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 for amending or dumping the tax cuts.
The similarities can be deceiving, however. The government’s net debt is currently 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 sprung 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 United States (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 — Jim 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’ time. 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 next year. 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 to 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, re-targetting them at low and middle-income earners, or reducing them but not eliminating them.
But any decision now would be too early, and that’s nothing to do with politics.
