Paul Bongiorno
Labor’s approach to the stage three tax cuts

Deep in the bunker that is federal Parliament House’s cabinet room, the Albanese government’s economic brains trust spent much of Tuesday strategising about Australia’s response to what the treasurer calls the “gathering storm clouds in the global economy”.

The expenditure review committee (ERC) is chaired by the prime minister himself. Its nickname is “the razor gang”, which dates back to the Fraser government of the 1970s. The committee’s mission statement then and now is to slash spending that is considered profligate or merely unaffordable in the current circumstances. But nobody can deny that politics as much as economics shapes the thinking of these fiscal inquisitors. The nine permanent members of the gang are, after all, the most senior politicians in the government.

The politics is being shaped by the government’s insistence that it has inherited one hell of a mess from its Liberal predecessors. Giving weight to the charge is the trillion dollars of debt on the books and the ballooning cost of servicing that debt. Finance Minister Katy Gallagher says that cost is almost $18 billion a year – “currently bigger than what we spend on universities”. In other words, whatever spending the razor gang approves in the coming budget will have to be paid for substantially by borrowed money.

Little wonder then that the discussion on Tuesday was dominated by “the cautionary tale” coming out of Britain, with the enormous political and economic price new prime minister Liz Truss is paying for unveiling billions of pounds worth of unfunded tax cuts that particularly benefited the richest people in the land.

Rather than cheering this latest manifestation of trickle-down economics, financial markets hit the panic button at the sheer recklessness of the latest ideologues in charge of the Conservative party.

Chancellor of the Exchequer Kwasi Kwarteng has a degree in classics rather than economics but even he was shocked at the Shakespearean drama he had brought on. The pound plunged to record lows against the US dollar, banks withdrew mortgage deals because of interest rate chaos and pension funds holding one trillion pounds of savings were rescued from disaster only after unprecedented action by the Bank of England. 

Gallagher says it was all “front of mind for us”. Like Treasurer Jim Chalmers when he emerged from the political war games in the cabinet room, she confirmed the stage three tax cuts were part of the discussion. Both said the government had not changed its position, taken to the May election, to leave the $243 billion stage three tax cuts in place. Though Gallagher on RN Breakfast did not quibble when the interviewer  said “yet”. She said the considerations for savings were “across the budget”. The flattening of the tax rates would see people on $45,000 paying the same 30 per cent rate as those earning up to $200,000. 

Chalmers said that, as the ERC finalises the budget, it is obviously factoring in the broad context, “including deteriorating global conditions, the need to build a fiscal barrier, the need to make sure that every dollar of spending is defensible when it comes to being affordable, sustainable and responsible and sufficiently targeted”. No wonder the opposition leader, Peter Dutton, senses a crab walk away from stage three. 

There are plenty of people in the Labor caucus, not to mention the Greens and most of the crossbench in the senate, who see the stage three cuts as failing Chalmers’ benchmarks. Two months ago, veteran Liberal backbencher Russell Broadbent joined the chorus calling for them to be scrapped. He said people on his parliamentary income didn’t need the $9000 and that circumstances had changed dramatically since Scott Morrison unveiled them in his 2018 budget.

However, weighing heavily on the minds of some in Labor is the damage that might be done to the government’s credibility if it breaks its election promise. The assistant minister for treasury, Andrew Leigh, told Sky News keeping promises was “important for the integrity of the democracy”. He said the government had started well, delivering on policies such as a national anti-corruption commission, and that it “holds true for other policies as well”.

Leigh found support from three of his backbench colleagues who told The Australian that breaking the tax cuts promise could hurt Labor among aspirational voters. One outer Sydney MP, Mike Freelander, said you could make an argument that “people who earn up to $200,000 are not necessarily rich”.

Maybe not. But taking a cue from Britain, the more telling political vulnerability of stage three is the question of who will bear the burden of paying for the cuts. The Truss government in Britain at least fessed up, with the prime minister saying government programs would have to be cut. One of her ministers, Simon Clarke, told The Times it was very hard to “cut taxes if you don’t have the commensurate profile of spending and supply side reform”. The British tabloids translated that as socking the poor to benefit the rich. No surprise Truss and Kwarteng ingloriously backed down.

In Australian terms, among the people who would have to help pay are those on the National Disability Insurance Scheme waiting lists, those who can’t afford to see a doctor as Medicare teeters and, of course, the unemployed still expected to live below the poverty line.

Broadbent thinks any negative reaction would be “a blip” – even though Dutton and his shadow Finance minister, Jane Hume, are serving notice that they will do their best to keep reminding voters they can’t trust Labor on taxes.

Research released by The Australia Institute this week suggests breaking this particular promise would be far from a fatal blow. It found a majority of Australians (61 per cent) think that adapting economic policy to suit the changing circumstances, even if it means breaking an election promise, is more important. Almost twice as many Australians (41 per cent) support the Labor government repealing the stage three tax cuts as oppose it (22 per cent), with 37 per cent unsure.

Katy Gallagher says let’s not pretend “that the economic circumstances aren’t changing and haven’t changed since May”. She cites the “high and rising inflation environment”, rising interest rates, falling real wages and a deteriorating global outlook. Chalmers adds that the likelihood of a recession in Britain and the United States has moved from “possible to probable”.

Hume says the stage three tax cuts “are baked into the budget”, but what’s really baked in is deficits as far as the eye can see. Like for the unfunded British tax cuts, there is no longer the buffer of endless surpluses that Morrison predicted in 2018. A more realistic deficits outlook was in the Coalition’s March budget and few are expecting Chalmers to substantially deviate from it. Some are bullish that the biggest improvement in the bottom line in history could produce surpluses in the next four years, but economist Richard Denniss dismisses this as fantasy.

Inside the government there is a view that Albanese is no longer as paranoid about breaking the promise on tax cuts as he was. He is a central participant in the planning of the looming budget and needs no convincing of the deterioration in the economic context since the election.

The question now is more when the government shifts and what it does. There is an emerging consensus in Labor’s ranks that stage three will not be scrapped entirely but instead made fairer and less expensive by capping the threshold for the 30 per cent rate at $180,000 or keeping the 37 per cent rate on incomes above $120,000. This makes much more political sense in the lead-up to the next election than giving the richest Australians the lion’s share of benefits at the expense of everyone else.

Insiders say there will be no bombshell announcement at the end of the month, although Chalmers will have to include Treasury’s budget estimates for the next four years. Experience tells us these are more kindly defined as “guesstimates” and even if Albanese and Chalmers are heading towards some significant tweaking, they don’t have to show their hand just yet. After all, estimates are revised every six months.

More urgent is convincing the Reserve Bank that the government is working with it and not against it. Chalmers says that without this there are consequences not just for the budget but for the economy as well. He says this is “what the Brits are at risk of doing”. Indeed, financial markets made a swift and harsh judgement on that, which the treasurer does not wish to provoke here. Especially as such a move would inevitably lead to a crippling upward spiral in interest rates.

Remembering that the Treasury secretary, Steven Kennedy, is on the Reserve Bank board, he would have assured it on Tuesday that fiscal policy was aligned with monetary policy. His message would have been that we will see evidence of this in the treasurer’s promised budget “tough decisions”. Some analysts speculate Kennedy may even have signalled that stage three is under serious review. 

Blunting inflationary expectations is an important lever in the goal of returning to the 2-3 per cent band. Certainly, it is more important than keeping election promises no longer fit for any good purpose.

This article was first published in the print edition of The Saturday Paper on October 8, 2022 as "Stage three’s a crowd".

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