According to media reports, the Coalition has announced nearly $10 billion in new spending since the May Budget. But will it announce tax cuts during the campaign?
The political case for doing so is strong. The ACNielsen poll on Monday added to the accumulating evidence that tax cuts are heading back into favour. 51% of voters thought that tax cuts should be offered in the campaign, while 41% thought that they should not.
While that is only a small majority in favour, the proportion of potential Liberal voters interested in a tax cut is likely to be much higher. The 2004 Australian Election Survey found that Liberal voters were significantly more likely than Labor voters to prefer tax cuts to more services, and to rate tax as an ‘extremely important’ issue.
It is also an issue on which – consistent with the history of party stereotypes being resistant to contrary empirical evidence – the Liberals remain credible. In both the Newspoll and AES time series Labor is almost always well behind as the party better able to handle (Newspoll) or closest to the respondent’s view (AES) on tax. (Labor last drew even in the Newspoll series in January 1998.)
True, it is unlikely to save the Coalition from a big defeat. But it might help stave off electoral catastrophe. And if Labor keeps matching Coalition promises, it will at least deliver the Liberal constituency something, win or lose on election day.
Andrew Norton 
If Howard did something useful before going into the election, he ought to simply annnounce large seriously meaningful tax cuts now, enact them as law to be phased in the new year and see the reaction from the Left. They should leave the cupboard bare while targeting the taxcuts to every single constituency.
Labor would then have either agree or state they would be rolling them back.
Let’s see what the chooks woiuld with that fox in the hen hosue.
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Yep. If parliament returns next week let them enact massive tax cuts. It’s time Howard gave something back to those who have given him so much. Let the ALP campaign against already enacted tax cuts.
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I agree SD — you’ve got me excited again knowing that I can get 15% tax, and all the same services for the poor (not that I need them), in HK again. Its clear we’re all getting cheated in Australia, and since the Liberal party is going to go down anyway, they may as well become a liberal party, and put a few dissenting ideas into people’s minds, versus the current Stalin loving conservatives. At least they’ll have a platform for the next-next election that is realistic and different to Labor (“we are liberal party, not a bunch of dull conservatives”).
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both JC and sinkers are bonkers.
What would tax cuts do when our growth is outstripping potential growth and we already have capacity constraints.
the structurall budget would be blasted to smithereens.
most people would be worried about potential rate rises.
not good for highly indebted households.
to introduce tax cuts in a reponsible way one would have to cut spending as well. would that win votes?
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Homer – See Stephen Kirchner’s article on this. Tax cuts would be less inflationary than the spending we are seeing, because they would be partly saved.
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Andrew, if revenue continues to fall from the skies at the same rate as in recent years, governments will be able to afford both increased spending on services and lower taxes. If revenue dries up (very unlikely), the trade-offs will be much more acute. But either way, the issues of differentiation between Labor and Coalition will be
1. how much priority to give to tax cuts relative to spending increases
2. how the tax cuts should be allocated to different income groups and
3. what should be the major spending targets.
It is possible for the Howard Government to focus heavily on the first of these in his election promises and even introduce legislation next week and throw the challenge to Labor. But in either case, Labor can respond by offering a different mix of 1, 2 and 3.
Frankly, given the recent concerns about health, public schooling, housing and urban infrastructure and growing evidence that the Commonwealth, despite its mining boom-induced revenue bonanza, has been mean with the States, I am not sure Howard would necessarily win the political debate by giving high priority to 1. Of course Labor could make a mess of its policy package (as it did in 2004).
There is another dimension of politics to consider. I suspect many Australians already think Howard has delayed the election call too long (and spent far too much on tax-paid advertising). Using Parliament in its dying days to introduce new legislation might not go down well. But who knows?
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Fred – Clearly election campaigns are not the time for spending cuts, so tax cuts now could only come from the surplus (I am hearing endlessly about government advertising costing $1 million a day, but even if true it is only about 0.15% of daily federal spending – the trouble with focusing on obvious-to-the-punters waste is that it doesn’t save that much money).
It’s not just about this campaign though, it is setting up the Coalition for opposition. Public services will still be dysfunctional after two terms of Rudd, because the problems are much deeper than just money. The Coalition has to both help create and then ride the reversal of the current tax-and-spend phase of the political cycle.
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On the other hand you will get the Rudd look-alike (Chris Richardson) and all the ‘market’ economists who don’t read Stephen Kirchner saying how inflationary it would be. But I agree that they have little to lose and it would personally be very nice!
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Andrew, the concern of many Australians about government advertising is not about the waste or cost (although the amounts are not insignificant) but the smack of political corruption about it. There is an urgent need to reduce the already enormous advantages of incumbency and produce a more level playing field between government and Opposition. That is the real issue – not whether it costs 0.15 or 0.2%.
Labor governments have over-indulged too although rarely on the same scale and within days of the election. In any case two wrongs don’t make a right.
I am personally very glad Rudd has promised to limit and independently monitor such spending.
