Stage three tax cuts to cost seven times more than UK tax cuts: Greens
The Age
October 5,2022
Australia’s stage three tax cuts will cost seven times as much as similar cuts that caused a political storm in Britain when measured as a share of economic output, according to new figures that will be used to urge the federal government to rethink the $243 billion cost.
The Australian cuts are forecast to be worth 0.7 per cent of gross domestic product when they begin in 2024 but will increase in size in the following years, in contrast with British cuts that amounted to only 0.1 per cent of GDP before they were scrapped last week.
Treasurer Jim Chalmers says he will “put the economics before the politics” on stage three tax cuts.
Greens leader Adam Bandt will cite the comparison, done by the Parliamentary Library in recent days, to intensify calls to stop the stage three tax cuts going ahead despite an election promise from Labor to keep them in place.
With Treasurer Jim Chalmers vowing to put economics ahead of politics in tough decisions in the October 25 budget, the government is debating whether to make a swift decision to change the tax package in the wake of the financial turmoil in the UK last week or leave the question for next year.
“We have not changed our position on stage three,” said Finance Minister Katy Gallagher on Wednesday morning.
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“But we are finalising a budget and I think the Treasurer and I have been upfront with some of the challenges and some of the changes we’ve been seeing in the economy that are front of mind for us and we can’t ignore those and we won’t ignore them because we are going to do the right thing, not just for the budget but the right thing for the Australian people.”
The opposition’s finance spokeswoman, Jane Hume, said it was “disingenuous” to compare the two tax packages.
“The tax policy debate going on in the UK is not at all analogous to [our] stage three tax cuts. Essentially, tax cuts here have been in legislation for a number of years. That’s not a new addition to our fiscal and economic policy like the UK tax policy was,” Senator Hume told Radio National on Wednesday morning.
“Most importantly, [ours] have already been budgeted for. They’ve been baked in and reflected in our budgets for a number of years. That’s a very, very different experience to the UK....We shouldn’t be comparing one country’s tax policy to another country’s tax policy.”
The analysis from the Parliamentary Library uses the forecast cost of the stage three tax cuts done by the Parliamentary Budget Office and compares the results with the cost of the tax cuts outlined last week by British Prime Minister Liz Truss and Chancellor Kwasi Kwarteng when both plans are measured against GDP.
The stage three cuts sacrifice $17.7 billion in revenue in 2024-25 and the cost climbs steadily to $31.4 billion in 2030-31, with continued increases after that.
The British tax cuts were forecast to cost £2.4 billion in 2022-23 and were due to climb to £4.6 billion the following year before settling at lower costs in subsequent years, although Truss and Kwarteng came under intense political attack for not putting the plan to the Office for Budget Responsibility for a more detailed costing.
The Parliamentary Library calculates the British plan would have cost 0.1 per cent of GDP in its first year and 0.18 per cent in its second year before falling to 0.07 in the final year of the known costings.
The stage three cuts, by contrast, would be equivalent to 0.7 per cent of GDP in their first year and would climb steadily to 0.9 per cent of GDP by the end of the decade. This assumes nominal GDP, the measure of economic output that is central to budget forecasts, grows from $2.5 trillion in 2024-25 to $3.5 trillion in 2030-31.
The comparison heightens the argument over the Australian plan after global financial markets punished the British government for unveiling the tax cuts last year and assuming they could be funded with continued borrowing, leading investors to cut the value of the pound and shy away from buying government bonds.
The Australian package, however, has already been factored into federal budget forecasts. While the government is paying higher interest rates on new bond issues, there has been no similar sign in Australia of a reluctance by investors to buy Commonwealth bonds.
“The UK Tories have looked at the global economic outlook and decided that tax cuts are political poison, but Australian Labor apparently still requires convincing,” said Bandt.
“Continuing ahead with the stage three tax cuts is economic vandalism, moving us closer to a flat tax system, while also risking UK-style economic damage.”
The stage three tax cuts abolish the 37 per cent tax rate and apply a 30 per cent rate to all income between $45,000 and $200,000.
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