Tax cuts key step to forge more productive economy

If, as expected, the Coalition’s $158 billion ­personal income tax cuts legislation passes the Senate today, it will serve the national interest. The three-stage plan, providing an immediate $1080 offset for workers earning between $48,000 and $90,000, culminates in a lower, flatter tax rate of 30 per cent in 2024-25 for those earning $45,000 to $200,000. A medium-term strategy for redressing bracket creep has been needed for decades. After including the plan in its budget, the government won a mandate for it on May 18 and has been adamant it will not split the package. The Labor opposition, which passed the legislation in the House of Representatives, is entitled to pursue amendments, including bringing forward stage two of the tax cuts, listed for 2022-23, in the Senate. Its Treasury spokesman Jim Chalmers says it is vital to “get more money into workers’ hands sooner” as a stimulus. That’s a good point. And if Labor and crossbenchers ultimately blocked the cuts they would wear the wrath of voters. But as of last night, the government appeared to have secured the support of Tasmanian senator Jacqui Lambie and the two South Australian Centre Alliance senators, Rex Patrick and Stirling Griff, to pass the tax cuts in full, without amendment.

In a speech in Darwin on Tuesday night, hours after slashing borrowing costs to their lowest level since Federation, Reserve Bank governor Philip Lowe said the tax cuts would help struggling households. For the second month in a row, the central bank cut rates by 0.25 of a percentage point to 1 per cent. But Australia cannot rely on monetary policy alone to support growth and jobs, the governor said: “We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.” He urged the government to take advantage of the low rates to borrow to invest in infrastructure. Provided the right projects were selected, doing so would add to productive capacity when existing infrastructure was struggling to keep up with population growth.

Dr Lowe’s advice was backed up yesterday by Tony Shepherd, a former Business Council of Australia president, who urged Scott Morrison to ramp up spending to maintain and fix existing infrastructure. That responsibility, as Mr Shepherd told The Australian, was often overlooked because politicians preferred cutting ribbons on new projects. But poorly maintained infrastructure, a problem across the three levels of government, was as big a drain on the economy as lack of infrastructure. Maintenance could be organised in two or three months, which made it an effective mechanism for a short-term stimulus while contributing to longer-term growth. The NRMA has noted that the backlog to adequately upgrade existing roads and construct new roads has risen to $2.2bn, with regional councils responsible for 75 per cent of the shortfall, Michael Roddan writes today. In regional NSW alone, $300m worth of works are required to replace roads classified as “very poor”, and a further $600m to replace “poor’’ roads. Even if the economy did not need fiscal stimulus, Department of Infrastructure secretary Steven Kennedy said recently, boosting maintenance would deliver significant productivity returns. The benefits, while concentrated in areas with the busier roads, would be dispersed geographically.

On Tuesday, Dr Chalmers blamed the Morrison government for the slowest growth since the GFC, at a time when interest rates were a third of what they were during that crisis. Current economic circumstances, however, differ markedly from those of a decade ago, in Australia and internationally, making such comparisons unhelpful. Much depends on whether the truce between the US and China over trade proves sustainable and whether the world’s two largest economies can establish a more constructive and open trade relationship. In Australia, the strength of the resources sector and the falling dollar would also be a plus, as Dr Lowe predicted.

NAB acting chief executive and incoming chairman Phil Chronican had good news for property owners at The Australian’sCompetitive Advantage Forum on Tuesday, pointing to evidence that the poor outlook for housing prices had eased “and we may be at the beginning now of the next growth cycle’’. The banks, he said, were dealing with their own “conflicting forces’’, as revenue growth moderated just as more ­investment was needed in technology. Major banks are also repaying customers billions of dollars in ­remediation in the fallout from the Hayne royal commission. Like Dr Lowe, Mr Chronican believes it will take more than rate cuts to kickstart the economy. Tax cuts, he said, would help, as would governments removing other impediments to business investment.

In these circumstances, the last thing Australia needs is for the political class to be bogged down in a protracted, narrowly focused debate over the tax cuts package, like that which ultimately scuttled the final stage of the Turnbull government’s company tax reform plan last year. After tomorrow, when the tax cut lever, like the interest rate cut, should be in place, the Morrison government and the states should turn to infrastructure development and maintenance. They should also improve policy settings, including workplace relations, to encourage private sector investment and jobs growth. Living standards depend on it.