tag:theconversation.com,2011:/uk/topics/tax-cuts-32978/articlestax cuts – The Conversation2024-03-07T23:50:16Ztag:theconversation.com,2011:article/2252592024-03-07T23:50:16Z2024-03-07T23:50:16ZThe first 100 days of tax policy bode well for National’s supporters – others might be worried<p>Ahead of the 2023 election, it was clear there was <a href="https://theconversation.com/taxing-questions-is-national-glossing-over-the-likely-cost-of-administering-its-new-revenue-measures-212529">not a lot in National’s tax policies</a> to benefit the least well off. Nothing has happened over the first 100 days of government to change this assessment. </p>
<p>From a progressive perspective, it is clear New Zealand has elected an austerity government. The National-ACT-NZ First coalition is prepared to impose <a href="https://www.rnz.co.nz/news/political/507659/the-public-service-agencies-asked-to-cut-spending">swingeing cuts in the public service</a> and <a href="https://www.stuff.co.nz/politics/350183053/i-am-terrified-how-nationals-benefit-changes-may-impact-disabled-community">curtail welfare</a> to meet its <a href="https://www.aljazeera.com/economy/2023/11/24/new-zealand-gets-new-government-promising-tax-cuts-less-red-tape">promises of income tax relief</a> for some. </p>
<p>We won’t know what the tax cuts will be until the Budget on May 30. But early indicators are they will be squarely aimed at National’s voting base.</p>
<h2>What did (and didn’t) survive negotiations</h2>
<p>The <a href="https://www.1news.co.nz/2023/11/24/nz-first-scuppers-nationals-foreign-buyers-tax-plan/">foreign buyer’s tax proposal</a> did not survive coalition negotiations with NZ First. We have also heard little more about <a href="https://www.bellgully.com/insights/will-the-new-government-gamble-on-online-casino-gambling-tax/">taxing offshore gambling</a>. Perhaps the government has realised this is <a href="https://www.stuff.co.nz/business/300957731/newsable-taxing-offshore-casinos-easier-said-than-done-says-expert">easier said than done</a>. </p>
<p><a href="https://newsroom.co.nz/2023/08/31/national-wants-migrants-to-pay-to-play/">Cost recovery from immigrants</a> was another proposed revenue source. Strictly speaking, this wasn’t a new idea. A <a href="https://www.mbie.govt.nz/dmsdocument/23568-2022-immigration-fee-and-levy-review-proactiverelease-pdf#:%7E:text=1%2520The%2520intended%2520level%2520of,of%2520total%2520immigration%2520system%2520costs.&text=27.3%2520Retaining%2520the%2520fee%2520rates,Migrant%2520check%2520would%2520be%2520increased">review of immigration fees and levies</a> commissioned by the Labour government in 2022 identified several ways to increase the price of some immigration services, many of which have been implemented. All is quiet on this policy as well. </p>
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<a href="https://theconversation.com/the-governments-first-100-days-have-gone-largely-to-plan-now-comes-the-hard-part-224935">The government’s first 100 days have gone largely to plan – now comes the hard part</a>
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<p>Another component of National’s tax proposals was <a href="https://www.nzherald.co.nz/business/election-2023-property-council-hits-out-at-policy-proposals-to-remove-depreciation/TZOG4LGOONFJVDCBJN4R4ZG2MI/">removing the depreciation allowance</a> on commercial property. This was an unusual idea for National and we suspect it will not become law.</p>
<p>The phased-in return of <a href="https://theconversation.com/yes-nz-landlords-gain-from-the-repeal-of-interest-deductibility-rules-but-it-was-a-flawed-law-from-the-outset-218818">mortgage interest deductibility for residential rental property</a> owners is included in the National-ACT coalition agreement. However, the provisions are more generous than those originally proposed by National and are now retrospective, with a 60% reduction in 2023-24, 80% in 2024-25 and 100% in 2025-26. </p>
<p>This will reduce government revenue and potentially result in tax refunds for residential rental property owners in 2023-24, who will be allowed a 60% interest deduction, rather than 50% under the existing legislation. The announcement in December 2023 that the bright-line test will be <a href="https://www.beehive.govt.nz/release/first-steps-tax-and-income-relief-announced#:%7E:text=%E2%80%9CToday%20I%20am%20announcing%20our,for%20less%20than%20two%20years.">reduced to two years</a> from July 1 2024 will further reduce tax revenue.</p>
<p>The Clean Car Standard was an initiative of the previous government to address vehicle emissions. Research suggested households that would <a href="https://www.beehive.govt.nz/sites/default/files/2021-01/Clean%2520Car%2520Import%2520Standard%2520Explainer_0.pdf">benefit the most</a> from vehicle and fuel efficiency standards were low-income ones. Despite <a href="https://www.nzta.govt.nz/vehicles/clean-car-programme/clean-car-programme-questions-and-answers/">strong support</a>, the clean car discount scheme was repealed in December 2023 as well.</p>
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<a href="https://theconversation.com/theyre-nice-to-me-im-nice-to-them-new-research-sheds-light-on-what-motivates-political-party-donors-in-new-zealand-185574">'They're nice to me, I'm nice to them': new research sheds light on what motivates political party donors in New Zealand</a>
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<p>The scheme provided rebates for zero- or low-emission vehicles, and additional fees for high-emission vehicles. New Zealand was already late to the party when this policy was introduced in April 2022. </p>
<p>In 2022, electric and hybrid vehicles accounted for around one-third of all new car registrations, which increased to <a href="https://www.canstar.co.nz/personal-loans/top-selling-electric-cars-in-nz/">41% in 2023</a> (26.5% hybrid and 14.5% electric). Sales of electric vehicles in December 2023 (before the removal of the discount) were nearly 14 times higher than those in January 2024. </p>
<p>Electric or hybrid vehicle owners will also start paying road user charges from April 1, 2024. While the government campaigned on no new taxes, extending the tax base does not appear to qualify as a new tax. </p>
<p>Likewise, the recently announced <a href="https://www.thepress.co.nz/nz-news/350200896/car-rego-hike-fund-20-billion-transport-plan">increase in car registration fees</a> to fund a massive road-building programme is not being considered a <a href="https://www.1news.co.nz/2024/03/05/rego-cost-rises-cant-be-a-broken-promise-bishop/">tax increase by the government</a>. </p>
<p>The government has also announced <a href="https://www.times.co.nz/news/motorists-set-to-be-squeezed-by-higher-fuel-prices/">fuel tax increases</a> – scheduled to start in 2027. National ministers have responded to criticism by saying the eventual tax increase will not be in this political term. </p>
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<h2>The Budget should provide clarity</h2>
<p>The <a href="https://www.beehive.govt.nz/release/government-introduces-taxation-principles-reporting-act-repeal-bill">Taxation Principles Reporting Act 2023</a> mandated reporting based on specified principles. While there is never full consensus on what good tax principles are, this act would (or should) have resulted in greater transparency on at least some tax measures. However, it was repealed in December 2023.</p>
<p>To reiterate, until the Budget, we won’t gain a full understanding of the government’s tax objectives. </p>
<p>Action taken in the first 100 days of the government has given us a reduction in tax transparency, beneficial tax treatment for residential landlords, reduced incentives for consumption of low-emission vehicles, some clear areas where expenditure will be slashed, but little clarity on how tax cuts will be funded. </p>
<p>While we can’t yet know the full details of tax policy, the expenditure side indicates the poor and the environment will be worst affected, while residential rental property owners will benefit.</p><img src="https://counter.theconversation.com/content/225259/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>National’s tax policies have been tweaked since the election, thanks to coalition agreements with NZ First and ACT. But the plan for tax cuts seems to have survived, to the benefit of core supporters.Lisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of WellingtonJonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2242942024-03-04T17:08:06Z2024-03-04T17:08:06ZBudget 2024: what to expect from Jeremy Hunt’s pre-election tax giveaway<p>UK chancellor Jeremy Hunt’s last budget before the general election will be highly political. His aim on March 6 will be to convince voters that the Conservatives are a tax-cutting party. Standing in his way is a <a href="https://www.cnbc.com/2024/02/15/uk-economy-slipped-into-technical-recession-at-the-end-of-2023.html">weak economy</a> and <a href="https://www.bloomberg.com/news/articles/2023-12-21/uk-budget-deficit-jumps-27-in-first-eight-months-of-fiscal-year?leadSource=uverify%20wall">unwieldy budget deficit</a>, which keeps adding to the high levels of government debt. </p>
<p>So can he afford tax cuts – and could they change the outcome of the election?</p>
<p>Hunt would like to extend the tax cuts for individuals and businesses that he began in the <a href="https://theconversation.com/autumn-statement-as-it-happened-218211">November autumn statement</a>, cutting employees’ National Insurance (NI) taxes from 12p to 10p in the pound and giving businesses a potential £10 billion in tax relief for investment spending. </p>
<p>But since then, the UK economy has gone into recession and the long-term national finances have worsened. Estimates by the government’s Office for Budget Responsibility (OBR) will <a href="https://www.bloomberg.com/news/articles/2024-02-22/hunt-given-good-news-on-uk-budget-forecasts-by-fiscal-watchdog">likely show</a> that Hunt only has “headroom” for around £13 billion in tax cuts. This is around half the amount that the OBR’s <a href="https://obr.uk/efo/economic-and-fiscal-outlook-november-2023/">November 2023 forecast</a> predicted would be available (and the pot is even less when you take into account the need to keep some in reserve for emergencies).</p>
<h2>The main options</h2>
<p>Some people want Hunt to <a href="https://www.telegraph.co.uk/money/tax/inheritance/reform-pledge-total-abolition-inheritance-tax/">abolish inheritance tax</a> or <a href="https://www.telegraph.co.uk/politics/2024/03/03/liz-truss-tells-jeremy-hunt-scrap-stamp-duty-legatum-budget/">remove stamp duty</a> on the sale of property. More likely, he’ll take the view that the most politically beneficial tax cuts will be the ones which reach the largest number individuals. </p>
<p>Only 27,000 people in the UK <a href="https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary/inheritance-tax-statistics-commentary">pay inheritance tax</a>, while <a href="https://www.gov.uk/government/statistics/income-tax-liabilities-statistics-tax-year-2020-to-2021-to-tax-year-2023-to-2024/bulletin-commentary">20 million</a> pay NI and nearly 32 million pay income tax. </p>
<p>In November, Hunt argued that cutting NI was preferable to cutting income tax as it helped to boost employment at less cost to the government. Cutting income tax, however, could have higher political profile, and is the stated long-term goal of the prime minister, Rishi Sunak. </p>
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<a href="https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Workman by some scaffolding" src="https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/579572/original/file-20240304-18-uazta3.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Fiscal drag is quietly squeezing millions of workers.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/man-in-yellow-jacket-and-black-pants-walking-on-sidewalk-during-daytime-6pwdyrBO5qw">Krzysztof Hepner/Unsplash</a></span>
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<p>It could also help to <a href="https://www.thetimes.co.uk/article/jeremy-hunt-tax-cuts-uk-thresholds-spring-budget-7d5xdsbph">quell the clamour</a> to reverse the freeze on income-tax thresholds that began in 2021. The government has already raised <a href="https://researchbriefings.files.parliament.uk/documents/CBP-9687/CBP-9687.pdf">more than £16 billion</a> from this “fiscal drag”, which is projected to <a href="https://www.thisismoney.co.uk/money/article-12781839/Tax-burden-highest-Second-World-War-44-billion-stealth-tax.html">add about £44 billion</a> a year to the public coffers by 2028. </p>
<p>But with <a href="https://obr.uk/docs/dlm_uploads/E03004355_November-Economic-and-Fiscal-Outlook_Web-Accessible.pdf">public debt</a> close to 100% of GDP and the <a href="https://www.bloomberg.com/news/articles/2023-12-21/uk-budget-deficit-jumps-27-in-first-eight-months-of-fiscal-year?leadSource=uverify%20wall">government struggling</a> to reduce its budget deficit (the difference between income and outgoings), this “stealth tax” is likely to continue. Even cutting 1p from income tax <a href="https://www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-changes/direct-effects-of-illustrative-tax-changes-bulletin-january-2023">would cost</a> £7 billion, while an NI cut would cost £5 billion, so either would use up most of the available headroom.</p>
<h2>Paying for tax cuts – and laying traps for Labour?</h2>
<p>To finance bigger tax cuts, the chancellor may announce other ways of raising revenues or cutting spending. He could increase taxes that target only a small proportion of individuals, such as on vapes and tobacco. This would be in line with the government’s aim to stop smoking, and could <a href="https://www.thetimes.co.uk/article/what-will-a-vaping-tax-in-budget-mean-for-the-tobacco-industry-j57vxdwd6#:%7E:text=The%20vaping%20levy%20expected%20to%20be%20announced%20by%20Hunt%20on,15%20similar%20schemes%20across%20Europe.">raise around £500 million</a>. </p>
<p>There is <a href="https://www.theguardian.com/politics/2024/feb/28/hunt-considers-poaching-labours-plan-to-scrap-non-domiciled-tax-rules">also speculation</a> that he might tax “non-doms”, despite ruling it out in the past. Targeting these individuals living in the UK who claim tax exemption from their foreign income could raise <a href="https://www.lse.ac.uk/News/Latest-news-from-LSE/2022/i-September-22/Abolishing-the-non-dom-regime-would-raise-more-than-3.2-billion-each-year-finds-new-report">up to £3.2 billion</a>. It would mean stealing a Labour policy, but giving the money away as tax cuts would also undermine the opposition’s plans to spend the proceeds on improving education and the NHS. </p>
<p>In the same vein, Hunt is <a href="https://www.bloomberg.com/news/articles/2024-02-29/jeremy-hunt-may-extend-uk-windfall-tax-on-oil-gas-at-budget">reportedly considering</a> using Labour’s plan to extend the windfall tax on oil and gas companies beyond 2028. Since <a href="https://www.mirror.co.uk/news/politics/labours-rachel-reeves-vows-not-31815588">Labour has pledged</a> not to raise income taxes or NI, these taxes are crucial to their plans to fund improvements in public services. </p>
<p>As for Hunt cutting future spending, the scope is limited but not insignificant. Spending is already set to increase by just 1% per year to 2028-29, which probably entails cuts once you factor in inflation. Yet lowering that to 0.75% per year is likely to save another <a href="https://news.sky.com/story/chancellor-jeremy-hunt-considering-further-public-spending-cut-to-boost-tax-giveaway-in-budget-13086803">£5 billion to £6 billion</a>.</p>
<p>Labour may struggle to accept such a plan. The 1% target has <a href="https://www.theguardian.com/politics/2024/jan/23/head-of-obr-says-lack-of-budget-details-led-to-work-of-fiction-forecasts-last-year">already been compared</a> to “a work of fiction” by Richard Hughes, head of the OBR. He argues that after years of austerity, the government has given no indication of what it could cut without putting vital services at risk, or how it would pay for ambitious plans to <a href="https://educationhub.blog.gov.uk/2024/01/02/how-to-apply-for-30-hours-free-childcare-and-find-out-if-youre-eligible/">expand free childcare</a> and <a href="https://www.theguardian.com/society/2023/aug/30/one-in-11-workers-england-could-nhs-staff-by-2036-37-study">increase the NHS workforce</a>.</p>
<p>Nonetheless, many experts are questioning the logic of the existing spending restrictions. The former chief economist of the Bank of England, <a href="https://www.bbc.co.uk/news/uk-politics-68461581">Andy Haldane</a>, claims the rules are “stunting” economic growth and constraining the chancellor. But the chancellor thinks any changes <a href="https://www.bbc.co.uk/news/uk-politics-6846158">might worry financial markets</a>, similar to what happened to Liz Truss in 2022. </p>
<p>And others believe that the government’s fiscal rules, the most important of which is to have debt falling as a share of GDP in five years time, are not a useful guide to policy. The <a href="https://ifs.org.uk/articles/gaming-fiscal-rules-no-way-make-budget-policy">Institute for Fiscal Studies</a> thinks they are so loose as to allow the government to “game the system”. Changing these wouldn’t be impossible: there have been <a href="https://www.instituteforgovernment.org.uk/explainer/fiscal-rules-history#:%7E:text=The%20first%20fiscal%20rules%20in,set%20the%20UK%20has%20had.">22 changes since</a> they were first introduced in 1997. However, <a href="https://www.ft.com/content/ad0b201d-c761-42ba-be75-a66a8d6fed82">Labour has pledged</a> to introduce similar rules and spending restrictions if it comes into power. </p>
<h2>Will it help win the election?</h2>
<p>It is far from clear that tax cuts are what the electorate wants, even among Conservatives. Recent polling suggests the NHS, the economy and the cost-of-living are <a href="https://www.ipsos.com/en-uk/uk-opinion-polls">much higher priorities</a>.</p>
<p>Polls going back years also suggest <a href="https://fairnessfoundation.sharepoint.com/Documents/Forms/AllItems.aspx?id=%2FDocuments%2FFF%2FResearch%2FCurrent%2FOpportunity%2FTax%2FSummaries%2FMinority%20Sport%2Epdf&parent=%2FDocuments%2FFF%2FResearch%2FCurrent%2FOpportunity%2FTax%2FSummaries&p=true&ga=1">a shift</a> towards greater concern about the effect of tax cuts on public services. Only 16% of Britons now want them cut, if it means cutting public services, rising to only 17% among Conservative voters. Meanwhile, 31% want <em>increased</em> taxes to improve public services while 33% want taxes and spending to stay the same.</p>
<p>However, another poll asking what should be the government’s <a href="https://savanta.com/knowledge-centre/published-polls/pre-budget-snap-poll-savanta-29-february-2024/">priority in the budget</a> found that 54% backed lowering taxes for people, while only 35% favoured increasing spending on public services.</p>
<p>At any rate, the budget will be an opportunity to judge the public mood and see whether either party can convince the public it can tackle the cost-of-living crisis while improving public services. In particular, all eyes will be on Hunt to see if he can do anything to turn around the <a href="https://www.bbc.co.uk/news/uk-politics-68079726">government’s moribund polling</a>.</p><img src="https://counter.theconversation.com/content/224294/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Schifferes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Can the chancellor move the dial on the Tories’ grim polling?Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2248872024-03-04T17:03:16Z2024-03-04T17:03:16ZTax cuts in an election year? They can boost consumer confidence and work wonders for a governing party<p>A budget in the year of an election is a big moment for any government. In 2024, it could be the chancellor of the exchequer’s <a href="https://www.bbc.co.uk/news/business-68359756">last chance</a> to try and generate a sense of economic optimism and improve <a href="https://www.tandfonline.com/doi/full/10.1080/00036846.2017.1363859">consumer confidence</a> after years of <a href="https://theconversation.com/price-inflation-is-slowing-but-heres-why-it-still-feels-like-were-in-a-cost-of-living-crisis-218055">households feeling squeezed</a> by austerity measures and rising prices. </p>
