By Rachel Clun
Stage 3 tax cuts will add to inflation, forcing the Reserve Bank to lift interest rates further next year, and the government should either scrap or drastically change the tax plan, economists have warned.
Billions in savings from changing course could be used to help those struggling the most financially, the economists suggested as Treasurer Jim Chalmers prepared to meet Labor backbenchers on Thursday to discuss how the government could tackle cost-of-living pressures.
Treasurer Jim Chalmers is to meet backbenchers on Thursday to discuss cost-of-living support.Credit: Alex Ellinghausen
In a speech on Wednesday evening, Prime Minister Anthony Albanese said the government was open to adding to policies already introduced such as fee-free TAFE places, energy bill relief to low-income households and cheaper childcare to reduce price pressures.
“Our government will continue to do everything we responsibly can to support people who are under pressure,” he said.
Earlier in the day, shadow treasurer Angus Taylor asked Albanese whether the government would break its election promise to keep the stage 3 tax cuts in full.
“We haven’t changed our position on the stage 3 tax cuts,” Albanese said in question time.
Asked whether the tax cuts would be inflationary, the shadow treasurer said they must stay.
“Entrenched inflation means Australians are paying 15 per cent more income tax,” Taylor said.
“With Australians’ disposable incomes falling by more than any other advanced economy, now is the wrong time for Labor to raise taxes on working families by breaking their promise on the stage 3 tax cuts.”
But economists argued the extra money freed up by tax cuts would add to inflation at a time when the Reserve Bank was trying to lower it.
The stage 3 cuts, to be given to everyone earning more than $45,000, come into effect in July 2024. They are projected to cost the federal budget about $20 billion a year, or about $254 billion over a decade.
Analysis from Anglicare Australia found the cuts would give people earning over $180,000 an extra $233.65 a fortnight, and people on more than $200,000 would get an extra $349.04. Those earning $60,000 would get $14.42.
Grattan Institute economic policy program director Brendan Coates said it made no sense to proceed with the tax cuts as planned.
“To be throwing that amount of money into the economy in the middle of next year, when inflation is still expected to be above the RBA’s target then of 2-3 per cent, just makes no economic sense,” he said.
Independent economist Nicki Hutley acknowledged it would be politically difficult for the government to change the plans, but said the cuts were poorly designed and the economic outlook gave Labor reason to change them.
“They have cause to scrap them altogether, [but] given the politics, and given the economic circumstances, they absolutely can justify tweaking them so that they make more sense, that you put the benefit down right at the lowest income levels,” she said.
“This is the thing: when you let the inflation genie out of the bottle there just is no easy way to get it back in without people having to face some form of disadvantage.”
The Grattan Institute has recommended keeping the 37 per cent tax bracket, which applies to incomes over $120,000.
That would save the government about $8 billion, Coates said, which could then be used to raise both the JobSeeker payment and the maximum amount of Commonwealth Rent Assistance.
Beyond the economics, Anglicare Australia executive director Kasy Chambers said the tax cuts were simply unfair.
“This is a clear choice. If the government can afford to spend a quarter of a trillion dollars on tax cuts for people who don’t want or need them, then it can surely afford to help those who have been hit the hardest by the cost-of-living crisis,” she said.
Andrew Barker, a senior economist with the Committee for Economic Development of Australia, said the government had a challenge providing household relief while helping the Reserve Bank get inflation down.
He agreed the government should lift rent assistance and JobSeeker payments to help the most vulnerable, but thought it would be tricky to bring in wider energy bill relief.
“Energy bill relief, particularly if it’s across the board rather than targeted, does put more money in the pockets of consumers. So that increases spending,” he said.
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