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Fred – Though the current state of the polls points to a rather different conclusion, that the advertising is having no effect on 2-party preferred. The previous polling on WorkChoices suggests that the massive campaigns on each side also had no effect on issue opinion, or if they did they cancelled each other out.
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Andrew,
Stephen talks in terms of savings.
That is a complete furphy.
What the RBA is worried about is Aggregrate demand outstripping supply hence continous talk about capacity constraints.
No-one has believed the savings argument since de-regulation.
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Homer, how about company and capital gains tax cuts, which presumably are more likely to be saved and/or applied to productive and ultimately deflationary investment?
BBB
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Actually, I suppose that capital investment is still ‘savings’. Anyway, you know what I meant.
BBB
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Andrew, one cannot be sure how the ads are impacting on public opinion. It is possible that the Coalition’s popularity would have been even worse without the ads. While the ads are upsetting many people (especially on the Left), it may well be winning over some marginal voters. In truth, we don’t know.
Whatever impact they are having, many of the ads are substituting for what should have been political ads paid for by the Liberal Party, allowing it to keep its war chest intact.
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Fred – No doubt the government hopes so, but the ads I have seen seem to address concerns that few people hold, ie that they are at particular risk of losing their jobs, and I doubt a few common sense suggestions to slightly reduce greenhouse emissions will much affect voters concerned about that, given the very high policy benchmark set by the apocalyptic scenarios with which we seem to be daily bombarded.
Indeed, there is a contrary theory that you should try to avoid mentioning issues on which your opponent is strong.
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If they do announce tax cuts, I hope it involves a REAL increase in the tax threshold, not just more farting around with the low income tax offset.
Low income households won’t get this year’s tax cuts until the second half of 2008, and yet they immediately cop the interest rate increases that are designed to reduce the froth from spending the tax cuts that higher income people are already getting.
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Homer, the Budget Papers and Ken Henry’s post-budget speech both outlined how, by giving people an incentive to either work or work harder, tax cuts could increase aggregate labour supply, in effect reducing the NAIRU and generating a sustainable and non-inflationary increase in aggregate demand.
In any case, the stimulus to the economy from tax cuts is piddling compared to stimulus from the tsunami of credit that hits the economy every month. And yet we have been able to deal with that without unreasonably high interest rates.
And, as BBB says, there are other taxes which could be cut.
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Homer says:
both JC and sinkers are bonkers.
Homer, of all people. I’m both surprised and not surprised you would think that.
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What would tax cuts do when our growth is outstripping potential growth and we already have capacity constraints.
Where exactly are the capacity contraints? Mining? Mining is a China Story. And since when have prices actually repsonding to the price signal been a bad thing. I never saw you complain that the price of every single major commodity has trebled in US dollar terms. So in your bizarre world you would prefer to see commodity prices tumble.
You have a very warped idea of what infaltion actually means.
More to the point have you ever bothered to ask where those Dollars the government is holding actually came from? Have you?
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the structurall budget would be blasted to smithereens.
Nonsense. Our growth rate and growth potential would zoom. Not to mention productivity increases. Holding the line on spending would more than cater for this.
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most people would be worried about potential rate rises.
not good for highly indebted households.
Then tell the RBA to stop creating high powered money. Tax cuts have nothing to do with that, Mr. Keynes.
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to introduce tax cuts in a reponsible way one would have to cut spending as well. would that win votes?
Why do we need to cut spending when we have a mountain of a surplues that the left will get its hands on and simply spend it into oblivion?
Stop this voodoo economcis , homer. It is beneath you.
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I’m not convinced that any tax cut offered by the Coalition would have any credibility. Too little, and it’s tinkering around the edges. Too much, and it’s pie in the sky desperation stuff. The only cut with any credibility would be raising – or, damn it, abolishing – the lowest income tax rate. Well, no harm in offering.
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After the expected result comes through, expect the whole The Government’s Financial Position Is Worse Than First Thought thing. “And they proposed a tax cut, Mr Speaker!”
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Credible is in people will believe that it will happen – if they promise to increase spending on health or education people will still think Labor will be better.
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Go JC!!
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There is nothing Howard can do in terms of making spending initiatives that Labor won’t raise him on.
Howard buys a hospital in Tasmania for $40 million. Labor will buys the entire medical system and raises him $2 billion.
If he makes substantial tax cuts, labor will either have to go with them or repudiate them through the next term.
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Here is an excellent and timely essay on why tax cuts raises living standards.
It’s not a case of who the money blongs to. It’s a case that low taxes actually do raise liviing standards for all.
http://www.brookesnews.com/072409laffercurve.html
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Does make me feel a bit weary to see folk still pushing ‘the only thing that affects inflation is the money supply’ line.
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Guess it’s still true that old economics ideas never die.
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Leopold.
So why not simply print money the old fashioned German way and make ourselves all millionaires. It works , right and money is only a neutral concept.
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JC: More to the point have you ever bothered to ask where those Dollars the government is holding actually came from? Have you?
Gather round all ye schwabs posing as economically au fait and Australian at the same time..