<p>Jeremy Hunt will also be mindful of reviving the electoral fortunes of the Conservative Party – and keeping his job. </p>
<p>His predecessors have faced similar challenges. And several chancellors of Conservative governments have decided to remove the financial brakes when a general election is imminent, to make people feel a little better off. </p>
<p>My research looks at how <a href="https://www.tandfonline.com/doi/full/10.1080/00036846.2019.1659489">people feel</a> about their economic prospects, and how this is linked to the way they behave as consumers. And a brief look at <a href="https://www.researchgate.net/publication/222958654_Income_tax_and_elections_in_Britain_1950-2001">election year budgets</a> from the past suggests that tax cuts can make voters feel more positive about a governing party. </p>
<p><a href="https://www.semanticscholar.org/paper/The-Chancellors%3A-A-history-of-the-Chancellors-of-Dell/fc3ea870901100686f1801ed928443f36443b801">Richard Austen Butler</a> for example, was chancellor in the early 1950s, serving prime ministers Winston Churchill and Anthony Eden. For his final budget in April 1955, Butler decided to significantly reduce income tax rates. </p>
<p>The election was held the following month, and the Conservative Party won <a href="https://link.springer.com/book/9780333778678">with an increased majority</a>. </p>
<p>This was a prime example of a chancellor attempting to manipulate the economy to enhance his political party’s prospects. But from a macroeconomic perspective (looking at the UK economy as a whole), the 1955 budget was widely considered to <a href="https://academic.oup.com/book/26665/chapter-abstract/195428871?redirectedFrom=fulltext">be misguided</a>. For the tax relief Butler provided came at a time of an <a href="https://www.imf.org/external/pubs/ft/fandd/2013/09/basics.htm">economic boom</a>, when supply couldn’t keep pace with demand, which led to inflationary pressure. </p>
<p>Towards the end of the same decade, it was Derick Heathcoat Amory in the economic hot seat, dealing with prime minister Harold Macmillan’s <a href="https://academic.oup.com/book/4399/chapter-abstract/146363564?redirectedFrom=fulltext">perpetual fear of an economic slump</a>. </p>
<p>Although there were concerns about the consequences for inflation and the UK’s balance of payments, in April 1959, Amory delivered what economists call an “expansionary budget” – increasing spending and cutting taxes. Six months on, the Conservatives won another general election. </p>
<h2>Howe to do it</h2>
<p>Twenty years later, when Margaret Thatcher moved into No 10 Downing Street in May 1979, she appointed Geoffrey Howe as chancellor. During his time in office, any unpopular or controversial measures – including public spending cuts and tax increases – happened in his first three budgets. </p>
<p>This allowed him to present more attractive policies in the one that immediately preceded the next general election.</p>
<p>By the time of his final budget, in <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0289.2007.00394_16.x">March 1983</a>, Howe felt that inflation and the government’s finances were sufficiently under control to grant widespread tax cuts, including to North Sea oil companies and small businesses. The general election in June 1983 saw the Conservative Party win an <a href="https://www.jstor.org/stable/20002569">overwhelming victory</a> (also helped by <a href="https://www.jstor.org/stable/193822">increased popularity</a> after the Falklands war).</p>
<p>Nigel Lawson then replaced Howe as chancellor, in relatively favourable economic circumstances. He went on to pursue a tax cutting agenda, believing that increasing the incentive to work would reduce unemployment. </p>
<p>For his <a href="https://www.jstor.org/stable/24436288">1987 budget in March</a>, preceding a general election in June, Lawson cut income tax, reduced fuel duty, and brought down the the tax rate for small businesses. His actions helped the Conservatives win another overwhelming victory in the election. </p>
<p>After John Major became prime minister in 1990, he appointed Norman Lamont as chancellor under difficult economic circumstances. </p>
<h2>Consumer confidence trick?</h2>
<p>A recession was officially declared in January 1991 – which continued until April 1993. Meanwhile, when Lamont delivered his <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1468-0319.1992.tb00271.x">second budget</a> on March 10 1992, ahead of a general election in April, a key feature was the introduction of a new, lower 20% rate of tax on the first £2,000 of taxable income. </p>
<p>Again, the Conservatives won. Members of the Institute for Fiscal Studies later <a href="https://ifs.org.uk/articles/taxes-and-elections-are-they-any-chance-related">described that budget</a> as the “clearest example of pre-election tax cuts followed by post-election tax rises”. </p>
<p>But it worked. And all of these examples might provide Hunt with <a href="https://www.theguardian.com/business/2024/mar/02/toxic-budgets-the-uk-chancellors-who-left-a-poisonous-legacy">strong encouragement</a> to ignore fiscal rectitude when it comes to preparing his 2024 budget. A tax cut would likely promote an increase in consumer confidence, which <a href="https://onlinelibrary.wiley.com/doi/10.1111/manc.12395">motivates households to buy things</a>.</p>
<p>Yet Hunt is unlikely to forget that he was given his job after the <a href="https://theconversation.com/mini-budget-lessons-from-the-uks-long-history-of-economic-crises-191696">financial chaos</a> caused by the so-called “mini-budget” delivered by Kwasi Kwarteng – then the chancellor during Liz Truss’s short premiership – in September 2022. </p>
<p>So an array of unfunded tax cuts is not an option. </p>
<p>It would be very surprising though, if Hunt didn’t try to make voters <a href="https://data.sca.isr.umich.edu/fetchdoc.php?docid=37479">feel a little better off</a> ahead of a general election. The prime minister maintains that the trajectory is <a href="https://www.theguardian.com/politics/2024/jan/07/rishi-sunak-says-he-wants-to-cut-workers-taxes-this-year-and-may-reduce-benefits">lower taxes</a>, and his desire to reward people who work would suggest another reduction in national insurance payments. </p>
<p>While this may not be the most prudent form of action, it may yet provide households with a sliver of economic confidence – and a boost to the Conservative’s chances of winning another election.</p><img src="https://counter.theconversation.com/content/224887/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Gausden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A short history of reducing tax burdens and winning elections.Robert Gausden, Senior Lecturer in Economics, University of PortsmouthLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2221222024-02-14T16:56:14Z2024-02-14T16:56:14ZIs cutting UK taxes ahead of a general election affordable or not? An economist explains<figure><img src="https://images.theconversation.com/files/574614/original/file-20240209-26-ftovcf.jpg?ixlib=rb-1.1.0&rect=23%2C40%2C3843%2C2544&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The government has been warned.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/photo-realistic-reflective-metallic-spending-cuts-55744981">Becky Stares/Shutterstock</a></span></figcaption></figure><p>A Conservative government <a href="https://www.bbc.co.uk/news/business-68027060">considering tax cuts</a> a few months ahead of an expected general election may not sound very surprising. Tax cuts are understandably popular – especially when household incomes have been squeezed by <a href="https://www.bankofengland.co.uk/explainers/why-are-interest-rates-in-the-uk-going-up">high inflation</a> and rising interest rates.</p>
<p>But can the British economy afford them? Recent figures on UK borrowing led some analysts to <a href="https://www.theguardian.com/business/2024/jan/23/jeremy-hunt-tax-cuts-borrowing-deficit">suggest that it can</a>. <a href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/december2023">Those figures showed</a> that government borrowing fell to £7.8bn in December 2023, £8.4bn less than a year earlier, apparently giving chancellor Jeremy Hunt some “headroom” to announce tax cuts in his budget in March. </p>
<p>But then came warnings that the chancellor should not get carried away. One thinktank, the Institute for Fiscal Studies commented: “Tax cuts today add to the risk of tax rises or spending cuts tomorrow.” The IMF weighed in next, advising that tax cuts should be avoided. Eventually Hunt also <a href="https://www.bbc.co.uk/news/uk-politics-68159003">appeared to concede</a> that they may not be on the cards.</p>
<p>So is the headroom there or not? Is one month of lower borrowing enough to counter the longer term problems faced by the UK economy? </p>
<p>For some of those problems have been around for quite a while. Ever since the global financial crisis of 2008, the UK economy has been grappling with <a href="https://www.ft.com/content/2a0dbab1-f6a5-4432-8984-4112638dfdf0">stagnated productivity</a> and <a href="https://www.ft.com/content/c4437c9e-7ec4-11e8-bc55-50daf11b720d">declining wages</a>. </p>
<p>Then came the pandemic which was a big <a href="https://commonslibrary.parliament.uk/research-briefings/cdp-2022-0215/">blow to the economy</a>. More recently, supply chain disruption and the war in Ukraine have <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/articles/demandandsupplyfactorsincpiinflation/2021to2022">driven up inflation</a>. </p>
<p>Unsurprisingly, all of this led to a sharp reduction in consumer confidence which has been on a <a href="https://tradingeconomics.com/united-kingdom/consumer-confidence">downward trend</a> for years.</p>
<p>Any incumbent government facing a general election would be concerned about these factors. In the <a href="https://theconversation.com/autumn-statement-experts-react-to-national-insurance-and-business-tax-cuts-194286">autumn statement last year</a>, the government announced significant changes in the tax rates in an attempt to boost consumer confidence and increase their purchasing power. </p>
<p>And now that <a href="https://theconversation.com/price-inflation-is-slowing-but-heres-why-it-still-feels-like-were-in-a-cost-of-living-crisis-218055">inflation has fallen</a> fairly significantly (though remains above the 2% target) there is a general expectation that the Bank of England will start to cut interest rates. </p>
<p>As well as reducing mortgage payments for many households, this would also reduce future borrowing costs for the government, giving them some room to cut taxes in a bid to boost growth in the economy. </p>
<h2>Growing, growing, gone</h2>
<p>But not all types of tax cuts stimulate growth. It depends on how they are funded.</p>
<p>If cuts are financed by borrowing, they are likely to lead to <a href="https://www.researchgate.net/publication/362865094_Market_Volatility_Monetary_Policy_and_the_Term_Premium">serious repercussions for the economy</a> (<a href="https://www.theguardian.com/uk-news/2022/sep/30/liz-truss-uk-economic-crisis">just ask the former prime minister Liz Truss</a>). But tax cuts driven by spending reductions – such as less money going on government borrowing debts – can have a positive impact.</p>
<p><a href="https://www.imf.org/-/media/Files/Publications/WP/2017/wp17192.ashx">Evidence suggests</a> that the growth effects of lower personal taxes – such as income tax and national insurance – are most visible in stimulating higher demand for service sectors such as transport, construction, accommodation and hospitality. </p>
<p>Personal tax cuts would also have the simple but attractive benefit of giving workers in any sector a bit more money in their pay packet. After years of incomes being squeezed by global events, frozen tax thresholds and generally higher bills, that would provide some financial respite for millions of households – and improve confidence.</p>
<p>But increasing labour productivity in the UK is the single <a href="https://www.researchgate.net/publication/347248739_Effects_of_productivity_growth_on_domestic_savings_across_countries_Disentangling_the_roles_of_trend_and_cycle">most important thing</a> to do to secure a better economic future. One of the reasons for stagnated productivity in UK has been very <a href="https://www.ippr.org/articles/now-is-the-time-to-confront-uk-s-investment-phobia">low rates</a> of investment in the UK compared to the G7 countries. </p>
<p>And there is actually some good news on that front. In the last two years, investment growth was faster in the UK compared to <a href="https://www.gov.uk/government/news/chancellor-backs-business-and-rewards-workers-to-get-britain-growing">other G7 countries</a>, partly thanks to a <a href="https://www.gov.uk/guidance/super-deduction">government scheme</a> launched in 2021 which allowed businesses to significantly reduce their tax liability. </p>
<p>This lets companies deduct 130% of their investment in business equipment (known as “plant and machinery”) from taxable income. Globally, it’s a very competitive system which has shown promising results. Anything which makes the UK an attractive destination for global talent and investment may help increase labour productivity too, which would further increase consumer confidence and economic growth.</p>
<p>In the meantime, many people may still be hoping for new springtime personal tax cuts, and arguing for their benefits – both in the immediate future and further ahead. But to get those, the government would really have to make sure they are accompanied by a credible expenditure reduction plan, laid out in a government spending review. And the next one of those is not <a href="https://www.gov.uk/government/news/chancellor-launches-vision-for-future-public-spending">expected until April 2025</a>.</p><img src="https://counter.theconversation.com/content/222122/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Abhishek Kumar is affiliated with Centre for Social and Economic Progress (formerly Brookings India), New Delhi. </span></em></p>Cuts could really help squeezed households.Abhishek Kumar, Lecturer in Banking and Finance, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2182872023-11-23T17:24:30Z2023-11-23T17:24:30ZAutumn statement: what national insurance cuts and other changes mean for young people<figure><img src="https://images.theconversation.com/files/561136/original/file-20231122-15-b6z1ll.jpg?ixlib=rb-1.1.0&rect=62%2C26%2C5928%2C3961&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/business-woman-using-calculator-do-math-1500592778">Natee Meepian/Shutterstock</a></span></figcaption></figure><p>At first glance, Chancellor Jeremy Hunt’s <a href="https://theconversation.com/autumn-statement-experts-react-to-national-insurance-and-business-tax-cuts-194286">autumn statement</a> appears to reduce the tax burden, increase pay and make our lives a bit easier. But given the cost of living and other pressures, the big picture is not as pretty. If you’re a young professional, here’s what the changes could mean for you.</p>
<p>Let’s start with your salary. The national living wage will increase from £10.42 to £11.44 per hour from April 2024 and be extended to all workers aged 21 and above. That’s an inflation beating rise of 12.4% if you’re between 21-23, and 9.8% if you’re older than 23. For those between 18-20, the hourly rate increases by a whopping 14% or £1.11, to £8.60 per hour. </p>
<p>It’s worth noting that many young people earn more than the living wage already. The median salary for those aged 22-29 is <a href="https://www.forbes.com/uk/advisor/business/average-uk-salary-by-age/">about £30,000</a>. </p>
<p>If you’re in this category, you’re more likely to be affected by changes to national insurance, which the chancellor cut from 12% to 10%. This tax is paid on income between £12,570 to £50,270 and falls to just 2% for anything earned above that. So, if you’re earning £25,000, you will take home an extra £245 per year starting in January.</p>
<hr>
<figure class="align-right ">
<img alt="Quarter life, a series by The Conversation" src="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><strong><a href="https://theconversation.com/uk/topics/quarter-life-117947?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">This article is part of Quarter Life</a></strong>, a series about issues affecting those of us in our twenties and thirties. From the challenges of beginning a career and taking care of our mental health, to the excitement of starting a family, adopting a pet or just making friends as an adult. The articles in this series explore the questions and bring answers as we navigate this turbulent period of life.</em></p>
<p><em>You may be interested in:</em></p>
<p><em><a href="https://theconversation.com/why-its-so-hard-to-be-young-in-britain-right-now-213002?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Why it’s so hard to be young in Britain right now</a></em></p>
<p><em><a href="https://theconversation.com/more-young-people-in-the-uk-are-living-with-parents-and-grandparents-heres-what-you-need-to-know-if-youre-considering-it-216280?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">More young people in the UK are living with parents and grandparents – here’s what you need to know if you’re considering it</a></em></p>
<p><em><a href="https://theconversation.com/how-to-know-if-your-employer-is-serious-about-helping-you-find-purpose-in-your-work-205102?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">How to know if your employer is serious about helping you find purpose in your work</a></em></p>
<hr>
<p>If you are self-employed or have a side-hustle to earn extra money, the autumn statement has something for you too. From April 2024, class 2 national insurance will be permanently abolished. That’s a gain of £3.45 per week or about £179 per year. </p>
<p>In addition, the self-employed will be paying 1% less for their class 4 national insurance, which applies on incomes between £12,570 and £50,270. For someone earning £20,000 that’s only a gain of £74 per year while for earners of £35,000 the saving becomes a more hefty £224 per year. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/autumn-statement-experts-react-to-national-insurance-and-business-tax-cuts-194286">Autumn statement: experts react to national insurance and business tax cuts</a>
</strong>
</em>
</p>
<hr>
<p>Another headline announcement in the statement was that disabled people will face stricter requirements to look for work that can be done remotely, or face losing benefits. The number of young people unable to work due to ill health has <a href="https://www.bbc.co.uk/news/health-67443189">increased dramatically</a> since the pandemic, so this is likely to have a significant impact. </p>
<h2>Savings</h2>
<p>The chancellor also announced changes to <a href="https://www.gov.uk/individual-savings-accounts">Individual Savings Accounts (ISAs)</a>.</p>
<p>From April 2024, the money you place into an ISA will not only remain tax-free, but for the first time the law will permit the funds to be invested in real estate and private equity firms instead of just stock market shares. </p>
<p>Each year you can add another £20,000 into your total ISA amount tax-free. This now doesn’t need to be with the same bank, but you can buy into multiple providers. </p>
<p>That means banks and other financial institutions will soon be offering you the option to buy into funds that specialise, for example, in small tech startups.
