their $243bn cost over the next 10 years alone is on par with the lifetime cost of our (just as poorly thought through) plan to buy nuclear submarines.
If Chalmers can get cabinet to grasp the stinging nettle of Morrison’s tax plan he can pull our entire political and democratic debate from the funk it’s been in for decades. Australia is one of the richest countries in the world; we are in the middle of an energy price boom; we have enormous opportunities in renewable energy; but decades of tax cuts have trained us to feel poor, that we can’t have nice things, and that the future is something to fear rather than embrace.
People in rich countries such as Norway, Denmark, Finland and Sweden take for granted that they can have nice things like free childcare and university degrees. Their quality public schools and health systems are such that private schools and private health insurance are almost non-existent. And while it may seem strange for Australians to hear, having all those nice things hasn’t hurt their economies – in fact, it has helped them. Back in 1990, GDP per hour worked in Australia was about the same as that of the Nordic counties, but since we embraced the neoliberal obsessions of tax cuts, spending cuts, wage cuts and privatisation, productivity in the Nordic countries has steadily outpaced our anaemic performance.
And that’s where the real win-win for the treasurer kicks in. While conservatives love justifying tax cuts by saying money is always better spent by individuals than by governments, not only is there no evidence to support this claim, there’s almost no no reason to expect it is true.
It is literally impossible for economies to grow steadily over time without enormous public expenditures on sewers, roads, public transport, police and courts. Without public investment in this foundational infrastructure even the simplest of private sector activities will struggle.
And then there’s innovation, the real source of economic growth, which comes from having a highly educated population, a great research culture in public universities and significant public investment in R&D.
There is just no evidence to support the argument that giving tax cuts to people earning over $180,000 per year so that they can spend more money on Uber eats, or bidding up the price of inner-city housing, will deliver greater economic benefits than investing that same money into infrastructure and public services.
There is, however, strong evidence that investing money into services like early childhood education will deliver much stronger economic returns than spending on tax cuts.
Tax is an investment in our society. It’s the price we collectively pay for the things we collectively use. There is no economic theory that can tell us what the right amount of tax to pay is, or the right range of things we should publicly invest in. And there is also no economic theory that says the less we tax the stronger our economy, or society, will be. The question of how to tax and how much to spend is ultimately a democratic one, and in the case of the stage three tax cuts, a $243bn question at that. Chalmers is lucky to be at the helm when this question is being asked. Let’s hope we are lucky enough for him to get it right.
Dr Richard Denniss is the executive director at leading public policy thinktank the Australia Institute and formerly its chief economist
