Life on the West Island - Stage 3.1?

West Island Prime Minister Anthony Albanese is facing a tough decision about the Stage 3 tax cuts due to commence on 1 July this year. If implemented, these tax reductions will benefit mostly high income earners and cost the federal budget an estimated $350 billion over the forward estimates. Albanese has to balance the political damage which might result from keeping his election promise to implement the former coalition government’s promised Stage 3 tax cuts against the rapidly growing demand from across the nation for positive action to relieve cost of living pressures arising from inflation and corporate profit gouging.

The dial appears to be moving towards persuading the government to ditch the tax cuts or at least to greatly modify the package to orient it more towards those in greatest need. Expert opinion is that the government will suffer more harm by continuing its stated course of retaining the promised cuts than by being seen to address inequality and rising cost of living pressures. Recent calls from economists and specialised journalists support the latter option.

This week, University of Queensland Economics Professor John Quiggin published an opinion entitled Australia’s cost-of-living crisis isn’t about the price of groceries. It’s about wealth distribution. Here is part of his article:

The policy debate about the cost of living is among the most confused and confusing in recent memory. All sorts of measures to reduce the cost of living are proposed, then criticised as being potentially inflationary. The argument implies, absurdly, that reducing the cost of living will increase the cost of living. The issue here is that the “cost of living” is an essentially meaningless concept. The problem isn’t the cost of buying goods, but whether our income is sufficient to pay for those goods. For most of us, that means the real (inflation-adjusted) value of our wages, after paying tax and (for homebuyers) mortgage interest.

For much of the 1980s, the consumer price index rose faster than it has done over the last few years. Inflation was a significant problem for macroeconomic management and financial markets. But the “cost of living” was not a big issue because wages were indexed under the Prices and Incomes Accord. Some small reductions in real wages were compensated for by the reintroduction of Medicare and improvements in superannuation.

The Accord, focused on real wages, produced a gradual decline in inflation rates, while maintaining standards of living. By contrast, the current discussion of policy in terms of the cost of living has produced incoherent policies and declining living standards.

The natural policy response to concerns about the cost of living is to seek reductions in prices that are politically sensitive (such as petrol, electricity and basic groceries) and to provide ad hoc relief to groups seen as “doing it tough”. This has included wage increases to offset inflation for particularly “deserving” groups, even as the real value of most wages remains far below pre-pandemic levels. Labor estimates the value of their 2022-23 cost-of-living relief package at $14.6bn.

In the neoliberal context, any benefits given to one group of wage earners or welfare beneficiaries must be offset by costs imposed on another. The ad hoc nature of policy responses to the perceived cost-of-living crisis reflects the incomplete and inadequate nature of this framing of the issue. But it is not the worst consequence.

The crucial problem with “cost of living” thinking is the implication that the problem will be resolved by reducing the inflation rate, ideally with a rapid return to the Reserve Bank target range of 2-3%. In this way of thinking, the worst thing that could happen is for wages to rise enough to offset past inflation. Such an adjustment, it is claimed, could set off an inflationary spiral. A rapid reduction in inflation, achieved by holding real wages below their pre-pandemic level suits the institutional interest of the Reserve Bank, which are centred on its primary objective of price stability. But Australian workers would be better served by a gradual reduction in inflation, without real wage cuts, as was achieved in the 1980s under the Accord.

In the end, the “cost of living” isn’t about the prices on grocery shelves, it’s about the distribution of income. In Australia, income has shifted from wages to profits and from low- and middle-income earners to those in the top 10% of the income scale and, even more, to the handful of “rich listers” whose growing wealth has outstripped that of ordinary Australians many times over.

Other experts have weighed in, essentially supporting Quiggin’s position. For example, Emma Dawson, Executive Director of Per Capita, wrote:

The third stage of the Turnbull government’s income tax cuts were always bad economic policy, even in those distant pre-Covid days when they were designed by the then treasurer, Scott Morrison. While they may have been “affordable” according to the doomed economic forecasts of the time, they were never fair. Nor did they have any discernible purpose beyond effectively destroying the very concept of progressive taxation.

Senior economist Greg Jericho agreed, writing in The Guardian that …the stage-three tax cuts were always the worst economic policy, but also the dumbest political strategy. The government should dump the stage-three tax cuts and use the $300bn in savings to deliver fairer cuts, better services and infrastructure, and increased support for those on jobseeker.

Matt Grudnoff, senior economist at The Australia Institute, wrote that ...the majority of people say yes, if the economic situation changes, then of course the government shouldn’t just blindly follow bad policy because they promised it before the election. It’s just bad economic policy to introduce this tax cut now. Several alternative tax cut models would not only reduce the amount of money being gifted to Australia’s highest earners, but also benefit those earning less.

It’s becoming obvious that the West Island needs revised tax and income policies to address economic inequality and cost of living issues, not just lower taxes for the wealthy. Let’s call it Stage 3.1 Tax Cuts…