Imperative for tax reform is here – will PM meet it?

The apparent decision of Anthony Albanese to keep the stage three tax changes in place for this budget – assuming this is the final result – is correct in political and policy terms. Picture: NCA NewsWire / Philip Gostelow

The Albanese government’s dilemma over the stage three tax cuts is being elected on a platform in which it didn’t believe but was embraced for purely electoral needs – which means retention of the full tax agenda in the budget merely prolongs the political agony and policy conundrum.

This dilemma is entirely of Labor’s creation. Its flirtation over the past week with amending the tax cuts and breaking its election promise only exposes the depth of Labor’s confusion. Labor cannot take political ownership of the tax cuts but cannot amend the tax cuts in its first budget. This is Labor’s self-created absurdity.

The apparent decision of Anthony Albanese to keep the stage three tax changes in place for this budget – assuming this is the final result – is correct in political and policy terms. But Labor won’t get any credit for this, partly because it has advertised to the world it has no confidence in the Morrison government’s stage three legislated package.

This threatens to cast a political cloud over Jim Chalmers’ first budget. The apparent decision to defer the timing of any change and how it is implemented guarantees the public debate and policy dilemma have just begun and will only intensify until Labor confronts the issue of tax reform.

Labor’s current public stance is farcical and demeaning. “Our position hasn’t changed,” the Prime Minister repeated last Sunday. What position is that? It’s the position in which Labor doesn’t believe and won’t defend. How bizarre is this? Whoever heard of a government unable to defend, let alone champion, income tax cuts worth about $18bn annually? This is not just about politics – the stage three debate is about Labor’s true policy character, a far bigger issue.

On the politics, however, newspaper columns report Labor’s supposed political geniuses saying if you are going to break a big promise do it at the start, a long way from the next election. Where have such geniuses been for the past decade as government after government fell on the issue of trust, and the public became sensitised to governments smashing such trust early in their terms?

Breaking your major tax pledge in your first budget – after your PM has repeatedly reaffirmed that pledge – mocks any sense of integrity. It would taint the government from the outset. It would confirm Labor’s election promise was always a fraud. It would give a depleted opposition a powerful attack narrative: they broke their tax promise; then they broke their promise to cut power bills; then they broke their promise to cut cost of living. Every breach over three years would fuel the narrative.

No surprise that Albanese thinks it best to avoid such branding, having warned a month ago about “the breakdown in faith and trust” that meant democracy could not be taken for granted. How would that warning look after smashing trust in the opening budget?

Progressive politicians are now mired in a conflict between their electoral interests and their ideology. It will shape much of politics this term.

With the tax cuts favouring high-income earners, census figures published in this paper show that of the top 20 seats with the highest percentage of income earners on $104,000-plus yearly only three are held by Liberals. The teals, Labor and Greens – the progressive parties – hold 17 of the 20 seats. Tax increases for the better off, the instinctive ideological stance of progressives, will now overwhelmingly punish their own seats.

Any announcement by the Treasurer of major surgery on the tax cuts in the budget would be depicted as pandering to the anti-aspirational left and would suggest a weak government devoid of backbone and easy to roll over.

The economic case for action on the tax cuts now is flawed and premature. The tax cuts were legislated three years ago and have been factored into Australia’s budget outlook by financial markets. They don’t begin until July 2024, three budgets and two years away. Where the economy will be placed in 2024 is uncertain. Reducing tax cuts two years away cannot help the Reserve Bank fight inflation today – that argument doesn’t work.

The outrage over equity is misplaced. The tax package overall, stages one to three, is a modest, Liberal Party-style reform that returns bracket creep, enshrines the 30 per cent marginal rate across most of the income range and retains system progressivity. The top rate of 45c will trigger from $200,000, a low threshold by international standards.

The top 10 per cent of taxpayers would pay 44 per cent of tax compared with 44.6 per cent in 2017-18 while the top 1 per cent would pay 17 per cent of tax, a touch above the earlier figures. The case against stage three is not equity but its impact on the budget deficit.

But the budget test for Labor is what happens now on spending. How far does eliminating Morrison government rorts go? Chalmers says the budget will contain difficult decisions. That’s good. Does it mean Labor’s campaign promises will be offset by spending cuts?

Chalmers rightly warns the global inflation outlook is “increasingly dangerous”, threatens a global downturn and puts more onus on Australia’s fiscal responsibility. That means a responsible budget now, not action on tax cuts in 2024.

The way to approach the tax cuts is to see and modify them, as required, to respond to the immense economic challenge Australia will face. That is defined by high debt, the demand for fiscal accountability and managing the structural increase in spending that accentuates these pressures. The long-delayed imperative for tax reform has arrived and will be pivotal in making or breaking the Albanese government.

Chalmers has spelled out the news – NDIS spending is growing by 12.1 per cent yearly, hospital funding by 6.1 per cent, aged care by 5 per cent, defence spending by 4.4 per cent, while higher interest rates mean interest payments will grow about 14 per cent a year over the next four years. The nation’s social and security contract has expanded – but the policy consequences and financing have not been addressed. That is going to be Labor’s destiny.

Treasury chief Steven Kennedy said spending as a proportion of gross domestic product will average 26.4 per cent in the next decade compared with 24.8 per cent in the decade before the pandemic. Bigger government is here, backed by public opinion. The logic is that Australia’s tax burden must rise, an argument made by economists including Ken Henry, Ross Garnaut, Chris Richardson and Saul Eslake, among others.

For years Labor has been confused about tax reform, chopping and changing, trapped between its values and its politics. Fiddling with stage three in its first budget just avoids the real issue. If Albanese believes in trust, as he says, then he will take a major tax package to the next election and secure public consent – that could involve changes to stage three, it should address our crippling over-reliance on income tax and it should seek to raise more revenue with fewer economic disincentives by raising more tax from land, rents and consumption.

There is an alternative – for Labor to prioritise political safety over the national interest and ebb out of office by entrenching Australia’s underperformance.