The new British prime minister Liz Truss has been rolled by colleagues unprepared to support a fiscally profligate, market-spooking, trickle-down package that would have abolished the 45% top rate of income tax. The United States looks to be heading for a recession.
In Australia, the Reserve Bank of Australia will likely lift interest rates again on Tuesday, which would be the sixth hike in as many months. Tuesday also marks three weeks until Australia’s treasurer Jim Chalmers hands down his first budget.
Politically speaking, the weeks before any budget are exercises in massaging public expectations, and Chalmers has spent the last few weeks framing the economic statement as a bread-and-butter exercise. Dull but worthy. A workmanlike sequencing of the Albanese government’s election commitments.
But if we listen carefully over the past week or so, it’s quite clear Chalmers’ storytelling has started to shift. Australia’s treasurer is increasingly pitching his budget as an exercise in rebuilding the fiscal buffers.
The reason for this is simple. Another economic storm is brewing. At the moment, the third major global economic downturn in 12 years looks more probable than possible, and that has implications for Australia.
The treasurer’s recent rhetorical shift is directly relevant to one of the most contentious policy issues currently doing the rounds – the fate of the Morrison government’s stage-three tax cuts.
The rebalancing of the language was evident in television interviews Chalmers did last Thursday and on Sunday.
Before we examine what Chalmers has been saying, a quick recap for people who have missed the whole stage-three debate. These tax cuts are already legislated, and due to come into effect in July 2024. The changes create a 30% flat tax rate for anyone earning between $45,000 and $200,000. Flattening the tax scales costs the budget $244bn over 10 years.
Revisiting stage three would be fiscally prudent – demonstrably so – and, importantly, it would also align the objectives of fiscal and monetary policy, which is important when the RBA is trying to subdue inflation with the very blunt instrument of rate hikes, a process that belts leveraged working families through higher borrowing costs.
We saw this policy logic play out in Britain spectacularly over the past 24 hours. The original UK mini-budget proposal scrapped the 45% top tier tax rate for those earning more than £150,000 a year, and lowered it to 40% for everyone earning more than £50,270 on the argument cutting tax would be growth enhancing.
But the new Tory leadership found themselves shouted down by their own people, because using borrowed money to fund tax cuts for rich people in an inflationary environment is … how do we put this politely? Unwise.
The supreme ineptitude of Truss and her chancellor has now handed Labor a very useful precedent. But amending our own stage-three package would fly in the face of what Labor said about those tax cuts prior to the May election.
Having been clubbed to death during the 2019 campaign over a death tax that didn’t exist, Labor has been gun-shy about pursuing anything that looks even remotely close to tax hikes, apart from precooked measures relating to the tax paid by the multinationals.
The fate of the stage-three package has not yet been discussed by the Albanese cabinet – although some ministers think two things: it would be insane to deliver the stage-three changes as legislated in the current economic climate; and over the medium term, the tax cuts have the effect of crowding out important progressive priorities. If this is to be the restoring the fiscal buffers budget, then now is absolutely the time to move.
When asked on Sunday on Sky News whether or not delivering the stage-three package remained a core promise, Chalmers said Labor’s policy hadn’t changed – which is correct as things currently stand.
But the treasurer said several other things as well that are relevant in this context.
Chalmers pointed to rising inflation and interest rates, and “what’s happening around the world”. He said the global situation had “deteriorated dramatically” over the last month or so. The chance of recession had edged from “possible to probable”. He noted “no responsible government could ignore that”.
He said the current boil-over in the UK was relevant to Australia’s policy calculations. “What’s happening there I think is a cautionary tale about the costs and consequences of getting government policy and central bank policy out of whack, having fiscal and monetary policy working at cross purposes,” Chalmers said.
“It is a cautionary tale about what it looks like when you risk getting that wrong – and so that’s not irrelevant to us as we put together our own budget to hand down this month.”
Also pertinent and direct were these observations from the treasurer. “I think people are up for a broader conversation, whether it’s savings, trimming spending, whether it’s the best optimal tax arrangements, whether it’s how we grow the economy the right way – I think Australians are up for a real conversation about that.”
Budgets, Chalmers said, were about taking the “right and responsible path and not just the path of least resistance, and that’s what people can expect to see”. As hints go about the direction of travel, those are pretty significant from a very senior government figure.
Shifting on stage three would move the first Albanese budget from B for boring, to B for big – but experience tells me that the treasurer is currently intent on doing what treasurers are supposed to do. Flying that kite. Testing the available political space for budgetary repositioning.
Whether the reposition happens in this coming budget is for now an open question. When Labor considered the stage-three package back in opposition, there was an attempt at that time to adopt a position of maintaining the Morrison tax cut for workers earning below $180,000 while imposing a higher, deficit levy-style tax rate for people earning above that. But that attempt was ultimately overruled by a shadow cabinet decision that was more about pre-election politics than about medium-term budgetary prudence.
Labor absolutely understands that any broken promise will be weaponised by its political opponents, although making the case to blow a hole in the tax base in an economic slowdown may not prove a winning pitch.
But apart from anything Peter Dutton may have to say about it, revising stage three could be disconcerting for voters who supported a change of government on 21 May because Anthony Albanese ran a small target, safe option, pitch.
While the government mulls its options – as well as those international factors opening the door legitimately to a policy rethink – there is an intensifying domestic public advocacy campaign around the stage-three package.
This campaign won’t fully inoculate the government against criticism about broken promises given only engaged voters will be watching, but the advocacy could provide a degree of political cover.
A range of credible interest groups are fanning out, pre-budget, stating the obvious: these tax cuts cost a bomb, they don’t help inflation and don’t help Australia to pay for critical social services people rely on.
The message is simple: this package was legislated in a different economic and budgetary context. When circumstances change, smart people change their minds.
