Why Albanese and Chalmers felt they had to break their election pledge on tax cuts

The turning point towards a broken promise came at the end of last week. Only then did Anthony Albanese and Jim Chalmers have the formal advice from Treasury to justify a decision that would put their integrity on the line and shape Labor’s fate at the next election.

The prime minister and treasurer took the weekend to consider the Treasury conclusions: that changing the stage 3 tax package was the single best way to help households with the cost of living, they could do it without putting pressure on inflation, and they could encourage more people into work.

And they could do this, they were told, by giving 11.5 million workers a bigger tax cut than former prime minister Scott Morrison had promised in the original stage 3 package almost five years ago.

Prime Minister Anthony Albanese at the National Press Club this week.Credit: Alex Ellinghausen

This was a game-changer. The conclusions answered one of the key anxieties among Labor caucus members during a meeting last November that, it is now clear, opened the door to a new policy. The message from MPs was that Australians on middle incomes were desperate for more help with their household costs and could not wait until the May budget to see more action from Canberra.

The Treasury advice finally revealed the best way to answer that call. It showed that 84 per cent of taxpayers would get a bigger tax cut if Albanese and Chalmers were willing to break with the past and abandon their election pledge to honour the Coalition’s stage 3 cuts.

Things move fast in politics when the pressure is on. One week after getting that advice, Albanese is being branded a liar and Chalmers is fending off claims that Labor will increase taxes over a decade. Opposition Leader Peter Dutton is throwing everything at the government – including a call for an election – in the hope that this is the tipping point that tips him into power.

So the story of the stage 3 tax cuts, and the biggest broken promise of the past decade, is about a quick decision that came after years of Labor reluctance to undo stage 3 despite its frustration at the generosity of the cuts to people who earn more than $200,000 a year. Labor moved slowly for years because it was so wary of breaking its promise. Then it moved fast.

Albanese and Chalmers were thinking about their options on the cost of living over summer, but tax was not the certain answer. They had to wait for Treasury to be sure of the next step. The prime minister and treasurer, along with others, considered the recommendations on stage 3 over last weekend, with a growing sense that the conclusions were too strong to ignore.

The plan for a new tax package went to the peak group of economic ministers on Monday afternoon at a meeting of the expenditure review committee of federal cabinet, which gave the plan unanimous support. By Tuesday morning the proposal was before the full federal cabinet and again gained unanimous support. A new policy was born.

Everything is at stake at a pivotal moment in the life of this government because the outcome is about much more than the take-home pay for every taxpayer. It is about trust in Labor and its leaders. It is about a breach of faith and that means it is about integrity. It is not just political – it is personal.

The long journey to this outcome is marked by three moments: one in early 2019, one in late 2022 and the decisive point this week.

Labor tried to split the original tax package when it went to the parliament almost five years ago. Early in 2019, months out from an election, Morrison and then-treasurer Josh Frydenberg unveiled tax cuts that would flow over a decade with stages 1 and 2 mostly helping people on low and middle incomes. Stage 3, the most expensive and controversial, helped those on higher incomes and was scheduled to start on July 1, 2024.

This was a time bomb for Labor because it had to take a position that would haunt it when and if it ever won power. Which is exactly what transpired. The Labor leadership five years ago, with Bill Shorten as opposition leader and Chalmers in the finance portfolio, tried to strike out stage 3 in the Senate by urging independent senator Jacqui Lambie to join the Greens and Labor in amending the package.

When that effort failed, Labor chose to vote for the full package rather than deny anyone a tax cut. It had to restate that position throughout the election campaign. Wedged back then, it now seeks a wedge of its own by challenging Dutton to decide if he will try to block the new stage 3 and its bigger tax cuts for millions of workers.

The second point of potential change came toward the end of 2022 when the government opened a brief debate on whether to stop the cuts. Using signals rather than direct language, Chalmers left journalists in no doubt that he was open to arguments to amend stage 3, but the political risk became apparent very quickly. Albanese shut down the speculation in the second week of October with a line he repeated countless times: “Our position has not changed.”

The options lay dormant for more than a year. There was never an end to the talk about stage 3 because ministers were asked their views in public, but neither was there a secret option on the cabinet table.

The government had other challenges: budget repair, the Indigenous Voice, the energy bill subsidies of early last year and the international agenda that saw Albanese flying overseas. But there was a sense of drift within government at the end of last year, because Labor was losing ground in the opinion polls while being asked to offer more help to households, and there was an open question about what to do next.

This was the background to a movement within the caucus, small at the time but crucial in retrospect, to ask Chalmers for more answers on the cost of living. Tasmanian MP Brian Mitchell stood in caucus on November 28 to seek a meeting to consult on ideas for the next budget, which led to a forum with Chalmers and Finance Minister Katy Gallagher two days later. MPs emerged from that meeting with their lips sealed – a sign of their loyalty to the ministers – but with greater confidence that new measures were being planned.

