The Age asked me for 200 words on whether the Government should renege on the tax cuts. I said they shouldn’t. They also asked Joshua Gans what he thought – though they don’t seem to have asked him for a direct opinion on the tax cuts. I wasn’t going to bother posting my piece, as it’s just a bit of a rehash – but Joshua has suggested some quite different ideas that are well worth mentioning (though they’re all pretty much unimplementable I suspect – at least in the short term). But who knows? So both pieces are below the fold.
Because inflation has reared its head so virulently and so quickly, the tax cuts are much worse policy than they were even a few months ago when announced
But the government should not debase democracy to avoid debasing our currency. And it doesnt have to. Because the election campaign against the ALP was focused on generalized bogies like the unions, Labor wasnt forced into a long list of denials about what it wouldnt do. It has surprisingly clear air.
Many measures large and small can be pursued on both revenue and spending. The bureaucracy is now around 50 percent larger than when Howard took office. Even in no go zones like negative gearing is it asking too much to cap personal tax deductions at (say) 120 percent of revenue or even 150 percent?
And although the government needs to work hard to extract itself from the quicksand of inflation, it should also work smarter by collaborating with (or requiring) business to maximise the extent to which tax cuts are paid to employees as super using default schemes like New Zealands KiwiSaver.
My final word to the Cabinet: Dont die wondering if you should have done more in your first year.
The prospect of lower income taxes can fuel inflation especially when they are expected to stay that way. In this environment, to shift the weight off monetary policy in fighting inflation, the government does have other fiscal levers it can pull. It can reduce expenditures but this may disproportionately hurt the poor. More alluringly it could have a temporary rise in the GST. This would impact on consumption immediately as consumers delayed unnecessary expenditures. By doing this, the government can potentially offset income tax reductions whose impact is muted by savings behaviour. Thus, the pain of higher taxes is short and widespread but the impact in reigning in aggregate demand is stronger.
Even beyond the traditional macroeconomic instruments, consider the opportunities here to enact environmental policies that raise costs of dirty consumption goods. Right at this moment these would have a dual impact of fighting over-heating wherever it is occurring the economy and the environment.