Of course, the value of your investment can go down as well as up – it’s a risky proposition but it’s good to have options. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-to-know-about-tax-free-savings-before-the-april-5-isa-deadline-202015">What to know about tax-free savings before the April 5 ISA deadline</a>
</strong>
</em>
</p>
<hr>
<h2>No help for mortgages</h2>
<p>The chancellor did offer some extra assistance to those who rely on <a href="https://england.shelter.org.uk/housing_advice/benefits/benefits_for_under_35s_in_shared_housing">Local Housing Allowance</a> to pay their rent. The changes mean that 1.6 million households would benefit from an extra £800 per year for rent. The backdrop to this move is that private sector rents have risen by a whopping average of <a href="https://www.bigissue.com/news/housing/rents-in-the-uk-are-rising-at-the-highest-rate-for-14-years-will-they-keep-going-up/">30% since 2020</a>.</p>
<p>But the chancellor has not addressed a major issue affecting young people: getting on the property ladder. Mortgage interest rates have risen from 2% to over 4%, adding hundreds of pounds to a typical mortgage. In fact, for the first time in many years it’s now <a href="https://www.independent.co.uk/news/uk/home-news/uk-rent-england-scotland-london-b2396764.html">cheaper to rent</a> than pay a mortgage in many places. </p>
<p>To add to that, the cost of living crisis means that it’s even more difficult to save for a deposit since rents, groceries, transportation and socialising have all gone up substantially over the last few year. </p>
<figure class="align-center ">
<img alt="A young man sitting at a laptop computer, looking in surprise at a piece of paper" src="https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561317/original/file-20231123-29-d4pu1v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">For many, the tax cuts will not make up for increased cost of living.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/serious-young-african-american-man-sitting-2082974050">Pressmaster/Shutterstock</a></span>
</figcaption>
</figure>
<h2>The bigger picture</h2>
<p>The frustrating fact is that even after the cuts announced in the autumn statement, UK taxpayers will be paying more tax than ever before. According to the <a href="https://ifs.org.uk/articles/will-be-biggest-tax-raising-parliament-record">Institute of Fiscal Studies</a> this has been the biggest tax-raising parliament on record. It’s like if someone gives you a discount of 10% right after inflating their price by 30%. </p>
<p>Meanwhile, as salaries have risen in response to inflation, tax thresholds have been frozen since 2021. This means that more and more people are being “dragged” into a higher tax bracket. This is a phenomenon known as <a href="https://www.bbc.co.uk/news/business-67484100">“fiscal drag”</a>. And as we predicted back in 2021, inflation was not temporary or mild, and will be <a href="https://theconversation.com/rising-inflation-unless-we-act-now-it-will-not-be-temporary-168106">difficult to drop</a>. This process will keep eroding take home pay until the government changes tax thresholds. </p>
<p>If you need a drink after this less-than-cheerful analysis, the chancellor has you covered. Hunt announced that the government would freeze alcohol duty, so the cost of your drinks will not rise (at least not as far as tax is concerned) until August 2024.</p><img src="https://counter.theconversation.com/content/218287/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Young professionals are most likely to be affected by changes to national insurance.Alexander Tziamalis, Senior Lecturer in Economics | Freelance Consultant and Tutor |, Sheffield Hallam UniversityYuan Wang, Seinor Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1942862023-11-22T17:59:52Z2023-11-22T17:59:52ZAutumn statement: experts react to national insurance and business tax cuts<figure><img src="https://images.theconversation.com/files/561134/original/file-20231122-25-dom9pi.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4950%2C3295&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">UK chancellor, Jeremy Hunt, with his 2023 Autumn Statement. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/hmtreasury/53348723234/">Simon Walker/No 10 Downing Street/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p><em>The UK chancellor, Jeremy Hunt, as announced a raft of changes to the tax and benefit system as part of the government’s <a href="https://assets.publishing.service.gov.uk/media/655e107697196d000d985d6b/E02982473_Autumn_Statement_Nov_23_Accessible_v3.pdf">autumn statement</a>. They included:</em></p>
<ul>
<li><em>main employee rate of national insurance cut from 12% to 10% from January 6 2024, saving someone on the average salary £450</em></li>
<li><em>class 2 national insurance to be abolished, saving the average self-employed person £192 a year</em></li>
<li><em>national living wage to increase from £10.42 to £11.44 and extended to all over-21s from April 2024</em></li>
<li><em>universal credit to rise with October inflation of 6.7%, an average increase of £470, accompanied by more requirements for claimants to look for work</em></li>
<li><em>pension triple lock maintained with an increase of 8.5% from April 2024</em></li>
<li><em>an effective business investment tax cut of 25p for every £1 invested</em></li>
<li><em>alcohol duty frozen until August 1 2024.</em></li>
</ul>
<p><em>Here’s a selection of expert reactions taken from <a href="https://theconversation.com/autumn-statement-as-it-happened-218211?notice=Article+has+been+updated.">our live blog</a> of the autumn statement on November 22.</em></p>
<h2>Personal taxes could give an electoral boost, but what next?</h2>
<p><strong>Gavin Midgley, Senior Teaching Fellow in Accounting, University of Surrey</strong></p>
<p>This is a significant giveaway but possibly also a canny one politically, given that this rate only affects earnings up to £50,000 per annum – anything beyond that will still incur the existing rate. This could mean an avoidance of the “tax cuts for the rich” accusations that were levelled at the previous chancellor in the September 2022 mini-budget.</p>
<p>The Office for Budget Responsibility (OBR) has declared that the NIC cut accounts for virtually all of the fiscal windfall. And with downgraded growth forecasts for the coming two years, it’s difficult to see what the chancellor can do in the next full budget (very likely to be the last budget before the next general election).</p>
<h2>Business taxes: expected but questions remain</h2>
<p><strong>Hilary Ingham, Senior Lecturer in the Department of Economics at Lancaster University</strong></p>
<p>Out of over 100 measures outlined in today’s autumn statement, a significant number were directed at business. Making full expensing permanent – the largest business tax cut in modern history, according to Hunt – certainly carries a significant cost, some £11 billion per year. </p>
<p>While it won’t help all companies, this measure is one of the headlines from the autumn statement because the chancellor can now claim that, not only does the UK have the lowest headline corporation tax rate in the UK, it also has the most generous capital allowances.</p>
<p>The chancellor also extended the 75% discount on business rates, up to £110,000, for retail, hospitality and leisure business for another year. Whether this will be sufficient to save many hospitality businesses remains to be seen.</p>
<h2>Despite government headroom, the economy is faltering</h2>
<p><strong>Alan Shipman, Senior Lecturer in Economics, The Open University</strong></p>
<p>Inflation has halved since October 2022 and there has been talk of “fiscal headroom” because the government borrowed less than it expected in 2023. But the gap between its spending and tax receipts has continued to widen. Public borrowing was 23% higher than last year in the first half of 2023, and October’s deficit was the second highest on record. </p>
<p>A sustained investment recovery since 2022 is now faltering, with year-on-year growth in business investment slowing to 2.8% in the third quarter, from 9.2% the quarter before. Without more investment, it’s hard to deliver any growth in average output per hour worked. This key measure of labour productivity stopped growing in 2016 and fell sharply in 2020-21 during the pandemic shutdowns.</p>
<h2>Pension pot for life</h2>
<p><strong>Louise Overton, Associate Professor in Social Policy at the University of Birmingham</strong> </p>
<p>The state pension will surpass £10,000 <a href="https://www.pensionbee.com/press/state-pension-increase-april-2023#:%7E:text=Taking%20effect%20for%20payments%20starting,year%20%2D%20%C2%A3156.20%20a%20week.">for the first time</a> this year thanks to the continuation of triple lock. This is a significant step forward for older people living on a low income and a lifeline for the <a href="https://www.birmingham.ac.uk/research/chasm/financial-inclusion/2022/index.aspx">15% of pensioners</a> living in poverty in the UK.</p>
<p>But it’s hard to see how tax cuts and the continuation of the triple lock (at least in its current form) can be squared with a situation where significant sections of the working population remain worse off. Intragenerational inequality among older cohorts is real, but these measures can only serve to worsen the intergenerational savings gap. Any hope of closing this gap via private pension savings is unlikely to be realised by Jeremy Hunt’s plans to consult on “<a href="https://www.thisismoney.co.uk/money/pensions/article-12774637/Pension-pots-life-revealed-auto-enrolment-2-0.html">pot for life</a>” pension reforms. </p>
<p>If one of the unintended consequences is that pension funds would probably compete for top earners with more retirement savings, this move would represent another step towards the financial exclusion of small pension pot holders (typically women). They already face barriers to accessing financial advice and making the most of their defined contribution savings – an all too familiar story for the women in <a href="https://www.birmingham.ac.uk/documents/college-social-sciences/social-policy/chasm/2022/pension-decision-making-in-the-new-retirement-landscape.pdf">Chasm’s recent study</a> on pension decision making.</p>
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<img alt="Jar filled with coins, labelled pension." src="https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/561135/original/file-20231122-29-7o9akw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Not the kind of pension pot the chancellor has in mind.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/coins-glass-money-jar-pension-label-264841286">szefei/Shutterstock</a></span>
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<h2>Business funding may not be transformative</h2>
<p><strong>Phil Tomlinson, Professor of Industrial Strategy, University of Bath</strong></p>
<p>UK investment has <a href="https://www.ft.com/content/8c6461c6-e976-4563-b277-bf61ae0a2c07">only grown by 4.6% since the Brexit referendum</a>, compared to 32% in the US and 15% in the Eurozone. Low investment is a key contributor to weak productivity growth and has been a drag on the UK economy for years. The autumn statement sought to address this record. Similarly, last week, the government announced <a href="https://www.theengineer.co.uk/content/news/government-announces-45bn-funding-for-uk-manufacturers">£4.5 billion over five years</a> in funding for UK manufacturing to accelerate the shift to net-zero, along with an expansion of digital support for small and medium size businesses through the <a href="https://www.madesmarter.uk/adoption/">Made Smarter Adoption programme</a>. </p>
<p>Whether this funding will be sufficiently transformative to propel the UK to the head of the global clean-tech race is debatable. It is “small beer” compared to <a href="https://theconversation.com/the-uk-needs-a-new-industrial-strategy-or-it-will-lose-the-global-green-subsidy-race-205483">recent interventions in the US and EU</a>, while Labour has proposed to invest £28 billion in green technologies in the next parliament. </p>
<p>The eye-catcher for business in today’s statement was the announcement that “<a href="https://www.pwc.co.uk/services/tax/insights/full-expensing-new-valuable-capital-allowance.html">full capital expensing</a>” will be made permanent. This is a tax break that allows companies to deduct investment expenditure on profits and reduce their corporation tax bill. This should give a boost to UK corporate investment – the Office for Budget Responsibility thinks by as much as £3 billion each year. However, it is unlikely to be of much value to smaller firms and start-ups, which don’t tend to invest significantly in new capital equipment (due to lack of funds) and/or record large profits - especially in their early years.</p>
<p>The Chancellor hopes his new fiscal incentives will boost investment by around 1% of GDP. However, this may be wishful thinking when the “<a href="https://www.economicshelp.org/animal-spirits/">animal spirits</a>” of business are dampened due to high interest rates and the generally bleak economic outlook. </p>
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Read more:
<a href="https://theconversation.com/the-uk-needs-a-new-industrial-strategy-or-it-will-lose-the-global-green-subsidy-race-205483">The UK needs a new industrial strategy or it will lose the global green subsidy race</a>
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<h2>Little investment in public services</h2>
<p><strong>Shampa Roy-Mukherjee, Vice Dean and Associate Professor, Royal Docks School of Business & Law, University of East London</strong></p>
<p>UK government debt currently stands at £2.6 trillion which is approximately 98% of GDP and the sixth highest amongst European countries. In the last financial year, the government spent £111 billion on debt interest - more than it spent on education, according to the BBC. But the government has still been able to announce tax cuts conducive to economic growth in the Autumn statement.</p>
<p>This is because of additional tax receipts arising from an inflationary environment, as well as the additional forecasted revenue from freezing tax thresholds till 2028. Despite improved fiscal headroom, there is little evidence [from the statement] that there will be any substantive expenditure in public services, apart from the NHS. In fact, the forecast is for a 16% reduction in spending in real terms in other departments until 2028. </p>
<p>With the inflation battle now under control, had the burden of interest payments been at much lower levels, it might have freed up more desperately needed resources to invest in growth-oriented plans and improve public services.</p><img src="https://counter.theconversation.com/content/194286/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Louise Overton has received funding from the abdrn Financial Fairness Trust for research into defined contribution decision-making and CHASM has received funding from Barrow Cadbury Trust and Friends Provident Foundation for their financial inclusion monitor.</span></em></p><p class="fine-print"><em><span>Phil Tomlinson receives funding from the Engineering and Physical Sciences Research Council (EPSRC) for Made Smarter Innovation: Centre for People-Led Digitalisation.</span></em></p><p class="fine-print"><em><span>Alan Shipman, Gavin Midgley, Hilary Ingham, and Shampa Roy-Mukherjee do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>National insurance cuts and business investment were all included, as was the pensions triple lock. But our experts saw some omissions.Alan Shipman, Senior Lecturer in Economics, The Open UniversityGavin Midgley, Senior Teaching Fellow in Accounting, University of SurreyHilary Ingham, Senior Lecturer, Department of Economics, Lancaster UniversityLouise Overton, Associate Professor in Social Policy Director of the Centre on Household Assets and Savings Management (CHASM), University of BirminghamPhil Tomlinson, Professor of Industrial Strategy, Co-Director Centre for Governance, Regulation and Industrial Strategy (CGR&IS), University of BathShampa Roy-Mukherjee, Associate Professor in Economics, University of East LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2125292023-08-30T03:45:46Z2023-08-30T03:45:46ZTaxing questions: is National glossing over the likely cost of administering its new ‘revenue measures’?<p>The National Party’s newly released <a href="https://assets.nationbuilder.com/nationalparty/pages/17859/attachments/original/1693346887/Back_Pocket_Boost.pdf?1693346887">tax package</a> makes a clear and politically prudent play for the middle-income vote. Proposing to alleviate the financial pain of this “squeezed middle”, it may be key to determining who forms the next government.</p>
<p>The package attempts to provide some tax relief without fuelling inflation. To pay for the proposed tax cuts, the party would introduce new “revenue measures”. Just what these might cost to set up and administer may be a missing element of the picture.</p>
<p>National has announced four key initiatives as part of its tax plan, with implications for those on middle incomes, as well as those at the top and bottom of the income spread: </p>
<p>• shifting income tax brackets to compensate for inflation</p>
<p>• expanding tax credits to reach more modest income earners</p>
<p>• introducing the “<a href="https://www.national.org.nz/familyboost">FamilyBoost</a>” childcare tax credit (while ending Labour’s extension of 20 hours’ early childhood education for two-year-olds that was scheduled to start in July 2024)</p>
<p>• increasing Working for Families tax credits for working families (from July 2024).</p>
<p>Relief measures aimed at superannuitants include promising to increase NZ Super annually – although that <a href="https://www.workandincome.govt.nz/about-work-and-income/news/2023/1-april-payment-rate-changes.html">already happens under the current scheme</a> – and to keep the <a href="https://www.workandincome.govt.nz/products/a-z-benefits/winter-energy-payment.html">Winter Energy Payment</a>. </p>
<p>Environmental measures are a mixed bag. The <a href="https://www.transport.govt.nz/area-of-interest/environment-and-climate-change/clean-cars/">Clean Car Standard</a> or “ute tax” will be abolished, as will the <a href="https://at.govt.nz/projects-roadworks/regional-fuel-tax/">Auckland Regional Fuel Tax</a>. National has also promised not to increase fuel levies in its first term. </p>
<p>The party’s plans for the Emissions Trading Scheme are vague, but polluters will be expected to pay more for the damage they cause in the future. As the tax policy makes clear, short-term concerns about the cost of living trump longer-term considerations about climate change. </p>
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<h2>Revenue neutral means new taxes</h2>
<p>To ensure the package is revenue neutral, four new taxes will be introduced. If the policy is aimed at those who vote, then three of the new taxes are aimed at shifting the tax burden to those who cannot vote. </p>
<p>The Foreign Buyer Tax (FBT) will be levied at a flat rate of 15% on residential properties worth more than NZ$2 million bought by non-residents. </p>
<p>A second stream of revenue will come from a tax on offshore gambling. </p>
<p>And a third will be from cost recovery from immigrants to cover public spending on the immigration system. To be competitive, charges will not exceed 90% of corresponding Australian immigration charges.</p>
<p>The last seems to be least problematic, although questions might be raised about barriers to overseas student entry. </p>
