RBA balances inflation and activity in a strong economy

The Reserve Bank board’s priority, governor Philip Lowe restated on Tuesday, is to return inflation to the 2-3 per cent target range over time. The other side of its balancing act is to do so “while keeping the economy on an even keel”. The path to success, as Dr Lowe said, is narrow and clouded in uncertainty. In lifting the cash rate by 0.25 percentage points on Tuesday – half the increase tipped by most economists – the board lessened the chances in the foreseeable future of a “recession we don’t have to have”.

The increase will add to the burdens of home buyers, investors and business borrowers. The board forecast further rises ahead. It also acknowledged that higher inflation and interest rates were “putting pressure on household budgets”, with the full effects of higher rates still to be felt.

Consumer confidence has fallen, as have housing prices. More broadly, the economy is still growing solidly and national income is being boosted by record terms of trade.

On Tuesday, we reported that the Department of Industry, Science and Resources’ latest commodity price report suggests that another year of record commodity export earnings promises to provide Jim Chalmers with billions of dollars of extra revenue as he frames his October 25 federal budget. The bonanza could drive a further $40bn improvement in the budget bottom line compared with forecasts in the March budget.

Against Australia’s overall economic background, Dr Chalmers and Anthony Albanese would have no excuse for dumping the Coalition’s stage three tax cuts, already legislated. Doing so would break one of Labor’s oft-repeated election promises. As the Prime Minister said during the campaign: “They’ve been legislated, we support them, we stand by that.”

That should be the end of the matter.

Labor would not be forgiven easily for breaking such a major promise. But it is not the only reason doing so would be a bad move, against the national interest. For many years, The Australian has favoured lower, flatter personal tax rates to leave more of what workers earn in their pockets. In devising what would be the most significant reform to the personal tax system in two decades, Josh Frydenberg prioritised incentive and rewarding effort. By eliminating an entire tax bracket and ensuring that about 95 per cent of earners would face a marginal rate of no more than 30c in the dollar, stage three would lessen the insidious, financially debilitating problem of bracket creep, which undermines incentive. The 37 per cent marginal rate would be abolished, with taxpayers earning from $45,000 to $200,000 to pay a single top marginal rate of 30 per cent. Contrary to green-left claims, the change would not be an assault on fairness but would boost the productive economy. While reversing years of bracket creep, it would not make the income tax system less fair. The system would remain highly progressive, with the top 5 per cent of income earners continuing to pay a third of the overall income tax burden, before and after stage-three tax relief.

At Tuesday’s press conference, Dr Chambers gave his strongest signal that he was open to amending the package. He warned that the economic fallout in Britain – after Prime Minister Liz Truss announced, then dumped, unfunded tax cuts for workers earning above £150,000 ($260,000) – served as a “cautionary tale” on the need for Australia to align fiscal and monetary policy.

He repeatedly refused to rule out changes to the package in his budget in 20 days, despite the fact the tax cuts are not due to take effect until July 1, 2024. Unlike in Britain, where Ms Truss wanted to cut the top marginal tax rate of 45 per cent, Australia’s stage-three plan does not lower that top marginal rate.

As one Labor MP told The Australian, it would be “outrageous” to suggest any similarity between Australia’s stage-three package and Ms Truss’s dumped plans.