“Destroying Australia”: safety net shredded by Coalition tax cuts

By in Australian budget

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Sections of Australia’s media have launched an all out attack on the passing of the Coalition’s income tax package by the Senate.

The Monthly claims the tax cuts commits Australia to austerity and will worsen inequality:

On the face of it, spending $158 billion over the next 10 years – which is what the Coalition successfully convinced parliament to do yesterday – would have a stimulatory effect. But that ceases to be the case if the government’s budget remains in surplus (which is the government’s aim). Because to achieve surpluses the government will need to take spending cuts in other areas – infrastructure or services – to make up for the lost billions in revenue. Scott Morrison claims his government won’t be doing that, but it’s simply not possible to (1) spend $158 billion, (2) remain in surplus, and (3) avoid cuts to other government spending…

There’s a difference between government spending on tax cuts and government spending on infrastructure and services. The latter is almost always stimulatory, because it’s money actually injected into the economy – and in ways that often have “multiplier” effects… Tax cuts simply privatise what under the current tax regime is public wealth. Some of that money will be spent (as private consumption). But a lot of it will also be saved…

If Morrison really wanted to stimulate the economy – if he truly wanted to create more jobs, to “grow the pie” – then he’d ensure that most of the tax cuts are delivered to those on lowest incomes, because they typically spend most of any windfalls…

Morrison’s pursuit of a discredited, disingenuous and thoroughly divisive austerity agenda for the next three (or 10) years will further undermine what Australians once most valued about our country: its egalitarianism. The rich will get richer.

The Saturday Paper made similar arguments:

And so it passes, the greatest assault on the safety net from which Australian life is built. Scott Morrison’s tax cuts are through and the revenue base that provides for health and education and social welfare is shredded. The legacy of the 46th parliament is there in its very first week: the destruction of the social compact that made this country stable.

On analysis by the Grattan Institute, to pay for these cuts at least $40 billion a year will need to be trimmed from government spending by 2030… The damage done is near irreversible. It is infinitely easier to cut taxes than to raise them…

This is a fundamental misunderstanding of the purpose of taxation. You don’t pay tax in exchange for services. You pay tax for a society. Under Morrison, you pay less tax and you have less society. The obliterating self-interest of this week will be felt for generations. Morrison’s victory is a huge, huge loss.

Whereas The Australian’s Adam Creighton has cast doubt on whether the tax cuts will materially stimulate the economy:

ANZ estimates the impact this year at $7.2 billion — equivalent to an annual increase in disposable household income of 0.6 per cent. This is less than a quarter the size of the Rudd government’s fiscal stimulus payments rolled out from the end of 2008, the efficacy of which economists furiously debate.

“Evidence from the US, Australia and other countries suggests that, on average, households tend to save a large chunk of temporary tax rebates — between 60 per cent and 80 per cent,” said Greg Kaplan, an economist at University of Chicago.

If households save 80 per cent of the $9bn cut, that would leave a $1.8bn boost to spending in the second half of the year, which is a drop in the ocean in a $1.9 trillion economy. The outcome for the retail sector might be worse still. “Hand-to-mouth households — those with limited access to disposable liquid resources — account for almost all of the spending, while households with liquid wealth tend to save almost all of the rebate,” Professor Kaplan said.

Meanwhile, Labor has signalled that it still wants to roll-back the Coalition’s stage 3 tax cuts if elected:

Opposition infrastructure spokeswoman Catherine King… told the ABC’s Insiders on Sunday that the party still had concerns about the third stage of the tax package which essentially removes the 37 per cent tax rate and reduces the 32.5 per cent rate to 30 per cent…

“We remain concerned about stage three, particularly given, five years from now, we do not know what the economic circumstances are going to be,” she said…

“Stage three does not come in until 2024-25 … We tried through second reading amendments to carve that out. We weren’t successful at that. But we’ll have a raft of policies to bring to the next election.”

The reality is that Keynesian stimulus doesn’t use tax cuts. Because when behaviour is conservative in the private sector, then the government needs to step in and force spend as on offset. Moreover, consumption is only the first and the weakest impact of stimulus given any growth in retail will be partly offset by growth in imports (more so in Australia because we don’t produce anything).

The Coalition is following the Howard Government’s playbook of relying on tax cuts and a private debt/house price boom to stimulate the economy. But with interest rates already near their lower bound, housing much more expensive than yesteryear, debt loads already at record high levels, and tighter lending standards, this play is unlikely to be successful this time around.

There is greater stimulus hope in the gas reservation deal which the Coalition resisted. If that succeeds in dropping utility prices then it will deliver an income windfall double the size of the paltry tax cut and a massive competitiveness lift across the east coast economy. Fingers crossed on that front.

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