<p>While there are overseas examples of the FBT, National could face logistical hurdles in introducing something similar here. The Vancouver FBT, for example, piggybacks on the state transfer tax (stamp duty) and so there is an existing administrative structure. </p>
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Read more:
<a href="https://theconversation.com/mmp-in-new-zealand-turns-30-at-this-years-election-a-work-in-progress-but-still-a-birthday-worth-celebrating-194622">MMP in New Zealand turns 30 at this year’s election – a work in progress, but still a birthday worth celebrating</a>
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<p>It would be interesting to see whether a low-cost new tax can be introduced without existing infrastructure. </p>
<p>The casino tax seems most problematic. According to this new policy, a National government would establish a “regulatory regime” requiring foreign online betting operators to report their New Zealand income. This proposal seems fanciful. </p>
<p>It is also interesting to compare this initiative with the proposal to scrap Labour’s proposed extension of GST to providers of platform-based services, such as Airbnb. Both proposals are aimed at offshore services but Labour’s seems far easier to implement. </p>
<p>Generally, two of the new proposals appear to gloss over the massive IT costs that tend to accompany new taxes. Establishing a new bureaucracy to chase offshore companies also goes against the reduction of the public sector espoused by ACT, National’s likely partner. </p>
<p>The fourth proposal to scrap depreciation for commercial buildings, introduced during the COVID-19 pandemic, is the least National-like initiative. It seems to jar with the reinstatement of favourable tax treatment of rental properties. </p>
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<h2>Safeguarding the ‘un-squeezed top’</h2>
<p>If National’s package is aimed at helping the “squeezed middle”, it is likely to go some way to achieving that goal – and secure votes. What the package does not do is engage with the problem of tax-free wealth. </p>
<p>Just this week the International Monetary Fund once again <a href="https://www.rnz.co.nz/news/business/496786/new-zealand-economy-faces-year-or-more-of-tepid-growth-imf-report">urged New Zealand</a> to introduce a comprehensive capital gains tax. National’s package favours “the un-squeezed top” by reinstating tax deductions for rental properties, reducing the <a href="https://www.ird.govt.nz/property/buying-and-selling-residential-property/the-brightline-property-rule">brightline test</a> to two years, and leaving capital gains untaxed. </p>
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Read more:
<a href="https://theconversation.com/how-to-read-the-political-polls-10-things-you-need-to-know-ahead-of-the-nz-election-208738">How to read the political polls: 10 things you need to know ahead of the NZ election</a>
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<p>And the bottom? National would increase Working for Families tax credits. But as the Child Poverty Action Group have <a href="https://www.cpag.org.nz/our-campaigns/fix-working-for-families">consistently observed,</a> the discrimination against the children of non-working welfare recipients is unjustified and unfair.</p>
<p>Moving the income tax thresholds and extending eligibility for the Independent Earner Tax Credit are welcome. But these will make little difference to the lowest income earners. </p>
<p>Take a single person with no children earning the minimum wage of $22.70 per hour, working 37.5 hours per week ($44,265 a year). They gain around $1.30 a fortnight from the extended Independent Earner Tax Credit, and around $4.30 a fortnight from the income tax threshold movement. </p>
<p>So, roughly $5.60 a fortnight – not enough for a café coffee, let alone that lower priced tank of petrol the National Party policy also promises. </p>
<p>Contrast this with a single person without children who earns $180,000 per year. This person benefits to a greater extent from the movement of the income tax thresholds and gains $40 per fortnight – roughly seven times the gain of someone on minimum wage. </p>
<p>Combined with policies like the removal of the Community Connect public transport subsidies (targeted at young and low-income people) and stopping Fair Pay Agreements, there isn’t a lot here for the least well off. But these are probably not the voters National is after.</p><img src="https://counter.theconversation.com/content/212529/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The National Party’s tax package may be a middle-income vote winner, but it avoids the core problem of tax-free wealth. And how much the new system would cost to operate is far from clear.Jonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of WellingtonLisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1929032022-11-16T12:37:19Z2022-11-16T12:37:19ZAutumn statement 2022: this budget may not cause Truss-level chaos but it could still provoke markets<figure><img src="https://images.theconversation.com/files/495145/original/file-20221114-25-zvm0d8.jpg?ixlib=rb-1.1.0&rect=14%2C29%2C4896%2C3136&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Rishi Sunak's government is set to deliver its first budget statement on November 17 2022.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-united-kingdom-october-25-2022-2219757061">I T S / Shutterstock</a></span></figcaption></figure><p>Liz Truss’s short-lived government presided over an even shorter-lived <a href="https://www.msn.com/en-gb/money/other/no-10-reviews-kwarteng-e2-80-99s-mini-budget-measures-following-market-turmoil/ar-AA12QDG9">economic experiment</a> in “<a href="https://theconversation.com/liz-truss-a-brief-guide-to-her-economic-ideas-and-what-the-evidence-says-about-them-191735">Trussonomics</a>”. As investors responded to September’s mini-budget by demanding higher interest premiums to purchase UK debt, the government was unable to execute its plans. Truss was reduced to a helpless bystander as her new chancellor, Jeremy Hunt, started <a href="https://theconversation.com/emergency-budget-announcement-expert-reaction-to-new-uk-chancellors-attempt-to-calm-financial-markets-192669">dismantling her economic plans</a> before she even left office.</p>
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<p>When Conservative MPs installed Rishi Sunak as her successor, <a href="https://www.telegraph.co.uk/politics/2022/10/21/calm-competent-rishi-sunak-can-save-conservative-party/">many hoped</a> he could build on Hunt’s apparent success in starting to quell adverse financial market sentiment. He had, after all, spent all summer <a href="https://www.theguardian.com/commentisfree/2022/aug/28/sunak-and-truss-care-more-about-their-small-differences-than-the-crises-facing-britain">foretelling the dangers</a> that Truss’s financial plans posed to the British economy.</p>
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<p>Purely in terms of being seen to give markets what they want, initial signs looked positive for Sunak. By the time he became Conservative party leader on October 24, the <a href="https://www.ft.com/content/a5758ce9-f8f3-4013-aa97-81ff3db3eaf2">yields on 30-year gilts</a> had already returned to their pre-Truss levels, where they have subsequently remained. </p>
<p>Addressing journalists en route to the G20 summit in Indonesia less than three weeks later, he celebrated his and Hunt’s success in ridding financial markets of their most extreme anxieties about the UK. During the summit he went further to claim that the damage to the economy <a href="https://www.theguardian.com/politics/live/2022/nov/15/iain-duncan-smith-rishi-sunak-china-g20-jeremy-hunt-uk-politics-latest?filterKeyEvents=false&page=with:block-63737c128f08d41054ea82b2#block-63737c128f08d41054ea82b2">had already been repaired</a>. He attributed this to tens of billions of pounds of cuts to the UK’s public services being <a href="https://www.theguardian.com/uk-news/2022/nov/13/sunak-says-higher-taxes-and-spending-cuts-needed-to-satisfy-markets">anticipated</a> by financial markets ahead of the government’s Autumn statement.</p>
<p>Hunt’s budget announcement on November 17 is expected to deliver these widely-trailed reductions in public spending. The government clearly hopes that this will mark a decisive return to “normality”. However, it is too soon to declare Sunak home and dry – even if he can persuade Conservative MPs to vote for taxing people more for increasingly diminished public services.</p>
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<img alt="Liz Truss, green dress, lecturn, outside, police car and cordon." src="https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=363&fit=crop&dpr=1 600w, https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=363&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=363&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/495148/original/file-20221114-21-27czbw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Outgoing prime minister Liz Truss making her resignation speech in Downing Street on October 25 2022.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/downing-street-london-uk-25th-october-2219120279">Sean Aidan Calderbank / Shutterstock</a></span>
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<h2>A history of market reactions</h2>
<p>The story of brutally effective financial markets <a href="https://www.taylorfrancis.com/chapters/edit/10.4324/9780203982846-33/strong-national-economy-utopian-goal-end-twentieth-century-manfred-bienefeld?context=ubx&refId=42daee56-ed8e-452e-bbe6-7965caff4c5f">disciplining errant governments</a> has been repeated many times since the most recent wave of globalisation began in the 1990s. Markets often push up interest rates on national debt if they doubt a government’s commitment to <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-9485.00085">fiscal sustainability</a>. They might even hold an effective veto on the government’s policy choices, forcing interest premiums to heights where <a href="https://www.cambridge.org/gb/academic/subjects/politics-international-relations/comparative-politics/political-parties-growth-and-equality-conservative-and-social-democratic-economic-strategies-world-economy?format=PB">further borrowing becomes prohibitively expensive</a>. In this respect, the Truss government might be seen as merely the latest in a long list of those whose hubris resulted in a humiliating climbdown.</p>
<p>Academics have traditionally assumed, though, that this is a <a href="https://manchesteruniversitypress.co.uk/9780719054822/">specific problem for social democrats</a>. The literature often depicts financial markets’ <a href="https://www.cambridge.org/gb/academic/subjects/politics-international-relations/comparative-politics/great-transformations-economic-ideas-and-institutional-change-twentieth-century?format=PB">in-built distrust of the political priorities of centre-left governments</a>, causing them to demand more compensation for funding government debt.</p>
<p>For example, the Labour government of Harold Wilson won two UK general elections in 1974 on a platform of carefully rebuilding public services whose funding had been undermined by a previous <a href="https://www.abebooks.co.uk/9780582295353/Labour-Power-Study-Government-1974-79-0582295351/plp">interest rate hike</a>. The Socialist government of François Mitterrand came to power in France in 1981 having pledged to use nationalisation to guarantee a plentiful supply of jobs as the private sector faltered under pressure from <a href="https://www.fayard.fr/documents-temoignages/les-mondes-de-francois-mitterrand-nouvelle-edition-9782213701721">high interest rates</a>. Both, though, were required to reverse course two years into their term of office to try to suppress subsequent market disquiet at their alleged political overreach.</p>
<h2>The wider context</h2>
<p>By contrast, Truss campaigned for the Conservative Party leadership by promising to be the most <a href="https://link.springer.com/book/10.1057/9781137032249">pro-market British prime minister ever</a>. Unlike Wilson and Mitterrand, she did not spook market sentiment with the scale of the tax rises needed to finance greater public spending. The root of her problem was the inflationary effect of the budgetary black hole created by <a href="https://www.msn.com/en-gb/money/other/what-was-in-the-mini-budget-the-kwasi-kwarteng-tax-cuts-under-threat-if-liz-truss-u-turn-goes-ahead/ar-AA12X5ea">surprise unfunded tax cuts</a> for the richest. This giveaway was widely <a href="https://theconversation.com/why-imf-comments-on-the-uk-economy-spooked-traders-and-investors-191619">believed to be the opposite</a> of what the British economy actually needed. </p>
<p>Borrowing costs were already high because of the inflationary effects of unwinding COVID emergency programmes and Russia’s invasion of Ukraine. These effects might have been mitigated by borrowing to invest directly in rejuvenating the British economy. For example, paying for more NHS staff to tackle long-term health problems that <a href="https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/economicinactivity/articles/halfamillionmorepeopleareoutofthelabourforcebecauseoflongtermsickness/2022-11-10">deplete the workforce</a>, or investing in future skills levels by increasing spending on education. But Truss and Kwarteng wanted to borrow from financial markets simply to give that money away in tax cuts. So, financial markets said “no” when they <a href="https://duncanweldon.substack.com/p/learning-the-wrong-lessons">might have said “yes”</a> to the same level of borrowing for different purposes. </p>
<p>As for Sunak and Hunt, they have staked everything on persuading investors that they can force the economy to abide by <a href="https://www.theguardian.com/commentisfree/2022/nov/13/dont-be-taken-in-by-50bn-fiscal-hole-dodgy-tory-metaphor">fiscal rules of their own design</a>. It is a self-imposed constraint to act as if debt must start to fall as a proportion of GDP within three years. There is no evidence that investors also believe such a rule. They do take notice, however, when output is artificially suppressed, which is what the upcoming spending cuts could do. </p>
<p>It will take time to see if financial market sentiment is as unimpressed with the Sunak-Hunt path to doing the opposite of what the British economy needs as it was with the Truss-Kwarteng path. Many economists have <a href="https://truthout.org/articles/excel-spreadsheet-error-lessons-from-the-reinhart-rogoff-controversy/#:%7E:text=In%20short%2C%20the%20story%20of%20the%20Reinhart-Rogoff%20error,order%20to%20impose%20their%20will%20on%20the%20public.">lost faith in the idea</a> that there is an objective upper limit to sustainable debt-to-GDP ratios. So it is far from certain that investors will give the Autumn statement their seal of approval.</p><img src="https://counter.theconversation.com/content/192903/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Watson has received multiple sources of funding in the past from the UK Economic and Social Research Council. </span></em></p>Sunak and Hunt may hope for some normality after the budget, but markets may not be so content with the details.Matthew Watson, Professor of Political Economy, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1931502022-10-24T15:21:52Z2022-10-24T15:21:52ZRishi Sunak faces a very different economy to the one he left as chancellor – here’s what he must tackle as prime minister<p>As the <a href="https://www.bbc.co.uk/news/live/uk-politics-63327087">incoming UK prime minister</a>, Rishi Sunak has the immediate advantage of perceived success in his two years as chancellor. </p>
<p>His tenure ended last July when he <a href="https://www.gov.uk/government/publications/rishi-sunaks-resignation-letter-and-the-prime-ministers-response">resigned</a> due to a difference of opinion with then-prime minister Boris Johnson over the economy. But during his time as chancellor, he is credited with rescuing households and businesses from the effects of the COVID pandemic lockdowns by launching an innovative and impressively timely <a href="https://www.resolutionfoundation.org/publications/job-well-done/">furlough scheme</a>. He reversed a “<a href="https://www.spectator.co.uk/article/rishi-sunak-s-new-age-fantasy-and-the-great-tory-con">small state</a>” approach to become the private sector’s temporary paymaster, spending an unprecedented <a href="https://researchbriefings.files.parliament.uk/documents/CBP-9152/CBP-9152.pdf">£70 billion</a> to shorten the recession. </p>
<p>This image of having saved the nation by minimising the loss of national output and employment during the pandemic has outshone the less successful moments of his chancellorship. This includes inadequate <a href="https://www.gov.uk/government/publications/measuring-error-and-fraud-in-the-covid-19-schemes/error-and-fraud-in-the-covid-19-schemes-methodology-and-approach-an-update-for-2022">fraud-proofing</a> of furlough supports, the coronavirus surge that followed his “<a href="https://www.reuters.com/article/us-health-coronavirus-britain-vouchers-idUKKBN27F1IR">eat out to help out</a>” hospitality revival scheme and the discussion of his well-sheltered family finances.</p>
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<a href="https://theconversation.com/what-is-a-non-dom-an-expert-answers-our-questions-about-the-tax-status-claimed-by-rishi-sunaks-wife-and-other-wealthy-people-180928">What is a non-dom? An expert answers our questions about the tax status claimed by Rishi Sunak's wife and other wealthy people</a>
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<p>But as he takes up the UK’s highest office, the economic supports that enabled the furlough scheme have largely fallen away. The government’s long-term borrowing costs, previously close to zero, had <a href="https://www.reuters.com/markets/europe/uk-borrowing-costs-jump-again-boe-sticks-by-bond-plan-deadline-2022-10-12/">risen above 5%</a> by mid-October, even with the Bank of England shoring up demand to keep bond yields down. At the same time, <a href="https://www.bloomberg.com/news/articles/2022-10-19/a-52-billion-jump-in-mortgage-costs-fuels-risk-for-uk-lenders">consumer borrowing</a> has also risen in cost, dowsing any hope of a post-pandemic bounce-back of growth-promoting investment. </p>
<p>The UK now faces a <a href="https://edition.cnn.com/2022/10/21/economy/uk-credit-rating-outlook/index.html">worsening credit rating</a>, which is adding to the risk premium (and therefore cost) that investors place on public debt. And consumers are unlikely to spend their way out of the <a href="https://www.unbiased.co.uk/news/financial-advice/will-there-be-a-uk-recession-in-2022-what-it-could-mean-for-you">expected recession</a>. Millions are already struggling to meet rising food, fuel and mortgage bills, knowing their energy costs could jump again when the current <a href="https://www.theguardian.com/money/2022/oct/17/energy-price-guarantee-cap-household-bills-4347-april-hunt">price cap ends</a> in April 2023.</p>
<p>In the US, where Sunak earned his MBA and <a href="https://www.bbc.co.uk/news/uk-politics-61044847">made his fortune</a>, post-crisis presidents are often seen as “<a href="https://en.wikipedia.org/wiki/Lone_Ranger">Lone Ranger</a>” figures. They ride into town (with a masked companion) to resolve a desperate situation, winning over an initially sceptical public with effective steps that overcome past rivalries and injustices. </p>