Sources at the November 30 meeting say the discussion was about broad ideas, not stage 3. Some of the MPs, such as Jerome Laxale, the member for Bennelong, wanted to make sure there was another round of energy bill relief. This remains a leading option for the May budget. MPs knew the government had helped people on very low earnings – with more generous income support, for instance – but wanted a sharper focus on workers on middle incomes.

So the attention was on middle Australia. And that meant a broad definition of the middle. This led, almost inexorably, to thinking about whether a new version of stage 3 had to be the answer because tax was the obvious way to help workers on and above the average full-time salary of about $73,000. Because ministers wanted an “inclusive” solution for as many people as possible, the attention extended to incomes of $140,000 or more.

There was no quick answer because Albanese and Chalmers did not have a compelling list of new measures for the December budget update, known as the mid-year economic and fiscal outlook, or MYEFO. That is why the half-year budget became a “vanilla” document that did not include major new policies. It would not be a platform for a new round of cost-of-living relief.

Everyone knew the implications: without a major initiative in the update on December 13, the government would face greater demands for action early in the new year. It would be hard to ask Australians to wait for solutions as late as the budget in May.

At times, in private, ministers seemed to think out loud about different ways to structure the stage 3 benefits without increasing the cost or adding to inflation.

Only at the end of December, with the Christmas break almost under way, was a decision made to get more work done on the options. This triggered a request to Treasury Secretary Steven Kennedy to run the numbers. Kennedy made the fundamental assumption that the options had to avoid any upward pressure on inflation, and therefore could not add to federal expenses in a big way.

This led Kennedy to an equally fundamental observation: the best way to get an economic boost was to help workers on low and middle incomes. Spending money on more income support was not the priority. And that meant the greatest policy gain would come from changing the stage 3 tax cuts to shift the benefits to those on lower incomes.

None of this was obvious while ministers were on leave over summer. But the Treasury advice made it obvious and answered the nagging questions about whether other policies were a safer choice. Could the government unveil a “back-to-school” boost in February? No, that would be inflationary. Every other option was ruled out.

Kennedy and Chalmers spoke to Reserve Bank governor Michele Bullock in separate conversations over the key fact that the changes did not inject more money into the economy in a way that would put pressure on inflation. The government was comfortable that its new plan would not be blamed for increasing interest rates.

Everyone knew Albanese would have to bear the brunt of the political fight over a broken promise because his face would be on the front pages. There were no damaging leaks from the expenditure review committee, cabinet, the full ministry or the caucus this week. Labor was astonishingly disciplined on this tax decision by the standards of recent governments.

One moment threatened to knock the government off course, when radio station 2GB host Chris O’Keefe reported on Monday this week that stage 3 would be overhauled and every taxpayer would still get a tax cut. This was right. Two other elements were not: that the government would increase the tax-free threshold above $18,200 and scale back the top threshold for the stage 3 tax cuts from $200,000 to $180,000. Key people in the government swiftly ruled out these two options and still wonder about the source of the leak; they believe it could not have been someone with detailed knowledge of the plans or the final policy.

An increase in the tax-free threshold was not on the table because it would spread too much of the money across the entire income range. The preferred option was to reduce the 19 per cent tax rate to 16 per cent for incomes between $18,200 and $45,000, helping a group that received nothing from stage 3 in the original Coalition plan.

At the top end of the income range, the solution was to move the top threshold to $190,000 – higher than it is today, but not as high as it would be in the Coalition proposal. This meant the tax cut for someone on $200,000 a year would be about $4529 a year compared to $9075 in the Coalition package.

One single number clarified the entire change: all workers earning up to about $150,000 would get a bigger tax cut from Labor, while all those over that amount would receive a smaller tax cut than the original plan. But, importantly, they would still get a tax cut. This masthead revealed this fact on Tuesday night.

In the end, the threshold turns out to be $146,400. That is the point at which a worker receives a tax cut worth $3729 from the Labor plan and $3723 from the Coalition version. All those above this income receive more from the Coalition policy, even if it is only a few dollars.

While the submissions to federal cabinet were clear, one question could not be answered in the official papers. What was the counter-factual? How would this play out for Albanese and Chalmers and the government if they did not change stage 3 right now?

One possibility was that households would feel a bigger squeeze from the cost of living and would demand more help from Labor, which would have to tell them it had nothing to offer people on low and middle incomes because it had to honour the pledge to keep the Morrison and Frydenberg tax package. This was untenable. In fact, unthinkable.

Broken promises can do untold damage to leaders and governments. It is too early to be sure whether Albanese and Chalmers win the argument with Dutton over tax and trust. But the path to this decision left the Labor leadership in no doubt that they had to make this change.

Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.