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Tax cut changes 'better for all' - but will Albanese be forgiven?

It’s taken some tough decisions but it shows that bold economic policy settings do yield good results.

OPINION: Good economics is good politics. And that is exactly what has been delivered with the revamped tax cuts to be announced by the Albanese government. Here’s why.

One of the big concerns with the existing so-called stage three income tax cuts was that everyone earning less than $45,000 a year would get nothing from the reform. That is around one-third of workers getting nothing. In sharp contrast, someone in the top 5 per cent of income earners in Australia - that is with an annual income over $200,000 - would get a tax cut of $9,000.

For this reason, these tax cuts were widely seen to be unfair and unequal, especially when the current cost-of-living pressures have been such a critical economic issue for many workers in the past two years, including those on low and moderate incomes.

Stylised image of Treasurer Jim Chalmers and Prime Minister Anthony Albanese talking tax cuts.
Anthony Albanese has taken a big risk with his credibility by breaking an election promise, but are these tax changes what Australia really needs? (Source: Yahoo Finance Australia)

The proposed changes from the Albanese government will give income tax cuts to those earning less than $45,000, larger tax cuts for those earning up to $150,000 and slightly lower tax cuts for those earning more than $150,000 per annum.

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Unlike the existing proposal, every wage and salary earning will now get an income tax cut.

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Treasurer Jim Chalmers has confirmed there is effectively no net cost to the budget from these measures. Over the four years of the budget forward estimates, the proposed tax cuts will lower government tax revenue by $107 billion, compared to $106 billion under the prior scheme. In a $3 trillion economy, the $1 billion difference is equivalent to a rounding error – economic bread crumbs.

To that extent, the revamped measures are revenue neutral, they will have no impact on inflation pressures. Indeed, financial markets - which are a lightning rod for policy changes - have been driven by global market trends and not the change in tax policies. In other words, stocks are up, the Australian dollar is broadly flat and money market interest rates have edged higher. If there were any problems or concerns with the tax changes, markets would react.

The ‘good economics is good politics’ will likely suit the Albanese government. In addition to 100 per cent of wage earners getting an income tax cut on July 1, 2024, the current macroeconomic dynamics for 2024-25 point to wages growth around 3.5 to 4 per cent with inflation tracking around 2.5 per cent.

Not only will there be tax cuts, but real wages growth will continue, which will be welcomed by those currently under cost-of-living pressures. And, if the money markets are correct, there will be a series of interest rate cuts over the next six to 18 months, giving mortgage holders a cashflow boost when they arrive.

With the next federal election scheduled to be held in the first half of 2025, these economic fundamentals will be political gold for the government and hard for Peter Dutton’s opposition to criticise.

Tax cuts. Interest rate cuts. Low inflation. Steady and decent wage increases.

While the economy is currently negotiating a tough patch, with high interest rates used to squeeze inflation out of the system, the outlook for the second half of 2024 and into 2025 is looking to be more favourable.

It’s taken some tough decisions to get there but it goes to show that bold economic policy settings do yield good results.

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