Top economists urge government to rethink stage three tax cuts

Some of the nation’s most respected economists have called on the federal government to reconsider the size, shape and timing of the $254 billion stage three tax cuts, saying they pose a risk to the budget and will push up inflation.

In full-page advertisements in The Sydney Morning Herald and The Age on Wednesday, 100 financial experts – including former competition watchdog chair Allan Fels, the architect of HECS Bruce Chapman and tax expert Miranda Stewart – signed an open letter to Prime Minister Anthony Albanese arguing the cuts in their current form were unaffordable.

Allan Fels, Miranda Stewart, Bernie Fraser and Bruce Chapman are among 100 prominent economists and financial experts calling for the government to overhaul the stage three tax cuts.Credit:Alex Ellingahusen, Jessica Hromas and supplied

The tax cuts, legislated by the previous government with Labor support in 2019, have come under increased scrutiny since Treasurer Jim Chalmers revealed in October that their expected cost over the decade to 2032-33 had climbed $11 billion in less than six months.

Parts of Labor want the cuts, which are due to start in mid-2024, to be ditched. Chalmers has said they will impose a growing cost on a budget already struggling under the weight of increasingly expensive programs but Albanese has made clear the government is sticking with its election promise to deliver them, saying there was “no change” in its position.

The stage three tax cuts will eliminate the 37 per cent marginal tax rate for those earning over $120,000. They will also reduce the 32.5 per cent tax rate to 30 per cent for people earning between $45,000 and $200,000.

But the economists who signed the letter, including former NAB chief economist Rob Henderson, respected labour economist Jeff Borland, former Reserve Bank governor Bernie Fraser and former Curtin University economics professor Harry Bloch, said the sheer size of the tax cuts required their reappraisal.

The letter and advertisement, which were organised by the left-leaning Australia Institute, said the cuts in their current form were now unaffordable given the changes in the economic outlook since 2019.

When approved by the parliament, the budget was expected to be in surpluses with inflation within the Reserve Bank’s 2 to 3 per cent target band and net government debt trending down. But the COVID-19 recession, blowouts in government spending and soaring interest rates have led to a major deterioration in the budget outlook.

Fels told this masthead the stage three cuts were wrong for the current economic times and would cause long-term budget damage.

He said with monetary policy being tightened by the RBA, a loosening of fiscal policy would only add to Australia’s inflation issues.

The tax cuts were unfair to women and would make it more difficult for governments to cover the growing cost of programs including the National Disability Insurance Scheme, aged care, health and defence.

Fels said a case could be made for the cuts and the way they dealt with bracket creep but only if they were part of a broader reform of the entire tax system.

“There is a case for change if you’re dealing with broad tax reform, but on their own they are unfair,” he said.

“If linked to other reforms, such as a broadening and an increase in the rate of the GST, reducing superannuation concessions and capital gains concessions and other concessions, you would look at personal tax reform.”

Professor Miranda Stewart, one of the nation’s foremost tax experts, said the stage three cuts in their current form would permanently flatten the income tax rate structure.

“The removal of the 37 per cent bracket delivers a permanent tax cut to top income earners, mostly men,” she said.

“This makes the structural fiscal deficit worse, with a substantial fiscal cost without efficiency and equity benefits.”

But shadow treasurer Angus Taylor said the cuts were about letting Australians keep more of their own money.

He said inflation was contributing to bracket creep, which the tax cuts would address.

“This isn’t a cost to the budget – it is legislated tax relief that shouldn’t be taken away from hardworking Australian families at a time when they need it most,” he said.

“Any changes to the stage three tax cuts would be a betrayal of the Australian people and the Coalition will hold the government to account on that.”

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