<p>Contemporary American Conservatives have emphasised <a href="https://theimaginativeconservative.org/2014/02/lone-ranger-nationalist-myth-stephen-klugewicz.html">additional plot twists</a>: the Ranger must overcome prejudices and sidestep rigid laws to save the day. This certainly speaks to the task ahead for Sunak as he becomes the fifth UK prime minister in six years.</p>
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<img alt="Former prime minister Liz Truss stands at a lectern giving her resignation speech outside Number 10 Downing Street on October 20 2022." src="https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491394/original/file-20221024-496-q60vzl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Can Rishi Sunak clean up the economic mess left by Liz Truss, who resigned as UK prime minister on October 20 2022?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-united-kingdom-september-6-2022-2198582421">Fred Duval / Shutterstock</a></span>
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<h2>Staggering under stagflation</h2>
<p>Unusually, UK firms are experiencing widespread <a href="https://www.ft.com/content/a9677ee4-281d-4d0d-8456-661982890304">labour shortages</a> right now, among other supply constraints that usually characterise the peak of a boom rather than the brink of a recession. That’s down to the <a href="https://commonslibrary.parliament.uk/research-briefings/sn02791/">decade-long stagnation</a> of UK labour productivity. This is a problem that Sunak as a backbencher wanted to tackle with doses of deregulation and labour-market discipline, but which as chancellor he left unresolved.</p>
<p><a href="https://londoneconomics.co.uk/le/publications/pdf/EU%20integration%20and%20productivity.pdf">Productivity growth</a> picked up after the UK propelled the EU to complete its single market from 1992. So Sunak’s support for leaving the EU remains an obstacle to his re-uniting the Conservatives and rebuilding badly burnt bridges with European trade partners. Their importance has been heightened by the declining chance of any <a href="https://www.politico.eu/article/liz-truss-admits-us-trade-deal-out-of-reach/">transatlantic trade deal</a> and the <a href="https://www.imf.org/en/Blogs/Articles/2022/10/13/asia-sails-into-headwinds-from-rate-hikes-war-and-china-slowdown">slowdown</a> in the Chinese economy, which will dampen growth across emerging Asia.</p>
<p>So what’s a new prime minister to do? Having resigned from the cabinet in July, triggering the very Conservative infighting that has now led him to the top job, Sunak can leave the difficult fiscal choices to Jeremy Hunt, his successor as chancellor. But the prime minister still bears ultimate responsibility for the direction the government takes to deal with the economy. Hunt’s <a href="https://commonslibrary.parliament.uk/research-briefings/cbp-9643/">statements so far</a> have rescinded most of Kwasi Kwarteng’s mini-budget, indicating that the new government has no room for tax reduction and could be preparing for more <a href="https://ifs.org.uk/articles/response-chancellors-mini-budget-reversals">painful cuts in public spending</a> instead.</p>
<p>If Hunt sticks to the Conversatives’ election-winning <a href="https://www.conservatives.com/our-plan/economy">2019 pledge</a> of no rises in income tax, VAT or national insurance, the government will probably need to deploy “stealth taxes”. This means leaving working people to be taxed more as their wages rise to keep pace with prices while a four-year <a href="https://www.reuters.com/world/uk/britain-freeze-personal-tax-thresholds-until-2026-2021-03-03/">freeze in tax thresholds</a> imposed by Sunak is still in place. Social benefits could also be allowed to erode through being raised by <a href="https://www.theactuary.com/news/2022/10/19/hunt-refuses-be-drawn-triple-lock-pension-inflation-soars">less than inflation</a>.</p>
<p>The present high rate of inflation would also, in the past, have eased the government’s financial pressures by eroding the costs of public and private debt. But that shield has worn thin. Payments on <a href="https://www.investorschronicle.co.uk/news/2022/08/02/uk-government-debt-interest-payments-soar/#:%7E:text=The%20UK%20was%20an%20early,0.9%20per%20cent%20for%20Japan.">25% of the government’s debt</a> are now aligned with the inflation rate, and lenders are <a href="https://www.bbc.co.uk/news/business-63061534">rapidly passing on the rise</a> in borrowing costs to mortgage and credit card borrowers.</p>
<p>Former prime minister <a href="https://www.gov.uk/government/speeches/economy-speech-delivered-by-david-cameron">David Cameron</a> could cite an outgoing Labour government’s budget hole for earlier austerity rounds. But Sunak will struggle to blame his predecessors for the new fiscal squeeze the UK faces. Supporters of Kwarteng are likely to continually remind him – <a href="https://www.youtube.com/watch?v=q84P-eXYa1Q">as ex-prime minister Liz Truss did</a> on her way to beating him in the previous leadership contest – that tightening fiscal policy now will only <a href="https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022">deepen the recession</a> predicted by the <a href="https://www.theguardian.com/business/2022/sep/22/bank-of-england-interest-rate-rise-latest#:%7E:text=1%20month%20old-,UK%20in%20recession%2C%20says%20Bank%20of%20England%20as,raises%20interest%20rates%20to%202.25%25&text=Britain%E2%80%99s%20economy%20is%20now%20in,of%20inflation%20for%2040%20years.">Bank of England</a> and many independent analysts. </p>
<p>The rescuer from Number 11 must become “Austerity Rishi” now he’s moved next door. This could make it far more difficult for the Lone Ranger to ride into the sunset after saving the day.</p><img src="https://counter.theconversation.com/content/193150/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rishi Sunak is taking over as UK prime minister from Liz Truss during very difficult economic times.Alan Shipman, Senior Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1922432022-10-16T19:02:51Z2022-10-16T19:02:51ZIn sticking with tax cuts divorced from reality, Labor is left with a hard choice<p>The big question prior to Treasurer Jim Chalmers delivering the Albanese government’s first budget on October 26 has been whether it will seek to modify the “stage 3” tax cuts legislated by the Morrison government, with Labor’s support.</p>
<p>The cuts, set to come into effect in 2024, reduce the marginal tax paid on incomes between $45,000 and $200,000 to 30% (instead of the 32.5% now paid up to $120,000, 37% between $120,000 and $180,000, and 45% after that).</p>
<p>Labor promised before the election it <a href="https://www.alp.org.au/policies/lower-taxes">would implement</a> the cuts, but over the past few weeks it has encouraged a debate about abandoning this position, given changed circumstances. Nevertheless, it now appears the tax cuts will go ahead as legislated. </p>
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Read more:
<a href="https://theconversation.com/grattan-on-friday-should-anthony-albanese-keep-his-word-on-the-stage-3-tax-cuts-189790">Grattan on Friday: Should Anthony Albanese keep his word on the Stage 3 tax cuts?</a>
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<p>It’s worth considering that debate – and the comparisons drawn to the United Kingdom, where new Prime Minister Liz Truss announced a radical package of tax cuts, including reduced marginal rates for high income earners. </p>
<p>Within a matter of weeks she has been forced to scrap central elements of the package. She has now sacked her Chancellor of the Exchequer (treasurer) Kwasi Kwarteng, with whom she designed and announced the package. It looks like a doomed attempt to save her prime ministership. </p>
<p>Her backdown emboldened those calling for a similar policy shift in Australia. The parallels aren’t exact, but there are plenty of similarities between the economic and political difficulties faced by the UK and Australian governments.</p>
<h2>What made the UK cuts different?</h2>
<p>In both countries, the response to the COVID pandemic was broadly successful in keeping unemployment down and allowing for a rapid return to the pre-pandemic growth path. </p>
<p>High inflation, rising interest rates and sharp increases in energy costs now threaten to derail this recovery. The UK also faces extra challenges of its own making, with the mismanagement of Britain’s exit from the European Union disrupting exports to Europe and creating labour shortages. </p>
<p>Under previous prime minister Boris Johnson, the UK government’s economic response was more or less similar to that of other countries – with a modest <a href="https://www.theguardian.com/politics/2021/sep/07/boris-johnson-unveils-12bn-a-year-tax-rise-to-pay-for-nhs-and-social-care">increase to national insurance contributions</a> and cost-of-living increase to welfare payments. </p>
<p>After replacing Johnson, Truss <a href="https://www.theguardian.com/politics/2022/sep/08/liz-truss-to-freeze-energy-bills-price-at-2500-a-year-funded-by-borrowing">announced a radical package</a> combining a massive fuel subsidy with equally <a href="https://www.cnbc.com/2022/09/23/uk-government-dishes-out-tax-cuts-as-country-braces-for-recession.html">massive tax cuts</a> mostly benefiting corporations and high-income earners. </p>
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<img alt="Britain's Prime Minister Liz Truss, centre, at the Conservative Party Conference in Birmingham, October 3 2022, shortly after the government announced it was abandoning the tax-cut plan." src="https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/489490/original/file-20221013-13-r87pwv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Britain’s Prime Minister Liz Truss, centre, at the Conservative Party Conference in Birmingham, October 3 2022, shortly after the government announced it was abandoning the tax-cut plan.</span>
<span class="attribution"><span class="source">Tolga Akmen/EPA</span></span>
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<p>No offsetting savings were announced, although it was hinted that welfare benefits would not be raised in line with inflation. Estimates of the cost were £100 billion to £150 billion (7-10% of Britain’s annual national income), of which about half was associated with the tax package.</p>
<p>The public reaction was swift and hostile. But what mattered more was the response of financial markets.</p>
<p>Fears of inflation, which would reduce the real value of government bonds, led to holders of those bonds selling them off. Since market interest rates – that is, the return demanded by bond holders – move in the opposite direction to bond prices, these rates rose sharply. </p>
<p>The pound plummeted in value, as traders expected its real value to decline. Major pension funds, which employed complex strategies to manage their holdings of bonds, <a href="https://www.standard.co.uk/business/money/bank-of-england-may-need-to-extend-emergency-action-says-pensions-association-b1031845.html">faced collapse</a>. The Bank of England was forced to intervene by stepping in to inflate demand for government bonds. </p>
<p>Truss backed down on scrapping the top marginal tax rate of 45%, paid on income in excess of £150,000 (about A$250,000). This saved <a href="https://www.nytimes.com/2022/10/03/world/europe/uk-tax-rate-cut.html">about £2 billion</a>. In a second backdown late last week, Truss accepted a previously announced increase in corporate tax rates, which she had planned to cancel, would go ahead after all. But the equally regressive cut in national insurance contributions remains, along with a range of business handouts. </p>
<h2>Projections now bear no relation to reality</h2>
<p>Truss’s tax package was ideologically extreme. But it was, at least, designed as a response to current conditions. </p>
<p>By contrast, Australia’s stage 3 tax cuts were planned and legislated <a href="https://www.smh.com.au/business/the-economy/federal-budget-2018-income-tax-cuts-explained-20180507-h0zq0e.html">in 2018</a>, on the basis of economic projections that now bear no relation to reality.</p>
<p>As their name implies, they followed two previous rounds of tax cuts. Stages 1 and 2, which came into effect in 2018-19 and 2020-21 respectively, were smaller and largely designed with the political goal of smoothing the path for stage 3. </p>
<p>Because of the unexpected acceleration of inflation, most of the tax relief these cuts provided for low- and middle-income earners will be eroded by bracket creep – the process by which inflation pushes incomes into higher tax brackets, even with no change in the real value of those incomes.</p>
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Read more:
<a href="https://theconversation.com/that-243-billion-saving-from-axing-the-stage-3-tax-cut-is-more-mirage-than-reality-190350">That $243 billion 'saving' from axing the Stage 3 tax cut is more mirage than reality</a>
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<p>Moreover, some of the stage 1 cuts are temporary – implemented by then treasurer Scott Morrison as the so-called Low and Middle Income Offset (LMITO) rather than as a permanent change in tax rates. </p>
<p>This measure was originally due to expire in 2020-21, but Morrison extended it to 2021-22. Unless Chalmers extends it again, many Australians on modest incomes will face a tax increase this financial year, as their wealthier compatriots look forward to a cut.</p>
<p>As with the Truss tax measures, stage 3 massively favours high earners, with 70% of the benefits going to the 10% of taxpayers who earn more than $120,000 a year.</p>
<h2>Let debt grow or cut services?</h2>
<p>The macroeconomic impacts of the stage 3 cuts remain to be seen. But no one now can see them as a sensible response to economic difficulties likely to worsen over the next couple of years.</p>
<p>One idea that emerged from the past few weeks of debate was to maintain part of the cuts, by reducing the 32.5% marginal tax rate on incomes between $45,000 and $120,000 to 30%, while scrapping or scaling back the cuts for incomes between $120,000 and $180,000.</p>
<p>But with the tax cuts going ahead exactly as they were legislated in 2018, the Albanese government is left the same dilemma as in the UK: a choice between growing debt and cutting expenditure on vital services. </p>
<p>At a time when wages are failing to keep pace with inflation, while profits are booming, it’s not the kind of choice any government would normally like to make.</p><img src="https://counter.theconversation.com/content/192243/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>By sticking to a tax-cut plan made in 2018, the Albanese government must choose between debt and services.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1917962022-10-05T14:04:59Z2022-10-05T14:04:59ZTruss cut the most popular taxes – this wasn’t an accident, but it may be a mistake<p>The <a href="https://www.telegraph.co.uk/politics/2022/10/03/secret-midnight-meeting-killed-45p-tax-cut/?li_source=LI&li_medium=li-recommendation-widget">recent U-turn</a> on cutting the top rate of income tax has shown that even a government willing to “<a href="https://www.theguardian.com/politics/video/2022/sep/20/liz-truss-willing-to-do-unpopular-things-to-grow-uk-economy-video">do unpopular things</a>” to grow the UK economy is constrained by the need for public support. </p>
<p>The negative public reaction to chancellor Kwasi Kwarteng’s September 23 mini-budget came in part from its <a href="https://www.theguardian.com/uk-news/2022/sep/30/how-kwasi-kwarteng-mini-budget-hit-uk-economy-in-numbers">impact on Britain’s economy</a>. But even before the financial market reaction, the design of the Conservative fiscal plan shows Truss believes that getting the right set of economic policies for growth means paying less attention to <a href="https://theloop.ecpr.eu/to-understand-the-politics-of-taxation-we-must-understand-how-the-public-thinks-the-economy-works/">public opinion</a> about taxes. </p>
<p>Certainly, governments need to raise revenues, and cutting taxes is often politically advantageous. But the popularity payoff in terms of “bang for buck” varies because some taxes are <a href="https://www.tandfonline.com/doi/full/10.1080/13501763.2021.1992485">more popular among voters</a> as a way to raise revenue than others. Cutting the most hated taxes, therefore, should deliver more of an electoral boost than cutting those that are more popular. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/I_bz4uNXmgs?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">UK prime minister Liz Truss has said she is prepared to “do unpopular things” to boost economic growth.</span></figcaption>
</figure>
<p>It is hard to compare which taxes are more unpopular, however. This is because they take different amounts of money, as well as being different types of tax. So, to work out which are the most or least popular ways for the government to raise revenues, asking people to compare tax increases or decreases with the same impact on revenues is useful. For example, you might ask someone: “If you could choose, which tax would you cut to reduce government revenue by £1 billion?”</p>
<p>As part of our <a href="https://ajps.org/2021/07/13/measuring-attitudes-towards-public-spending-using-a-multivariate-tax-summary-experiment/">ongoing research</a> into attitudes towards government budgets, we <a href="https://benjaminlauderdale.net/files/papers/BarnesDeRomemontLauderdale_TaxPreferences_EPOP.pdf">conducted a survey</a> last year among a representative sample of the UK public that asked such questions, based on tax rate and threshold changes that would lead to the same revenue increase or decrease. We gave people a choice between two specific options. This let us measure the relative popularity of different taxes as a means of raising revenue, and the reverse – the relative support for different types of cuts (that is, changes that reduce the overall tax take). </p>
<p>For the purposes of our research, popular taxes are those that more of the respondents would choose to increase to raise revenues or at least wouldn’t decrease, given the choice. Unpopular taxes are those that more people would choose to cut and fewer would choose to increase.</p>
<h2>The popularity vote</h2>
<p>We found that people were not keen on cuts to corporation tax, alcohol and tobacco duties, and the higher and additional rates of personal income tax.</p>
<p>But these were almost exactly the same as those the government chose to cut (or cancelled proposed raises for) in September’s mini-budget. The abolition of the 45p rate of income tax was the fourth most unpopular way to cut taxes out of the 23 options we presented.</p>
<p>Not all of the changes announced in the mini-budget were unappealing to our survey respondents, however. Reversing the changes to National Insurance and cutting the basic rate of income taxation have more support among the members of the public that we surveyed. But more of the public would prefer increases to the personal allowance and the higher rate threshold as ways to reduce the income tax burden.</p>
<p>The fact that the government chose otherwise is not simply a case of trying to appeal to Conservative voters either. The evidence indicates that these preferences are widely shared across the population, as well as among Conservative voters. </p>
<p>For example, we found that Corporation Tax is the second most popular way for generating public revenues among Conservative voters. Alcohol and tobacco duties are Conservative voters’ favourites, which aligns with the <a href="https://twitter.com/PickardJE/status/1576956562681499649">lukewarm reception</a> for freezing them at the Conservative Party conference. Conservatives like the 45p rate of income tax less than their Labour counterparts, according to our survey, but they still see it as a reasonable way to raise the revenue. Only alcohol and tobacco, taxing corporations, or raising the 40p rate of income tax are more popular cuts among Conservatives.</p>
