Grattan on Friday: Should Anthony Albanese keep his word on the Stage 3 tax cuts?

1 September 2022 Michelle Grattan News Desk Canberra, Grattan, Politics

The final, mega stage of the Coalition’s tax cuts, worth more than $240 billion over a decade, are now in the gun sights of many critics, who are calling for Anthony Albanese to dump his promise to deliver them.

This week Greens leader Adam Bandt, releasing an analysis of the distributional impacts prepared by the independent Parliamentary Budget Office, said the tax cuts “cost a fortune, and the wealthiest 20% get close to 80% of the money”.

Bandt said they would “turbocharge inequality” and widen the gender pay gap. The benefit for women is half that for men, because women earn less. Over the decade men would get $160.6 billion, while women would get $82.9 billion.

Independent senator David Pocock, from the ACT, on whose vote Labor is expected often to rely when there is contested legislation, said “things have changed a lot since these [tax cuts] were legislated”, and suggested better ways some or all the money could be used.

But Albanese, answering questions on Labor’s 100 days anniversary on Monday, reaffirmed he had no plans to try to un-legislate the tax cuts – although some commentators felt he was leaving a smidgeon of wriggle room.

The cuts were announced in Scott Morrison’s final budget as treasurer in 2018, and tweaked in 2019, with Stage 3 commencing in mid-2024. The part of Stage 3 that benefits most taxpayers cuts the rate that applies to incomes over $45,000 from 32.5 cents in the dollar to 30 cents. The bigger part extends that 30 cent rate all the way up to $200,000, abolishing an entire rung of the tax ladder.

For high earners, the part of their income that was taxed at 37 cents will be taxed at 30, as will income above $180,000 that was taxed at 45 cents. The 45 cent threshold will cut in above $200,000.

The argument about the cuts is a mishmash of economics and politics. It’s been so since the start, although circumstances have deepened the dilemmas surrounding them.

Labor voted for Stage 3, using as justification that it was part of a package containing relief in earlier years for those on lower incomes, but also for political reasons. The decision was in line with Labor small target strategy. This was underlined by the fact the then-opposition didn’t propose to repeal the cuts or make changes if it won the election. Indeed, quite the opposite.

Although these cuts, legislated before COVID, had many critics at the time, the case against them increased with the budgetary hit imposed by the pandemic. That transformed the landscape.

Independent economist Saul Eslake says: “From the standpoint of economic management, the main argument for abandoning or deferring [them] is that the medium-term budget outlook is now very different from when those tax cuts were proposed and legislated.

“At that time, the budget was projected to be in surplus throughout the 2020s, and net debt reduced to zero by the end of the decade. Now, deficits are projected to continue as far as the eye can see, and net debt to continue growing in dollar terms into the early 2030s.

“It’s understandable that the government feels bound to honour the pledges it made But that would seem to make inevitable that, sooner or later, the government will need to look for other means of raising additional revenues in order both to meet the electorate’s expectations for higher spending in disability, aged and health care, and to put the budget on a more sustainable medium-term path,” Eslake says.

Ditching the tax cuts on the grounds of changed circumstances would have two clear Labor precedents.

Bob Hawke promised tax cuts before the 1983 election. Then, on the basis of discovering an unannounced $9.6 billion deficit when he reached office, the promise was quickly buried.

Years later the Labor government, then under PM Keating. legislated tax relief before the 1993 election. It boasted the cuts were L.A.W. Post election, the second round of these was scrapped.

Hawke, riding a tide of honeymoon popularity and making a convincing case, wasn’t damaged by his broken promise – which was just that, a promise, not something set in law. Keating, who had just enjoyed one of those miracle election wins but was at the fag end of Labor’s term, suffered serious harm.

Since the Hawke and Keating days, voters have become more distrustful of politicians and the political danger in breaking undertakings has increased.

If Albanese wanted to repeal or change the tax cuts, he would have the Senate numbers to do so, with the Greens and Pocock. But trashing an election pledge would have major implications for his credibility.

At the 2025 election, opponents would have the argument that Albanese’s word could not be trusted. With his eye already on a second term, he has to think of the long game.

Treasurer Jim Chalmers made two defences of the tax cuts this week. He challenged the argument they were just for the rich. And he maintained that scrapping them would not address current budgetary problems.

“It’s important to remember that these tax cuts kick in at $45,000. For a lot of Australians with quite modest incomes, they will be getting an additional tax cuts in stage three – we shouldn’t lightly dismiss that,” Chalmers said.

(The benefit accruing to a taxpayer earning between $45,000 and $60,000 is small, no more than $375 a year, which is much less than the recently-abolished tax offset of up to $1,500 – meaning that, taken together, the changes will leave some low to middle earners worse off.)

Chalmers also made the point that “even if a government were to tweak those Stage 3 tax cuts, they don’t come in for another couple of years.

“So they have absolutely no bearing on some of these challenges that we’re dealing with right now.”

Of course the fact the tax cuts don’t start until mid-2024 of itself gives the government latitude to change its position, and allows for sustained lobbying.

In today’s uncertain conditions, that’s an eternity in policy terms.

But the passage of time also imposes constraint. The closer a government gets to an election, the harder it becomes to take risky decisions. Especially decisions that go to the question of trust.