Bad day for aspiration as PM reneges on tax reform

Breaking core promises is always bad, especially when a government is under pressure, as Julia Gillard found out when she trashed her promise that “there will be no carbon tax under the government I lead”. After breaking his promise to deliver the Coalition’s stage three tax cuts – which he reiterated at least 36 times in two years – Anthony Albanese is keen to convince Australians that the move is “the best way forward’’.

The 1.1 million households, which already pay a disproportionate share of the tax burden and will be worse off because of Labor taking back tax cuts legislated by the Coalition, will see the move for what it is – a tax grab at their expense. Instead of returning these workers’ hard-earned extra earnings that have been skimmed off by bracket creep in recent years, the government is redistributing them.

The Prime Minister’s lame excuse for doing so – that when “economic circumstances change, the right thing to do is change your economic policy’’ – is fiction. “There has been a pandemic, there has been a recession, there has been global inflation, there has been not one war but two wars that have had an impact,” he said. “So there have been considerable events.’’

The war in the Middle East, triggered by Hamas’s terror attack on Israelis on October 7 last year, is new. Russia invaded Ukraine in February 2022, when the Morrison government was in office. The Covid-19 pandemic was over by the time of the federal election in May that year. And the RBA, amid increasing concern about inflation, increased interest rates on May 3, 2022, before the federal election.

In the ensuing 20 months, sluggish productivity has emerged as the nation’s most pressing economic problem. It is being exacerbated by the Albanese government’s winding back of the industrial relations clock by 40 years to a more rigid, centralist time that predated the Hawke-Keating era.

The reversal of the previous government’s tax-flattening journey, as Tom Dusevic writes, is “a throwback to the class politics the nation had largely left behind’’. Apart from the 1.1 million households that will be worse off because of the government’s backflip, another 3.3 million households – mainly poorer families who pay no tax – will be unaffected. Mr Albanese appears to be betting the house on cementing or gaining support from the 6.3 million households – nearly 60 per cent of the total 10.7 million households – that will be the big winners from the changes.

At least for now. Those aspiring to work hard to increase their incomes to $150,000 or more in future will have less incentive to do so due to bracket creep. That is not the way to encourage initiative and enterprise. Given the propensity of many in that group to spend, the RBA will be watching for any inflationary effects from the changes.

Bracket creep will remain the biggest ongoing problem. As Australian Industry Group CEO Innes Willox said: “We still have a complicated four-tier tax system that discourages aspiration and disincentivises the majority of people from wanting to work harder and earn more. ”

In an economy saddled with an uncompetitive corporate tax rate that discourages business investment and cumbersome state tax regimes that discourage employers to hire more workers, the government’s sole contribution to tax policy this term sets any prospect of achieving reform backwards. By any standards, that is a poor effort. Watering down stage three does not simplify an overly complex system. Nor does it reverse over-reliance on PAYE tax. By applying yet another brake on productivity, budget management will only get harder.