<p>This is also not a case of the government simply appealing to the better off. Those with incomes above £45,000 hold very similar views to those with incomes below that amount, our research shows. And, if anything, they are more supportive of maintaining higher rates of tax on corporations and higher personal incomes. </p>
<p>These findings indicate that preferences over the composition of taxation are not especially driven by a “tax someone other than me” dynamic. Rather, there is widespread support for the broadest shoulders to bear the heaviest loads – even among those likely to bear the brunt.</p>
<figure class="align-center ">
<img alt="Black background, red scissors, " src="https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488062/original/file-20221004-19-11kfbb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Truss government wants to cut taxes to increase economic growth.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/scissors-alphabet-taxes-563060884">Art_Photo / Shutterstock</a></span>
</figcaption>
</figure>
<h2>Cutting council tax</h2>
<p>So, what taxes could the government have suggested cutting if it wanted to align with popular preferences? We already noted that increasing the personal income tax threshold would be a more popular giveaway. Equally popular, according to our survey, and <a href="https://www.theguardian.com/politics/2021/mar/14/reform-urged-for-outdated-council-tax-that-hits-poor-hardest">widely recognised as necessary</a>, are reforms and reductions in council tax. Indeed, when pitted against corporation tax, our research shows the public prefer cuts to council tax 68% to 32%.</p>
<p>These patterns suggest that we should take Truss’s stated desire to pursue unpopular policies to achieve economic growth seriously. Truss and Kwarteng clearly believe the public are wrong about tax policy because the cuts they have chosen to make are relatively unpopular among the public at large, Conservative voters and even higher earners, who will benefit most directly from them. So these are the tax cuts to choose when you do not feel constrained by public opinion.</p>
<p>Unfortunately for the government, since concerns about its tax policy are shared by its own voters and its MPs, it may not be able to continue ignoring the constraints imposed by public opinion.</p><img src="https://counter.theconversation.com/content/191796/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lucy Barnes receives funding from UKRI. </span></em></p><p class="fine-print"><em><span>Ben Lauderdale receives funding from ESRC. </span></em></p>Some taxes are more popular than others in the eyes of the public.Lucy Barnes, Associate professor in Comparative Politics, UCLBenjamin Lauderdale, Professor of Political Science, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1915232022-09-28T15:33:29Z2022-09-28T15:33:29ZOnly a U-turn by the government or the Bank of England will calm UK financial markets<p>The <a href="https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation?sf170940617=1">Bank of England</a> has promised to take action to calm the financial market mayhem that has followed the announcement of major tax cuts by the UK government.</p>
<p>The Bank plans to temporarily buy <a href="https://www.reuters.com/markets/europe/bank-england-buy-long-dated-bonds-suspends-gilt-sales-2022-09-28/">whatever quantity</a> of long-term debt is required to stabilise the cost of government borrowing, which has skyrocketed in response to Chancellor Kwasi Kwarteng’s new <a href="https://www.bbc.co.uk/news/business-63001463">economic plan</a>. The difficulty is that the Bank is also expected to further raise interest rates in order to fight inflation, which will also increase the cost of borrowing, making it harder for the government to stick to its plan.</p>
<p>This latest intervention underlines how intertwined monetary policy – the tools used by a central bank to support a country’s economic growth – is with fiscal policy – the tools used by the government to achieve the same ends. What the government does affects what the Bank has to do and vice versa. It also indicates that either the government or the central bank must consider changing their stated course to address the current economic crisis, or risk continued financial market volatility.</p>
<p>Under normal circumstances, the Bank of England should set interest rates to stabilise inflation over a medium-term time horizon of around two years. When the Bank anticipates that inflation is rising, it can control that by raising interest rates to discourage consumption spending by households and investment by firms. This reduced spending on goods and services is intended to slow the rise in prices.</p>
<p>With the central bank acting in this way, the government is free to conduct fiscal policy in line with its objectives, provided these policies ensure that government debt remains sustainable in the long-run. That is, whatever the mix of taxation and spending chosen by the government, it must ensure that over time it raises enough tax revenues to pay for public expenditure without unsustainable increases in borrowing. </p>
<p>Different governments may make different choices about the size of the state (that is, how much they tax and spends on public services) and whether economic efficiency or equality should be the priority. Regardless, the books must still balance in the long run.</p>
<p>This conventional view relates to “normal” times, however. During the financial crisis and the COVID-19 pandemic, when interest rates were more or less at zero, the Bank of England was forced to engage in unconventional monetary policies such as <a href="https://www.bankofengland.co.uk/monetary-policy/quantitative-easing">quantitative easing</a> (printing money to buy government debt) in order to support the economy. </p>
<p>While giving fiscal policy a greater role in supporting the economy in such situations may be appropriate, once the situation begins to normalise the government’s tax and spending decisions should return to being sustainable.</p>
<h2>Crisis of confidence</h2>
<p>The recent so-called mini budget saw the government take a number of steps that reduced market confidence in its commitment to sound fiscal policy. </p>
<p>The removal of the permanent secretary to the Treasury, <a href="https://www.theguardian.com/uk-news/2022/sep/08/tom-scholar-permanent-secretary-to-the-treasury-sacked-by-liz-truss">Tom Scholar</a>, the suspension of the government’s <a href="https://www.civilserviceworld.com/professions/article/kwarteng-will-need-to-tweak-fiscal-rules-for-30bn-taxcuts">fiscal rules</a>, failure to accompany the mini-budget with <a href="https://www.theguardian.com/politics/2022/sep/20/kwasi-kwarteng-urged-to-allow-release-of-obr-forecasts-with-mini-budget">forecasts</a> from the independent Office for Budget Responsibility, and the suggestion by Kwasi Kwarteng in a <a href="https://www.bbc.co.uk/news/live/uk-62995546">post-budget interview</a> that more tax cuts were to come, all signalled to the markets that rising debt levels were not a concern for the government.</p>
<p>The government has argued that its tax cuts will “grow the economy”, increasing tax revenues to pay for improved public services. The idea is that tax cuts can motivate workers and entrepreneurs so much that tax revenues rise despite tax rates being lower. </p>
<p>Most economists are unconvinced that these arguments apply, generally, to the UK today, and it is unlikely that any growth will be sufficient to pay for these tax cuts. Various <a href="https://ifs.org.uk/articles/mini-budget-response">analyses</a> of the mini budget <a href="https://www.resolutionfoundation.org/publications/blowing-the-budget/">suggest</a> debt will rise as a result of Kwarteng’s measures. </p>
<p>Comments by organisations including the <a href="https://www.reuters.com/markets/europe/reversing-uk-confidence-crash-requires-policy-u-turn-economists-2022-09-27/">IMF</a>, as well as economists such as Nobel prize-winner <a href="https://www.nytimes.com/2022/09/23/opinion/uk-truss-tax-cut-economy.html">Paul Krugman</a> and former US Treasury secretary <a href="https://www.cnbc.com/2022/09/27/larry-summers-blasts-uks-utterly-irresponsible-fiscal-policy.html">Larry Summers</a>, say the same thing. </p>
<p><a href="https://uva.theopenscholar.com/files/eric-leeper/files/leeper-leith-handbook-feb2016-final.pdf">Economic theory</a> also suggests that an alternative combination of monetary and fiscal policy is viable. When the government does not make sufficient effort to raise taxes or reduce public expenditure to stabilise government debt, the central bank can soften its monetary policy, meaning it allows inflation to rise to reduce the value of excess government debt.</p>
<p>A large part of the reduction in debt following the second world war was achieved by a combination of low interest rates and high inflation in the 1960s and 1970s, which reduced the returns to bond holders. </p>
<p>But since the Bank of England was made independent in 1997, the government no longer has any control over how interest rates are set by the central bank. Revoking this independence would be seen as undesirable today, but remains a theoretical possibility. </p>
<figure class="align-center ">
<img alt="A hand turning blocks reading " src="https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=351&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=351&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=351&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=441&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=441&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487055/original/file-20220928-12-u0zwwd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=441&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The government’s tax cut plan has led to a stand-off with the Bank of England.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/fiscal-monetary-policies-symbol-businessman-turns-1908099391">Dmitry Demidovich / Shutterstock</a></span>
</figcaption>
</figure>
<h2>Playing chicken</h2>
<p>Instead, the current situation features an independent (as of 1997) Bank of England reaffirming that it will do whatever needs to be done to stabilise inflation. At the same time, the government is relaxing fiscal policy without (yet) publishing a clear plan on how the deficit will be eliminated and the growth in government debt curtailed. </p>
<p>This implies a game of chicken between the Bank of England and the UK government. The Bank is raising interest rates to fight inflation. This also raises the interest payable on government debt, exacerbating the deficit created by tax cuts and further increasing government debt. With UK debt levels at their highest since the second world war, one of these policy makers has to blink and change policy. </p>
<p>Either the Bank of England pulls back from the tightening in monetary policy needed to fight inflation and stabilise the pound, or the government acts to return fiscal policy to a more sustainable footing by at least presenting a credible plan for raising taxes or reducing expenditure. </p>
<p>If there is no clear resolution to this tension, we can expect further volatility in the financial markets as investors try to guess which policy maker will execute a U-turn. The Bank’s current approach of raising rates to fight inflation at the same time as buying government bonds to reduce their interest rate and support financial stability, highlights the dilemma it faces.</p><img src="https://counter.theconversation.com/content/191523/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Campbell Leith has received funding from the Economic and Social Research Council. </span></em></p>The expected relationship between government and central bank policy has broken down in the UK.Campbell Leith, Professor of Macroeconomics, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1911402022-09-26T17:24:54Z2022-09-26T17:24:54ZMini budget: how will tax cuts and stamp duty affect young adults?<figure><img src="https://images.theconversation.com/files/486497/original/file-20220926-6718-3ixjga.jpg?ixlib=rb-1.1.0&rect=57%2C74%2C5445%2C3588&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-darkskinned-man-woman-analyzing-their-577523986">Cast Of Thousands / Shutterstock</a></span></figcaption></figure><p>UK chancellor Kwasi Kwarteng has announced a <a href="https://theconversation.com/mini-budget-2022-experts-react-to-the-new-uk-governments-spending-and-tax-cut-plans-191274">series of measures</a> aimed at boosting the economy as the UK faces a recession and continued cost of living crisis. The budget is a political and economic gamble based on the logic that boosting consumption will bring investment and longer-term growth. </p>
<p>The new measures (mainly £45 billion in tax cuts, on top of an estimated £100 billion in <a href="https://www.itv.com/news/2022-09-05/who-will-pay-for-liz-trusss-100-billion-energy-bail-out">energy subsidies</a>) mean a gargantuan increase in government expenditure, funded by extra borrowing. This will result in a great deal more government debt passed on to future generations, but some of the policies will have a more urgent impact on young adults. </p>
<p>Sadly that’s not likely to include the bringing forward of a 1p cut to income tax, and reversing a planned 1.25p increase in national insurance contributions. The combined effect of these cuts will be most felt by the wealthiest people. <a href="https://www.ft.com/content/3a0c52cd-acbb-483c-a7ac-01fe7cd4e89e">The tax savings</a> on an income of £20,000 will only be as much as £218, while someone on £200,000 will be rewarded with a whopping £4,333 in tax cuts. In this example, ten times more income brings 20 times more in savings. </p>
<p>What could have more impact is the announcement of a discount on <a href="https://www.bbc.co.uk/news/business-53319433">stamp duty</a> (the tax paid when you buy a house), which could potentially help some first time buyers with small deposits to buy a property. For most aspiring homeowners however, this is not necessarily good news. The effect of the discount will be to keep house prices high, at least at first – not what you want when you’re trying to buy.</p>
<p>Rising mortgage interest rates, combined with less disposable income due to the cost of living crisis, would normally force house prices to fall. That’s especially true after a period of <a href="https://www.theguardian.com/business/2022/mar/07/uk-house-prices-rise-at-fastest-rate-in-15-years-says-halifax">steep jumps</a> in real estate prices. But the government doesn’t want that, and hopes the stamp duty cut will make it more appealing for people to buy houses. </p>
<p>Supporting real estate may also have the knock-on effect of fuelling demand for goods and services such as solicitors, estate agents, furniture, white goods and tradespeople. There is also the “wealth effect”: economists have long associated consumers’ perceived property wealth with their <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1283.pdf">spending behaviour</a>. If you believe your house is worth a lot, you feel financially secure, allowing yourself to save less and spend more. </p>
<hr>
<figure class="align-right ">
<img alt="Quarter life, a series by The Conversation" src="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><strong><a href="https://theconversation.com/uk/topics/quarter-life-117947?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">This article is part of Quarter Life</a></strong>, a series about issues affecting those of us in our twenties and thirties. From the challenges of beginning a career and taking care of our mental health, to the excitement of starting a family, adopting a pet or just making friends as an adult. The articles in this series explore the questions and bring answers as we navigate this turbulent period of life.</em></p>
<p><em>You may be interested in:</em></p>
<p><em><a href="https://theconversation.com/quiet-quitting-is-a-new-name-for-an-old-method-of-industrial-action-189752?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Quiet quitting is a new name for an old method of industrial action</a></em></p>
<p><em><a href="https://theconversation.com/hope-from-despair-how-young-people-are-taking-action-to-make-things-better-184859?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Hope from despair: how young people are taking action to make things better</a></em></p>
<p><em><a href="https://theconversation.com/how-to-spend-time-wisely-what-young-people-can-learn-from-retirees-189340?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">How to spend time wisely – what young people can learn from retirees</a></em></p>
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<p>It’s possible that despite the stamp duty cut, house prices will <a href="https://www.telegraph.co.uk/money/consumer-affairs/why-stamp-duty-cut-wont-stop-catastrophic-house-price-crash/">ultimately fall anyway</a>. Knocking off £3,000 on the cost of buying a house will not offset the combined impact of higher energy prices, food costs and of course, interest rates. There will always be more buyers than sellers for quality UK properties, but now each buyer will be armed with smaller mortgages. This could be an opportunity for a first-time buyer. </p>
<p>But it could also hurt renters, as landlords pass on the additional costs of higher interest rates and remortgaging to their tenants. <a href="https://www.estateagenttoday.co.uk/features/2019/7/theresa-mays-legacy-how-has-housing-fared-under-her-government">Past Conservative governments</a> also increased some of the taxes that landlords pay on rental income. These factors have already contributed to steep <a href="https://www.theguardian.com/business/2022/jul/14/private-rents-in-uk-reach-record-highs-with-20-rises-in-manchester">increases in rents</a>, up to 20% in some areas. </p>
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Read more:
<a href="https://theconversation.com/cost-of-living-crisis-what-are-your-rights-if-your-landlord-wants-to-increase-your-rent-189089">Cost of living crisis: what are your rights if your landlord wants to increase your rent?</a>
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<h2>Preparing for recession</h2>
<p>Liz Truss’s government is following an economic doctrine which argues that richer people are more likely to invest, set up businesses, hire people and grow the economy. But when this theory has been tested in the past, it hasn’t <a href="https://www.theguardian.com/politics/2022/sep/23/kwasi-kwarteng-tax-giveaway-huge-gamble">ended well</a>. Still, tax cuts are tax cuts, and the government’s gamble may pay off. They’ve also announced a freeze in alcohol duty – cheaper drinks over which to commiserate with friends. </p>
<figure class="align-center ">
<img alt="A red Monopoly house marker sitting on top of a pile of pound coins" src="https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/486503/original/file-20220926-14-mro6wx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A cut to stamp duty will keep already-high house prices up.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/housing-cost-red-house-british-currency-642056404">Ink Drop / Shutterstock</a></span>
</figcaption>
</figure>
<p>Unemployment currently <a href="https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment">stands at 3.6%</a>, a nearly 50-year low. Low unemployment means that companies are likely to compete for the best staff and more likely to offer better pay packages to their employees. Indeed, this year graduate salaries rose at the <a href="https://ise.org.uk/page/graduate-salaries-rise-at-fastest-rate-in-20-years">fastest rate</a> in the last 20 years.</p>
