Meddling with stage 3 tax cuts would be PM’s most dangerous option

There is a logical answer to the simple question for Anthony Albanese and Jim Chalmers about whether they should inject $55 million into the economy every single day when inflation is too high and they are vowing to bring it down.

The answer is no, of course, and economists know it. Many dismal scientists do not like the stage 3 tax cuts that are set, in law, to return $20 billion to taxpayers through lower personal tax rates in the year from July 1. Their conclusion is that the changes will fuel demand and add to inflation.

The tension between economics and political risk on the stage 3 tax cuts: Treasurer Jim Chalmers and Prime Minister Anthony Albanese on Wednesday.Credit: Alex Ellinghausen

But the economic answer is not the only verdict on stage 3. The prime minister and treasurer have broader concerns about whether an overhaul of the tax package is the best solution to the urgent, nightmare challenge of rising prices. Most of all, they have to consider the immense political danger of changing a tax package they promised to keep.

The government is right to consider its options on stage 3 when it is approaching the last chance to make changes. It is certainly worth asking whether the package could be adjusted to make it fairer, for instance, by offering a greater benefit to those on lower incomes.

What if the government delivers the full $20 billion in a way that scales back the gains for those at the very top of the income scale, where spending is bigger and, arguably, the impact on inflation is greater?

These are hard questions when Labor promised to keep stage 3 at the election and Opposition Leader Peter Dutton is on alert for a breach of that promise.

Chalmers will be able to frame the debate about stage 3 when he and Finance Minister Katy Gallagher reveal their budget update in a few weeks. The May budget is the final opportunity to make changes before the cuts take effect on July 1.

The tax plan, unveiled in April 2019, removes the 37 per cent marginal tax rate for those earning over $120,000 and reduces the 32.5 per cent tax rate to 30 per cent for people earning between $45,000 and $200,000.

The biggest benefits go to those who earn the most and pay the most tax. Of the $20.4 billion benefit in the first year, $9.1 billion goes to those earning more than $180,000 a year. Another $8.8 billion goes to those earning between $90,000 and $180,000, according to Parliamentary Budget Office analysis for the Greens.

All sides view the stage 3 tax cuts from a different angle, like explorers staring at the same mountain range – vast and threatening for some, a thrilling climb for others. Progressive critics see the cuts through the prism of fairness, economists worry about inflation and conservative advocates see a righteous way to let taxpayers keep more of what is theirs. Dutton no doubt sees a series of ravines where he might, with luck, shove Albanese down a long drop to a muddy creek.

MPs are not panicking, but they all know the government is going through a rough patch.

The government, however, has to view stage 3 from all these angles at once. And only the government has to consider the tax cuts from an even higher vantage point: that of its own stability and survival on a longer journey. That is because the question on stage 3 is fundamentally about honouring an election pledge and keeping faith with voters.

What does Albanese say? In his Whitlam Oration in Canberra on Wednesday night, the prime minister reminded listeners of a line from Gough Whitlam about “promises fulfilled and reforms begun” and then applied that line to this government.

“Promises fulfilled, reforms begun,” Albanese said. “With more to do and ready to do more.” In taking pride in acting on election promises, Albanese reinforces the argument for keeping stage 3 in full.

This is where the economic case falters. The Labor decision on stage 3 has to be about an agenda that builds trust with the electorate and puts the government in the strongest position to win the next election. Everything is at stake because Labor needs to hold majority government for more than one term to be confident of embedding reforms on climate, health, the environment, income support, the National Disability Insurance Scheme and more.

The question for progressive critics of stage 3 is whether they believe scrapping or cutting the tax package is so essential for the country – so vital for fairness – that it is worth handing the Coalition a broken Labor election promise; in other words, a deadly political weapon. Dutton would treat any change to stage 3 – not just scrapping the cuts – as a personal breach of faith by Albanese.

The political danger is real because Labor seems lost at the halfway point in this term of parliament. It has delivered on many election promises but is agonising over what to do next. The defeat of the Indigenous Voice referendum marked a key moment when the voting public dismissed what Labor was selling. Labor has looked bruised ever since, slow to act on challenges such as the High Court ruling on detainees.

One caucus member puts things this way: with every sudden problem, the political failure is not the event itself but the lack of preparation for it and the inadequate response to it.

The caucus is not fracturing and MPs are not panicking, but they all know the government is going through a rough patch, and this raises a huge doubt about the politics of tax: is the government match-fit to gamble its future on a change to stage 3?

Does Labor have a reservoir of political capital to absorb the cost of breaking an election promise? No. Does it demonstrate the political skill required to change a totemic policy of this scale while keeping voters on side? No. Does it have Dutton on the ropes on any other issue so it could throw him on the defensive while it makes a move on tax? No.

Albanese and Chalmers face urgent questions about the cost of living and there are no easy answers, but changing stage 3 is the most dangerous option of all.

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