The first coins ever produced in Europe were made by the Boii tribe (celts who became Bohemians and Bavarians) on the Danube near what is today called Bratislava (Slovakia). These coins were called Talers and hence the word Dollar. Taler meant a silver plate and hence the Thali metal plate meal option in Indian restaurants to this day..
So the answer to your question is a region of the danube, JC , and I bet you didnt think of that because you and Quiggin are undereducated and in the same boat out there in oceania so kiss and make up.
BTW The “Austrian Economists” as Rafe refers to them were all basically disowned by Austria and are a source of embarassment to young educated elites here in Öber Österriech.
So call them late for dinner but dont call them Austrian..
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At the risk of going off-topic, I’d like to confess that I don’t understand inflation as a concept very well at all. I’m not an economist, although I gather being one doesn’t guarantee understanding either.
For example, I have this concept in my mind that inflation is purely about money, that it can’t exist in a barter economy. Wrong or right? I struggle with the idea that price rises are a sign of inflation when I assumed that sometimes (perhaps much of the time) they are about changes in demand, or quantity demanded, and relative scarcity.
Could anyone point me to something to read that gives an explanation of the concept that a non-economist might have a chance of grasping? Better would be readings that have a range of different explanations; better still would be readings with actual blood and guts in them as different camps wage war.
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Perhaps for the blood and guts, I could just ask the same question on Catallaxy.
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spog, I’m not a macroeconomist, but I can tell you that inflation is a sustained rise in the *general* price level. This presupposes a common means of exchange, which I guess does not exist in a pure barter economy. Anyway, it’s the general nature of price rises that indicates inflation. Just because gold or oil prices rise does not mean there is high inflation. If the cause of a price rise of a good is scarcity of that good, then not all prices will rise in a similar fashion. What has been happening in recent years is a rise in the prices of commodities and real assets (eg property) but falls in other prices (eg manufactored goods). Accordingly, central banks have not considered that we have a major inflation problem.
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So according to you either a) I have to believe the money supply is the ONLY thing that affects inflation, or b) I have to believe the money supply has no effect on inflation.
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Or maybe – just maybe – I can believe money is ONE of a number of things that affects inflation. Considered that?
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And I personally think the RBA should have raised interest rates higher, sooner. But that doesn’t make your arguments any less wrong.
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Leopold, you don’t have to believe anything. But Inflation is not the CPI. Inflation is a debasement of the currency brought on by centeral bank mismanaging the supply of money.. that is printing too much money. the money supply M3 has risen 350% since 1994.
Infaltion is not the price of eneergy going up and neither is it the price of food going up because of drought like conditions.
Raising rates to curb inflation has nothing to do with interest rates going up or down. It has everyithning to do with the quantity of the money stock.
But hey, you can believe what you like.
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Rajat
They don’t consider it to be a major problem because they have forgotten how to define the problem in the first place. The RBA cannot even define money any longer so it can’t define inflation.
In your example the price of energy affects all goods and services. If the price of energy rises due to higher demand eleswhere or supply is constricted the effect is actually deflationary in that a larger some of money has to be spent to purchase the same quantity of energy input.
The fact the RBA does not see it like this is going to be tragic.
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Update: Howard has indeed announced a tax cut.
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Er… 1) you raise interest rates by contracting the money supply, so advocating higher rates is advocating a smaller money supply by definition; 2) no, mate, inflation is an increase in prices, which, ipso facto, lowers the value of the currency. And it is measured (probably mildly over-stated) by the CPI.
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The simplistic monetarism of Mr Friedman (a great economist in other ways, I note) really doesn’t have much currency these days (pun intended).
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Leopold
How do you know that the interest level you choose will in fact lower the money supply? Having an interest rate target by defintion means the CB has to supply any amount of money demanded at that level. Tell me how they know it will be the right setting?
Is an increase in the price of energy inflationary? Is the fall in the price of computers deflationary?
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Um… last time I checked the RBA (not the CB) engages in open market operations (buying/selling bonds) which affect the supply of base money in such a way as to affect interest rates in the way they prefer.
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Leopold
CB means central.
RBA targets an interest level- by as your said- buying and selling securities. The base money is the soup pot where high-powered money is created. Whenever the RBA does an add- adding liquidity to the system the effect it is that this operation ratchets up the amount of funds the banking system can lend through the multiplier effect of fractional reserve by about 16:1. That means that for ever dollar added to the system by the RBA the banking system is able to lend out 16 as the first tranche.
Ordinarily the Central bank ought to increase the money supply enough to satisfy economic and population growth needs and not one penny more. However that isn’t the case. They deliberately add more either because they are worried about economic growth or because the interest rate target setting is too low and much more money is demanded than was anticipated. The effect is a money expansion that produces inflation. This time round- for the past 12 years monetary expansion has been felt mostly in the price of hard and financial assets. In other words they have created the money illusion of growth. In other words they have performed monetary debasement in the most explicit way possible. There is nothing more toxic that a central bank conducting monetary policy through interest targeting and maintaining easy money conditions. It will come back and haunt us.
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