<p>However, it is also important to <a href="https://money.com/why-teachers-are-quitting-pandemic/">improve the quality</a> of existing jobs, protect the struggling UK public sector and build skills for younger people. This includes nurses and teachers, who have quit their jobs <a href="https://www.healthcaredive.com/news/nurse-burnout-covid-quit-travel-incredible-health/620488/">in droves</a>, and the <a href="https://www.tuc.org.uk/news/gig-economy-workforce-england-and-wales-has-almost-tripled-last-five-years-new-tuc-research">4.4 million</a> gig economy workers, most of them <a href="https://www.forbes.com/sites/eriksherman/2021/12/28/getting-a-better-view-of-gig-workers-younger-poorer-mostly-doing-it-on-the-side">young</a> and easier to exploit through lack of <a href="https://www.tuc.org.uk/blogs/poverty-pay-uk-millions-self-employed-earn-less-minimum-wage">pay</a>, pensions, holiday and sick pay.</p>
<h2>What you can do to protect yourself</h2>
<p>As interest rates rise, it makes sense to pay off or at least avoid taking on extra debt. If you’re applying for a new mortgage or remortgaging, fix the interest rate for at least two years if you can – interest rates will only get higher in the next few months and possibly beyond. By all means, chase a professional opportunity and seek a promotion or a pay rise, but perhaps hold off on switching jobs. With a recession coming, many employers may follow a “last in, first out” approach with their staff – you don’t want to be the first out. </p>
<p>If you have some cash in the bank, these can be good times. Interest you can earn on savings accounts is going up and even better deals are likely on the way. It can also be a good time to invest. Markets are falling hard and will continue to fall for as long as bad news outweighs the good. Inflation, rising interest rates, recession and panic can be unlikely friends, bringing you closer to a good deal in real estate or the stock market if you take a long-term view. </p>
<p>A good investment can multiply your money, but finding deals takes time and effort. Diversify your portfolio and avoid crypto and NFTs. People are more susceptible to making risky investments when they feel under economic pressure – people on lower incomes buy more lottery tickets than the rich. As interest rates rise, these investments will fall in value.</p><img src="https://counter.theconversation.com/content/191140/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Tziamalis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An economist explains what young people need to know about the mini budget, and how to protect yourself financially.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1913702022-09-26T14:37:14Z2022-09-26T14:37:14ZSterling hits all-time low: two things can turn this around but neither is straightforward<p>While most people in the UK were still in bed in the early hours of Monday morning, the pound dived. It fell over 4% during Asia trading to reach its lowest ever level against the dollar of US$1.035, while also hitting €1.079 against the euro. This was an exceptional fall, and continues its 3% decline against the US dollar on Friday in response to the hefty borrowing and tax-cutting in Chancellor Kwasi Kwarteng’s mini-budget. </p>
<p><strong>Pound v US dollar since mini-budget</strong></p>
<p>In parallel, traders have been dumping British government bonds, which is driving up long-term interest rates or yields. The yield on ten-year bonds, which heavily influences mortgage rates and other bank lending, is now above 4% for the first time since its highs following the 2007-09 financial crisis. </p>
<p><strong>UK Ten-year bond yields 2007-22</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="UK 10-year bond yields" src="https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=317&fit=crop&dpr=1 600w, https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=317&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=317&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=398&fit=crop&dpr=1 754w, https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=398&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/486528/original/file-20220926-899-2vejhj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=398&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.tradingview.com">TradingView</a></span>
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</figure>
<p>The pound rebounded back above US$1.08 in the hours after the European markets opened, while ten-year bond yields have also eased a little. It is possible that the pound crash during the Asia session was over-extended because trading volumes in the British currency are lower, which makes it easier for smaller amounts of money to make a bigger impact on the market. It is not uncommon for lows to be made in early Asia trading, as has been the case in previous <a href="https://theconversation.com/flash-crashes-if-reforms-arent-ramped-up-the-next-one-could-spell-global-disaster-109362">currency crashes</a>.</p>
<p>On the other hand, <a href="https://www.bloomberg.com/news/articles/2022-09-26/probability-of-pound-sliding-to-parity-this-year-jumps-to-60">many analysts think</a> the pound reaching parity with the US dollar is increasingly likely. So where is all this heading and what will the consequences be?</p>
<h2>The mini-budget gamble</h2>
<p>The pound has <a href="https://www.ifcm.co.uk/market-data/personal-instrument-pci-prices/gbp-index">already been weakening</a> for over a year. This is partly because the US dollar has been getting stronger as the US Federal Reserve has raised interest rates and reduced the supply of dollars to try and get inflation under control, and partly because the UK with its exposure to high gas prices and post-Brexit challenges does not look like a great prospect for economic growth. </p>
<p><strong>Pound v US dollar 1972-2022</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="GBPUSD chart since 1972" src="https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=334&fit=crop&dpr=1 600w, https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=334&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=334&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=420&fit=crop&dpr=1 754w, https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=420&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/486526/original/file-20220926-20-m3p6oe.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=420&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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<span class="attribution"><a class="source" href="https://www.tradingview.com">TradingView</a></span>
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</figure>
<p>The new Truss government’s economic and fiscal policies have made the market even more uneasy. They are <a href="https://theconversation.com/mini-budget-will-kwasi-kwartengs-plan-deliver-growth-191285">based on</a> a combination of energy subsidies and huge tax giveaways – particularly to high-income households and homeowners – which will increase annual borrowing by more than £100 billion. </p>
<p>The tax-cutting, which covers £45 billion of that increase, is a shift away from the direct transfers of money from governments to households and businesses that have been used to help maintain consumption since 2008 in the UK and many other countries. The benefits of tax-cutting in stimulating the economy <a href="https://www.investopedia.com/terms/s/supply-sidetheory.asp#:%7E:text=The%20supply%2Dside%20theory%20is,attempts%20to%20stimulate%20the%20economy">are more delayed</a>, which makes them more uncertain than direct handouts. In a situation where there is arguably a need for immediate action to support consumption because people’s purchasing power is being eroded by rising inflation, direct cash transfers would have been faster acting. </p>
<p>Tax cuts may not even work here. People in the UK may well see the negative reaction from the markets and become more pessimistic about the prospects for the economy. If so, they are likely to spend less, which would weaken growth as opposed to increasing it in the way that the government is hoping for. The government deficit – the gap between how much it spends compared to how much it brings in – would then increase and the tax cuts would be counterproductive. </p>
<p>Either way, the weaker pound is going to further exacerbate UK inflation by making imports more expensive. At the same time, the rise in bond yields will potentially damage growth by increasing lending costs and making consumers feel poorer. It will also make the extra government borrowing in the mini-budget even more expensive than it was going to be already. All of this is likely to put further pressure on the public finances. </p>
<p>This is all a reminder that politically motivated economic policy does not sit well with the markets. With the government stimulating while the Bank of England is tightening monetary policy by raising rates, they are also acting as two opposing forces when it would be better for them to coordinate with one another. </p>
<h2>What a turnaround looks like</h2>
<p>It is nevertheless possible that the pound is now steadying amid speculation that the Bank of England may intervene with a rate rise to support the currency. This would echo the Japanese central bank’s <a href="https://www.reuters.com/markets/asia/boj-keep-ultra-low-rates-remain-global-outlier-despite-weak-yen-2022-09-21/">recent intervention</a> to support the yen, which is also in a historic decline against the US dollar. </p>
<p>Yet if the Bank of England does raise headline rates, possibly by 0.5 percentage points or more, this would have a detrimental effect on business financing and economic activity by further increasing the likelihood of higher rates on mortgages and business loans. This might completely negate the government’s attempts to support the economy by cutting stamp duty and reversing the planned corporation tax hike – again undermining the growth plan. </p>
<p>The bigger question is what happens to US inflation. If it were to fall thanks to a drop in the cost of energy imports and an improved global supply chain, the Federal Reserve may pivot on monetary policy. This would entail a pause on recent interest-rate increases or even the start of a reversal, which would take pressure off currencies such as the pound and help rescue the UK economy. </p>
<p>Only then would the supply-side measures in the mini-budget geared towards helping businesses with lower corporation tax, simpler planning and low-tax investment zones bear fruit. Even then, the government would have to hope that consumer and business sentiment had not deteriorated too much in the meantime. That all amounts to an extraordinarily risky gamble – if it doesn’t pay off, expect more trouble ahead.</p><img src="https://counter.theconversation.com/content/191370/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jean-Philippe Serbera does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The markets have thumped the new UK government over its fiscally bold ‘mini-budget’.Jean-Philippe Serbera, Senior Lecturer in Banking And Financial Markets, Sheffield Hallam UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1903502022-09-15T20:05:01Z2022-09-15T20:05:01ZThat $243 billion ‘saving’ from axing the Stage 3 tax cut is more mirage than reality<figure><img src="https://images.theconversation.com/files/484808/original/file-20220915-25774-n8xfin.png?ixlib=rb-1.1.0&rect=0%2C610%2C3532%2C1736&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>What if we could save A$243 billion by abolishing the Stage 3 tax cuts?</p>
<p>An article in Guardian Australia says we could spend it on all kinds of things, from <a href="https://www.theguardian.com/australia-news/datablog/ng-interactive/2022/aug/26/scrapping-stage-three-3-tax-cuts-would-save-243bn-how-would-you-spend-it-calculator-interactive">pay rises for aged care workers to electrifying homes</a>.</p>
<p>But the money probably wouldn’t be there – not most of it.</p>
<p>The <a href="https://www.aph.gov.au/-/media/05_About_Parliament/54_Parliamentary_Depts/548_Parliamentary_Budget_Office/Costings/Publicly_released_costings/2022/Stage_3_tax_cuts_distributional_analysis_updated_PDF.pdf?la=en&hash=7A6C7350261623ECC11268D806C00A821B1DDC7F">Parliamentary Budget Office</a> came up with the figure of $243 billion in response to a request from Greens Leader Adam Bandt to total the revenue the cuts would cost in their first nine years, which begin in July 2024.</p>
<p>The PBO used a standard, and, on face of it, an unexceptional assumption – that the cost would be the revenue that was lost in each year compared to what would have been raised if tax scales hadn’t been adjusted – for the entire decade.</p>
<h2>Cost, but compared to what?</h2>
<p>To recap, Stage 3 cuts the rate that applies to incomes over $45,000 from 32.5 cents in the dollar to 30 cents then extends that 30 cent rate all the way up to $200,000, <a href="https://theconversation.com/stand-by-for-the-oddly-designed-stage-3-tax-cut-that-will-send-middle-earners-backwards-and-give-high-earners-thousands-182751">abolishing an entire rung of the tax ladder</a>.</p>
<p>The problem with the PBO’s assumption is that the alternative is unlikely to be borne out in reality.</p>
<p>Whenever incomes climb (The PBO assumes about 45% growth in incomes over the next 10 years) the tax scales are typically adjusted to stop more income going into higher tax brackets – so-called <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Budget_Office/Publications/Budget_explainers/Bracket_creep">bracket creep</a>. </p>
<p>The graph below shows what would happen to the average tax rate in the absence of an adjustment over the next decade. </p>
<p>It would climb from 17.9% to 20.1% of household income. </p>
<hr>
<p><iframe id="2u2aV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/2u2aV/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>With the Stage 3 cuts, average rates would at first fall to 17%, and then increase, climbing beyond current rates in 2028 as bracket creep reasserted itself. </p>
<p>This suggests the “cuts” aren’t much of cuts at all, certainly not long-lasting ones.</p>
<p>It is difficult to both claim that the cuts will cost the budget A$243 billion by 2032 and that they will allow the average tax take to climb.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/stand-by-for-the-oddly-designed-stage-3-tax-cut-that-will-send-middle-earners-backwards-and-give-high-earners-thousands-182751">Stand by for the oddly designed Stage 3 tax cut that will send middle earners backwards and give high earners thousands</a>
</strong>
</em>
</p>
<hr>
<p>It means axing the cuts would produce less of a honeypot than might be thought.</p>
<p>While the PBO prepared its costing in accordance with standard practice, a more realistic costing of the Stage 3 cuts would have compared them to the sort of tax adjustments we could have expected without them.</p>
<h2>Winners and losers</h2>
<p>The Stage 3 tax cuts will be regressive, meaning they will cut the rates faced by high earners more than the rates faced by low earners.</p>
<p>My calculations suggest that in the first year they will cut the tax paid by the highest-earning fifth of households by 2.1 percentage points, leaving the tax paid by other households little changed. </p>
<p>And they will certainly cost the budget money – leaving less money for services of the kind that mostly benefit lower income households – although nowhere near as much as the $243 billion quoted.</p>
<p>But the cost will be temporary. The effect on inequality will be longer-lasting.</p><img src="https://counter.theconversation.com/content/190350/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Phillips does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The tax cuts only look big when compared to no cuts, an alternative that isn’t realistic.Ben Phillips, Associate Professor, Centre for Social Research and Methods, Director, Centre for Economic Policy Research (CEPR), Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1900412022-09-06T15:13:20Z2022-09-06T15:13:20ZCost of living: why Liz Truss’ low-tax strategy won’t work<p>One of the first things the new UK prime minister Liz Truss did upon winning the Conservative party leadership race was to <a href="https://www.reuters.com/world/uk/britains-truss-expected-be-named-conservative-leader-new-pm-2022-09-05/">reiterate her desire</a> to turn the UK into <a href="https://www.bbc.co.uk/news/business-62786336">a low-tax economy</a>. </p>
<p>She <a href="https://uk.news.yahoo.com/liz-truss-says-her-tax-092141842.html">outlined her reasoning</a> about the fairness of this position during a recent <a href="https://www.bbc.co.uk/iplayer/episodes/m001bv01/sunday-with-laura-kuenssberg">BBC interview</a>:</p>
<blockquote>
<p>The people at the top of the income distribution pay more tax so inevitably when you cut taxes you tend to benefit people who are more likely to pay tax … What I am about is about growing the economy and growing the economy benefits for everybody.</p>
</blockquote>
<p>This stance will likely cause controversy among voters, particularly those that aren’t high earners and especially as UK households face a very real squeeze on personal finances this winter.</p>
<p>Truss’s idea is based on the principle that a lower tax economy that primarily benefits higher earners will boost economic growth via increased investment and spending, benefiting the majority of people across all income levels. This <a href="https://www.britannica.com/topic/supply-side-economics">well-established</a> theory is known as supply side economics, although it’s often referred to by the arguably more loaded term “trickle down economics”.</p>
<p>This idea is all the more controversial considering the UK is in the middle of a <a href="https://www.forbes.com/uk/advisor/energy/cost-of-living-crisis/">cost of living crisis</a>. </p>
<p>Recent dissatisfaction with the government’s response to the economic situation has of course been partly due to the apparent power vacuum created by outgoing prime minister <a href="https://www.bbc.co.uk/news/uk-politics-62070422">Boris Johnson’s resignation</a> plus a lengthy leadership election. But regardless, the <a href="https://twitter.com/BritainElects/status/1565669326388183040">Conservative party’s polling fortunes</a> have fallen, while, for the first time in more than a decade, the <a href="https://twitter.com/BritainElects/status/1564994961048756224">Labour Party now leads</a> in terms of gaining the public’s trust to manage the economy. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483010/original/file-20220906-18-1cy13u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The new prime minister wants to cut taxes to boost the economy.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/text-tax-scissors-concept-cut-on-1810819600">Mouse family/Shutterstock</a></span>
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</figure>
<p>Truss hopes that a low-tax economy will help to improve the government’s fortunes, but there are two reasons why this may not prove to be an effective strategy with voters in the <a href="https://www.independent.co.uk/news/uk/politics/liz-truss-cost-of-living-b2160266.html">current economic climate</a>.</p>
