Life on the West Island - Economic lunacy

Recent events on the other side of the globe might give pause to the West Island government. Within days of taking up the top job, new United Kingdom Prime Minister Liz Truss announced a return to “trickle down” economics, with massive tax cuts for the rich in the flawed belief that these would stimulate spending by wealthy individuals, thus creating a boom in jobs for the poor and some sort of recovery for the struggling British economy. Instead, the Pound fell to an all-time low against the Dollar and the London Stock Exchange went into a deep dive.

The UK tax cuts were reported to be likely to cost their budget around $4 billion in a full year, and were widely derided by the public, economists and the media as giving a windfall to the rich while the disadvantaged saw their support programmes cut.

Within a week of the original announcement, The Guardian reported that...the new British Prime Minister Liz Truss has been rolled by colleagues unprepared to support a fiscally profligate, market-spooking, trickle-down package that would have abolished the 45% top rate of income tax.

SBS News considered that the British experience could be instructive to the Albanese Labor government as it considers what to do about tax cuts already legislated on the West Island and due to come into effect in July 2024: the change would abolish the 37 per cent tax rate, putting in place a 30 per cent flat tax rate for anyone earning between $45,000 and $200,000. It would cost the budget $244 billion over 10 years. Taxation expert professor Helen Hodgson at Curtin University said “tax reform is needed to ensure middle-income earners are not being impacted heavily by stagnant wages. It was justified in 2018 to say bracket creep was going to push people into higher tax brackets. But in fact, we've had wage stagnation in that interim. And we're only just now reaching a point where inflation is kicking in. The predictions that it was based on in 2018 haven't actually come to pass - and it needs to be rethought.”

Economics Professor John Quiggin of the University of Queensland said there are useful lessons to draw from the UK's experience: The UK is a different country, but it has important similarities with Australia. And one similarity is that it's concerned about inflation and central bank interest rate increases. The UK example illustrates the now-debunked idea of the benefits behind so-called "trickle down" economics that gained traction under Margaret Thatcher and Ronald Reagan and held sway for decades in Western economies in Europe, the US, UK and Australia. That whole idea, I think, was discredited by the failure of austerity policies, particularly in Europe, after the global financial crisis of 2008.

So it would seem that the economic advice to the Albanese government would be to repeal the proposed 2024 tax cuts for wealthy West Islanders. But as Katharine Murphy reported in The Guardian, that might cause a political problem:

The supreme ineptitude of Truss and her chancellor has now handed Labor a very useful precedent. But amending our own stage-three package would fly in the face of what Labor said about those tax cuts prior to the May election. Having been clubbed to death during the 2019 campaign over a death tax that didn’t exist, Labor has been gun-shy about pursuing anything that looks even remotely close to tax hikes, apart from precooked measures relating to the tax paid by the multinationals.

That said, Murphy believes that support for abandoning the economic lunacy of tax cuts for the rich is growing: the fate of the stage-three package has not yet been discussed by the Albanese cabinet – although some ministers think two things: it would be insane to deliver the stage-three changes as legislated in the current economic climate; and over the medium term, the tax cuts have the effect of crowding out important progressive priorities. If this is to be the restoring the fiscal buffers budget, then now is absolutely the time to move.

Until now, West Island Treasurer Jim Chalmers has held the line that Labor will stick to its election promise to implement the stage three tax cuts. But, speaking at a press conference this week, he hinted that the government may be ready to modify its stand: there will be difficult decisions to make in the federal budget due to be handed down on 25 October. As we finalise the budget, we will put a premium on what is affordable, what is sustainable and what is sufficiently targeted to deal with the economic cards that we have been dealt. The fallout in the UK from a failed push to pursue tax cuts for the wealthy right now is a cautionary tale when it comes to dealing with the substantial turbulence brought about by high and rising prices; whether it is energy or food security - or in other important ways.

Katharine Murphy sums up the government’s options, and the case for abandoning the planned tax cuts:

Labor absolutely understands that any broken promise will be weaponised by its political opponents, although making the case to blow a hole in the tax base in an economic slowdown may not prove a winning pitch. While the government mulls its options – as well as those international factors opening the door legitimately to a policy rethink – there is an intensifying domestic public advocacy campaign around the stage-three package. A range of credible interest groups are fanning out, pre-budget, stating the obvious: these tax cuts cost a bomb, they don’t help inflation and don’t help Australia to pay for critical social services people rely on. The message is simple: this package was legislated in a different economic and budgetary context. When circumstances change, smart people change their minds.

Put another way – the trickle-down theory has been comprehensively debunked. It is economic lunacy!