In a stern warning to the Federal Government, one of the nation's leading economists has urged a reconsideration of the proposed stage three tax cuts, inherited by the current government from the previous one, asserting that their implementation could exacerbate inflationary pressures and hamper the ability to reduce interest rates in the near future.
Too big and too soon
Chief economist with leading left-leaning think tank The Australia Institute, Greg Jericho, delivered a critical assessment of the incoming stage three tax cuts during his address at the Revenue Summit 2023.
Jericho argued that proceeding with the tax cuts as scheduled would have adverse consequences for the economy. He went so far as to put forward four alternative approaches that he deemed superior to the current plan.
The controversial tax cuts are set to provide Australians earning more than $200,000 with a substantial annual tax reduction of up to $9,000, beginning next year.
Speaking on ABC's Q+A program, prominent economist Richardson voiced concerns that these tax cuts might hit at the worst possible moment, being too big and too soon in the context of existing inflationary pressures.
Richardson explained that the RBA’s current strategy involved withdrawing money from the economy to curb inflation. But the stage three tax cuts would inject a substantial amount of money back into the economy, undoing that work and potentially exacerbating inflation rather than alleviating it.
Tax breaks for high earners
The proposed cuts are slated to deliver $14 billion in relief to high earners. Legislated by the Morrison coalition government, they’ve been reaffirmed by the current assistant treasurer Stephen Jones. He said the government's position had not changed.
Richardson cautioned that if Australia proceeded with these tax cuts, it might lag behind other countries in implementing interest rate reductions. He suggested that delaying the tax cuts by at least 12 months could be a prudent move.
While the tax cuts are set to take effect on July 1, 2024, the concerns raised by economists like Chris Richardson underscore the need for careful consideration of their potential impact on inflation and interest rates in Australia. The RBA’s upcoming decisions on interest rates will play a crucial role in addressing these economic challenges.
The RBA's upcoming board meeting on December 5 and the release of its meeting minutes will shed light on the central bank's perspective on the path of interest rates in the country.
There is still time for the government to reconsider the tax cuts, but it’s running out.