Budget blues: why the Stage 3 income tax cuts should wait

by Danielle Wood, Kate Griffiths and Matt Cowgill

Federal Parliament should pass the Government’s Stage 1 tax cuts immediately but should defer consideration of the controversial Stage 3 cuts.

The Stage 1 cuts would give the economy a much-needed boost at a time of low growth and stagnant wages.

The Stage 2 cuts would help most Australians by giving back bracket creep and are likely to be affordable.

But the Stage 3 cuts, scheduled to come into effect in 2024-25, would cost the budget $85 billion over the subsequent six years. We do not know now whether these cuts are affordable or the right size and shape for the economy so far into the future.

The economy is softening, the budget position is uncertain, and calls for the Government to use fiscal policy to stimulate the economy are growing. Tax cuts now could provide that stimulus, but there are big risks from locking in major tax cuts on the never-never.

Government would have to substantially reduce growth in spending to deliver both the Stage 3 tax cuts and promised surpluses, particularly if the economy worsens.

The Stage 3 tax cuts would reduce bracket creep and boost people’s incentives to work, but they are far from the best way to do so. Committing to Stage 3 now could also ‘crowd out’ the chance of meaningful tax reform over the next decade.

If the Stage 3 cuts pass, the top 15 per cent of income earners would pay a lower share of their income in tax, but middle-income earners would pay a higher share. The income tax system in 2024-25 would be less progressive than it has been at any point since the 1950s. Whether this is desirable is a value choice, but it is a choice that Australia should make with its eyes open.

By contrast, the temporary and targeted Stage 1 tax cuts are well timed to boost consumer spending and economic activity at a time when inflation is virtually non-existent, the labour market is weakening, new building approvals are drying up, and per person living standards have gone backwards for three consecutive quarters.

Given the softening economy, passing the Stage 1 tax cuts should be a priority. But there is absolutely no need for the Government to tie its hands by committing to the Stage 3 tax cuts now.

Read the media release