Stage three tinkering of little value

The changes merely shuffle the unfunded stage three tax cuts to give very modest relief to low and middle income earners. Pictured: Kirsty Parkes and her family have been hit by rising cost of living. Picture: Nikki Short

The most shocking thing about the modified stage three tax cuts is the poverty of the economic debate about cost of living and tax reform – with both relegated to a battle of politics.

The recent global inflationary surge has caused a cost-of-living crisis and exacerbated bracket creep, creating a strong justification for tinkering with the cuts to direct the bulk of the relief away from higher income earners and towards the broad middle – even as inflation has probably peaked and is trending down.

Stage three is now being sold less as a tax cut and more as a ­“reform” that will enhance the equity of our tax system.

But the reality is these changes to stage three do not fix the underlying cost-of-living crisis. And they take Australia even further away from a tax system that is fit for purpose.

It’s simply another exercise in short-term thinking by our policymakers.

Do Australians, particularly low and middle income earners need some relief? Yes, they do – as many households struggle to make ends meet as gas and electricity bills roll in, as back-to-school expenses hit, and as many common staples like fruit and vegetables rise as bad weather sweeps across the eastern seaboard. But any government relief must be paid for, or else we will incur the wrath of the Reserve Bank. The reality is that short-term Band-Aid solutions won’t solve the cost-of-living crisis, which is driven by structural problems in our economy. If you want to solve higher energy prices, then get the cheaper renewable energy into the system reliably and more quickly.

If you want to solve higher rents, then get housing reforms that actually deliver more houses quick smart. If you want to ensure prices aren’t rising more than they should, then double down on real competition reform across the sectors.

Of course, these things cost money. So, enter the tax debate. It’s important to remember that the stage three cuts are the third in a series of changes and so shouldn’t be viewed on their own.

Similarly, it’s important to remember that these tax changes were legislated a full five years ago – when no one conceived of a global pandemic, the war in Ukraine, or a 4.25 basis point lift in interest rates.

A tax system that is fit for purpose should be the aim, not shuffling the cards in a political game.

The changes to take effect from July 1 this year include: reducing the 19 per cent marginal tax rate to 16 per cent, and reinstating the 37 per cent marginal rate between $135,000 and $190,000. The top marginal rate of 45c in the dollar (excluding the Medicare levy) would take effect from $190,000, instead of $200,000 as originally proposed under stage three.

On the pure numbers, the government is clearly trying to direct tax savings away from higher income earners and towards low and middle income households.

Compared to stage three, an individual earning $200,000 would now receive a tax cut of $4529 instead of $9075 – almost half what was proposed.

At the same time, most Australian taxpayers (those earning between $46,000 and $135,000 per year) would receive an additional $804 tax cut.

Those earning less than $46,000 would receive less, but it will be more than the nothing that stage three had in store for them.

Setting aside the politics of the decision, what do these changes mean in terms of the economics? For the cost-of-living challenge, it will make little difference.

The additional $804 that most taxpayers will receive in 2024-25 amounts to less than $15.50 per week – less than a large pizza and the 2024 equivalent of Amanda Vanstone’s “sandwich and a milkshake”.

What about the other side of the cost-of-living debate? The battle against inflation. Importantly, while the government claims the changes are broadly neutral, we estimate in 2024-25 they will cost the federal budget around $2.6bn more than stage three.

In large part that is due to the decision to lower the 19 per cent marginal rate to 16 per cent – a change that costs approximately $10bn in 2024-25 alone.

These changes therefore pump an additional $2.6bn into the economy compared to what was previously expected. The Reserve Bank will now have to make its own judgment.

The changes do not address bracket creep (and nor would stage three) – Australia’s top marginal tax rate has been $180,000 since 2008.

In that time, the number of taxpayers who are in the top tax bracket has more than doubled due to bracket creep.

The changes merely shuffle the unfunded stage three tax cuts to give very modest relief to low and middle income earners who would otherwise have missed out.

This is the price of the short-termism that dominates our ­political discourse.

Pradeep Philip is head of Deloitte Access Economics, where Stephen Smith is a partner.