Monday, December 17, 2007

Tax Cuts Inflationary

The ABC and other media are reporting that Access Economics has warned the (new) Federal Labor Government that its promised tax cuts will be inflationary. During the election campaign, John Howard's Coalition Government promised $34 Billion in personal tax cuts; Kevin Rudd promised $31 Billion. In the midst of the election campaingn the Reserve Bank of Australia raised interest rates by 25 basis points (0.25%), an unprecedented intervention during an election campaign.

In October, I reported that the promised tax cuts would be inflationary. I stated:

"(tax cuts) by themselves, they will be inflationary. The economy will have to produce nearly $50 Billion of EXTRA GDP. It is already groaning under the strain of other pressures such as the US sub-prime mortgage market, rising oil prices, rising food prices, and rising prices of other goods ... We need responsible economic management, not inflationary tax cuts."

Now, it seems that Access Economics has confirmed that view. They also point out that finding cuts might be politically unpopular, and mentioned "middle-class welfare" as one area where cuts could be made. "Middle class welfare" is a term often used to describe Federal Government houndouts that are not means tested, and provided to people who are not in need of the money. It is a policy that was heavily used by the Coalition Government to win votes. Cutting it will be fraught with political danger, even if it is tapered and means-tested.

Treasurer Wayne Swan has a difficult task to deliver ANY tax cuts, and still find sufficient extra savings to fund them, and increase his budget surplus from 1% to a more responsible 1.5% of GDP.