<p>First, the kind of spending and consumption that Truss hopes to trigger with tax cuts wouldn’t happen overnight. Economists generally agree, whether they support supply side economics or not, that <a href="https://link.springer.com/article/10.1007/s11079-019-09536-8">there is a time lag</a> between lowering taxes and seeing the effects on the population’s economic position. </p>
<p>This means the increase in economic activity required to uplift the public’s economic mood, if it did happen, would likely take years, not months. As we approach this winter, pressure is mounting for the government to take immediate action on <a href="https://www.express.co.uk/news/science/1664418/fuel-poverty-thousands-will-die-uk-humanitarian-crisis-experts-warn">fuel poverty</a>. This is something that will not be fixed by a long-term measure.</p>
<p>Second, cutting certain taxes is not guaranteed to have the desired effect on economic growth. The UK is currently second last out of the G7 countries for <a href="https://data.oecd.org/inequality/income-inequality.htm">income equality</a>, which has increased steadily over the last 40 years. This is due to a relative <a href="https://www.theguardian.com/society/2021/may/26/poverty-rate-among-working-households-in-uk-is-highest-ever">rise in poverty</a> at the lower end of earnings over the long term, but also a relative <a href="https://www.statista.com/chart/27505/uks-richest-are-getting-richer/">increase of wealth</a> at the top end. </p>
<p>But in order for a tax cut to be effective as a supply side economics tool, it needs to incentivise expenditure. With a high level of inequality, there is <a href="http://eprints.lse.ac.uk/107919/1/Hope_economic_consequences_of_major_tax_cuts_published.pdf">less incentive</a> for wealthier individuals and corporations to spend as the marginal benefit of the tax cut falls. In other words, if you can already comfortably afford what you need, having more wealth would not necessarily affect your spending.</p>
<p>What a government could do instead is introduce tax cuts specifically aimed at encouraging expenditure, for example, reducing taxes on consumption such as value-added tax (VAT). It could also increase allowances available for capital spending, meaning that corporations can reduce their tax liabilities by investing in equipment and infrastructure. This should also give the benefit of increasing future productivity.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/483011/original/file-20220906-4758-o4sllb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Would a taxation u-turn help people and businesses with mounting bills?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-businessman-accountant-hand-holding-pen-712434244">Natee Meepian/Shutterstock</a></span>
</figcaption>
</figure>
<h2>A broader appeal</h2>
<p>Given the immediate pressure of the cost of living crisis and the perceived inequality of lowering taxes for high incomes, Truss’s tax cut proposals will continue to be divisive. Indeed, this measure was likely designed to galvanise the Conservative Party base at a <a href="https://www.express.co.uk/news/politics/1657024/Boris-Johnson-Tory-leadership-contest-tory-membership-support-Liz-Truss-vn">crucial time</a>, as Truss was campaigning to be leader. The strategy is also likely to be useful to Truss during the upcoming conference season. </p>
<p>Further, framing higher-end tax cuts as being “fair” goes hand-in-hand with conservative ideology of the working world as a meritocracy in which those that reach the top deserve the rewards. Certainly, the Tories recent ballot box success is partly down to the <a href="https://www.politics.co.uk/news/2012/10/10/camerons-pitch-to-the-voters-were-the-party-of-aspiration/">marketing of aspiration</a> and a better future to voters. Arguably this also helped in the Brexit referendum. </p>
<p>So, it’s clear why Truss would want to continue with this strategy. But, of course, she could always <a href="https://www.dailyrecord.co.uk/news/politics/liz-truss-u-turn-help-27882558">change tack</a> with voters at a later date. </p>
<p>In fact, this may be necessary as Truss switches from appealing to Conservative party members to nationwide electioneering. We do not know what a Liz Truss premiership will look like yet, but the strength of her commitment to a low-tax ideology will be tested by public opinion now that she is in office.</p><img src="https://counter.theconversation.com/content/190041/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Midgley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Why the new UK prime minister could struggle to translate her low-tax strategy to the general public.Gavin Midgley, Senior Teaching Fellow in Accounting, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1896652022-09-01T14:53:46Z2022-09-01T14:53:46ZTory leadership race: will Liz Truss’s tax cut proposals win her votes? Here’s what voter data says<p>When the results of the Conservative leadership race are announced next week, the UK’s new prime minister will be facing a formidable set of challenges. There is the worst cost of living crisis in 50 years, a war in Europe, an antagonistic relationship with the EU and divisions within the Conservative party itself. The public is sceptical about the government’s ability to solve any of these issues with many switching to Labour <a href="https://en.wikipedia.org/wiki/Opinion_polling_for_the_next_United_Kingdom_general_election">in the polls</a> since December of last year.</p>
<p>Given this array of problems, presumed next prime minister Liz Truss’s focus on <a href="https://www.theguardian.com/politics/video/2022/jul/21/liz-truss-my-tax-cuts-decrease-inflation-tory-leadership-video">tax cuts as the solution</a> to rapidly growing inflation looks very odd. At a time when the pound is <a href="https://tradingeconomics.com/united-kingdom/currency">rapidly falling</a> in currency markets and Citi bank is forecasting an <a href="https://www.theguardian.com/business/2022/aug/22/uk-inflation-will-hit-18-per-cent-in-early-2023-says-leading-bank-citi-gas-electricity">inflation rate of 18% in 2023</a>, putting tax rebates into people’s pockets runs the risk of making inflation worse. </p>
<p>There is a strategy behind Truss’s approach, which makes sense if we look closely. There are votes to be won by focusing on taxes – but these are among Conservative party members, not the general public.</p>
<p>Looking at the public first, the issue of taxation does not appear among any of the <a href="https://www.statista.com/statistics/886366/issues-facing-britain/">top nine issues</a> voters are prioritising at the moment. Not surprisingly, this list is dominated by the economy and healthcare. On the other hand, if people get help from the government to pay their fuel bills, it could very well move up the agenda and give the new prime minister a boost. Just look at how <a href="https://yougov.co.uk/topics/politics/articles-reports/2022/02/23/what-public-opinion-rishi-sunak">popular</a> the pandemic furlough scheme made Truss’s leadership rival Rishi Sunak.</p>
<p>To understand the effect of tax cuts on voting, we can look directly at the relationship between tax payments and voting in the 2019 general election. A relatively obscure <a href="https://www.gov.uk/government/statistics/income-and-tax-by-parliamentary-constituency-2010-to-2011">government publication</a> provides data on the median tax burden in each of the 632 parliamentary constituencies in Britain at the time of the election.</p>
<p>The chart below, using data from this publication, shows the relationship between the median tax paid per person in each constituency, and the Conservative vote share in that election. The median tax paid in Britain was just under £2,500 at the time of the election. </p>
<figure class="align-center ">
<img alt="A dot chart with median tax per person on the x-axis and Conservative share of the vote on the y-axis, with dozens of small dots representing parliamentary constituencies. The summary line is nearly horizontal, showing little correlation between the two." src="https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482112/original/file-20220831-8166-cx3hnk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">There was little correlation between the median tax burden in a constituency and voting
Conservative in the 2019 general election.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The Conservative party has traditionally sought to develop its reputation as a <a href="https://www.conservatives.com/our-plan/conservative-party-manifesto-2019">tax-cutting party</a>. Truss is continuing this tradition, even though tax rates are very high at the moment. Given this, we might expect constituencies that pay high taxes to be more Conservative than constituencies that pay much less.</p>
<p>Yet that is not what we see, since the trendline is flat – indicating that there is no relationship between support for the Conservative party and taxes paid by the typical voter. In other words, high-tax constituencies are no more likely to vote Conservative than they are to vote for another party. </p>
<h2>Winning over party members</h2>
<p>So what’s driving Truss’s big emphasis on tax cuts? This is a sensible strategy given that the Conservative party membership is rather old. A <a href="https://www.routledge.com/Footsoldiers-Political-Party-Membership-in-the-21st-Century/Bale-Webb-Poletti/p/book/9781138302464">recent book on party membership</a> in Britain by political scientist Tim Bale and colleagues showed that 40% of the party’s membership in 2015 was over 65. </p>
<p>As the chart below shows, there is an association between median pensioner incomes and voting Conservative in the election. As the typical pensioner income rises in a constituency, it is more likely to vote Conservative. The association is not very strong, but it is enough for Truss to focus on when appealing to the Tory base, who are choosing between her and Sunak to lead the party.</p>
<figure class="align-center ">
<img alt="A dot chart with median pensioner income on the x-axis and Conservative share of the vote on the y-axis, with dozens of small dots representing parliamentary constituencies. The summary line is inclining, showing a positive correlation between the two." src="https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482114/original/file-20220831-3577-lhq1k5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">There is, however, a positive correlation between median pensioner income and constituencies voting Conservative.</span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>However, this focus could change once she is safely ensconced in Downing Street. The wider public is not interested in tax cuts and so this policy will probably rapidly fade into the background. Truss is likely to make an immediate gesture by cutting the <a href="https://www.standard.co.uk/news/uk/liz-truss-vows-reverse-national-insurance-rise-immediately-b1017113.html">proposed increases</a> in national insurance rates, and then U-turn to focus on handing out cash to businesses and individuals as a matter of urgency. A failure to deal rapidly with the most salient issue in the public’s mind – the cost of living crisis – will damage her premiership from the start. This means she will essentially adopt Rishi Sunak’s strategy.</p>
<p>That said, she will still have to square the circle of dealing with financial markets. Continuing reliance on borrowing to fund cash handouts risks triggering a sterling crisis and <a href="https://www.investopedia.com/terms/c/capitalflight.asp">capital flight</a> – a sudden exodus of money from the country. A collapse in the value of the pound would make imports more expensive, accelerating inflation. Similarly, capital flight would make it harder for the government to borrow in order to fund tax cuts. The support of the party membership is not enough to shore up the position of the next prime minister, who will face a delicate balancing act in the run-up to the next election.</p><img src="https://counter.theconversation.com/content/189665/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Whiteley has received funding from the British Academy and the ESRC. </span></em></p>The likely next prime minister is focusing on tax cuts to solve inflation.Paul Whiteley, Professor, Department of Government, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1897902022-09-01T10:52:06Z2022-09-01T10:52:06ZGrattan on Friday: Should Anthony Albanese keep his word on the Stage 3 tax cuts?<p>The final, mega stage of the Coalition’s tax cuts, worth more than $240 billion over a decade, is now in the gun sights of many critics, who are calling for Anthony Albanese to dump his promise to deliver it.</p>
<p>This week Greens leader Adam Bandt, releasing an analysis of the distributional impacts prepared by the independent Parliamentary Budget Office, said the tax cuts “cost a fortune, and the wealthiest 20% get close to 80% of the money”.</p>
<p>Bandt said they would “turbocharge inequality” and widen the gender pay gap. The benefit for women is half that for men, because women earn less. Over the decade men would get $160.6 billion, while women would get $82.9 billion. </p>
<p>Independent senator David Pocock, from the ACT, on whose vote Labor is expected often to rely when there is contested legislation, said “things have changed a lot since these [tax cuts] were legislated”, and suggested better ways some or all the money could be used.</p>
<p>But Albanese, answering questions on Labor’s 100 days anniversary on Monday, reaffirmed he had no plans to try to un-legislate the tax cuts – although some commentators felt he was leaving a smidgeon of wriggle room.</p>
<p>The cuts were announced in Scott Morrison’s final budget as treasurer in 2018, and tweaked in 2019, with Stage 3 commencing in mid-2024. The part of Stage 3 that benefits most taxpayers cuts the rate that applies to incomes over $45,000 from 32.5 cents in the dollar to 30 cents. The bigger part extends that 30 cent rate all the way up to $200,000, abolishing an entire rung of the tax ladder. </p>
<p>For high earners, the part of their income that was taxed at 37 cents will be taxed at 30, as will income above $180,000 that was taxed at 45 cents. The 45 cent threshold will cut in above $200,000.</p>
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Read more:
<a href="https://theconversation.com/government-to-legislate-for-multi-employer-bargaining-strengthening-push-for-wage-increases-189786">Government to legislate for multi-employer bargaining, strengthening push for wage increases</a>
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<p>The argument about the cuts is a mishmash of economics and politics. It’s been so since the start, although circumstances have deepened the dilemmas surrounding them.</p>
<p>Labor voted for Stage 3, using as justification that it was part of a package containing relief in earlier years for those on lower incomes, but also for political reasons. The decision was in line with Labor’s small-target strategy. This was underlined by the fact the then-opposition didn’t propose to repeal the cuts or make changes if it won the election. Indeed, quite the opposite. </p>
<p>Although these cuts, legislated before COVID, had many critics at the time, the case against them increased with the budgetary hit imposed by the pandemic. That transformed the landscape.</p>
<p>Independent economist Saul Eslake says: “From the standpoint of economic management, the main argument for abandoning or deferring [them] is that the medium-term budget outlook is now very different from when those tax cuts were proposed and legislated.</p>
<p>"At that time, the budget was projected to be in surplus throughout the 2020s, and net debt reduced to zero by the end of the decade. Now, deficits are projected to continue as far as the eye can see, and net debt to continue growing in dollar terms into the early 2030s. </p>
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Read more:
<a href="https://theconversation.com/word-from-the-hill-albanese-announces-more-than-1-billion-in-federal-state-tafe-funding-189776">Word from The Hill: Albanese announces more than $1 billion in federal-state TAFE funding</a>
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<p>"It’s understandable that the government feels bound to honour the pledges it made But that would seem to make inevitable that, sooner or later, the government will need to look for other means of raising additional revenues in order both to meet the electorate’s expectations for higher spending in disability, aged and health care, and to put the budget on a more sustainable medium-term path,” Eslake says.</p>
<p>Ditching the tax cuts on the grounds of changed circumstances would have two clear Labor precedents.</p>
<p>Bob Hawke promised tax cuts before the 1983 election. Then, on the basis of discovering an unannounced $9.6 billion deficit when he reached office, the promise was quickly buried.</p>
<p>Years later the Labor government, then under PM Keating, legislated tax relief before the 1993 election. It boasted the cuts were L.A.W. Post-election, the second round of these was scrapped.</p>
<p>Hawke, riding a tide of honeymoon popularity and making a convincing case, wasn’t damaged by his broken promise – which was just that, a promise, not something set in law. Keating, who had just enjoyed one of those miracle election wins but was at the fag end of Labor’s term, suffered serious harm.</p>
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Read more:
<a href="https://theconversation.com/treasurer-chalmers-on-boosting-migration-and-a-resilience-budget-189632">Treasurer Chalmers on boosting migration and a 'resilience' budget</a>
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<p>Since the Hawke and Keating days, voters have become more distrustful of politicians, and the political danger in breaking undertakings has increased.</p>
<p>If Albanese wanted to repeal or change the tax cuts, he would have the Senate numbers to do so, with the Greens and Pocock. But trashing an election pledge would have major implications for his credibility.</p>
<p>At the 2025 election, opponents would have the argument that Albanese’s word could not be trusted. With his eye already on a second term, he has to think of the long game.</p>
<p>Treasurer Jim Chalmers made two defences of the tax cuts this week. He challenged the argument they were just for the rich. And he maintained that scrapping them would not address current budgetary problems.</p>
<p>“It’s important to remember that these tax cuts kick in at $45,000. For a lot of Australians with quite modest incomes, they will be getting an additional tax cut in stage three - we shouldn’t lightly dismiss that,” Chalmers said.</p>
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Read more:
<a href="https://theconversation.com/summits-old-and-new-what-was-bob-hawkes-1983-national-economic-summit-about-187763">Summits old and new: what was Bob Hawke's 1983 National Economic Summit about?</a>
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<p>(The benefit accruing to a taxpayer earning between $45,000 and $60,000 is small, no more than $375 a year, which is much less than the recently abolished tax offset of up to $1,500 – meaning that, taken together, the changes will leave some low to middle earners worse off.)</p>
<p>Chalmers also made the point that “even if a government were to tweak those Stage 3 tax cuts, they don’t come in for another couple of years.</p>
<p>"So they have absolutely no bearing on some of these challenges that we’re dealing with right now." </p>
<p>Of course the fact the tax cuts don’t start until mid-2024 of itself gives the government latitude to change its position, and allows for sustained lobbying.</p>
<p>In today’s uncertain conditions, that’s an eternity in policy terms.</p>
<p>But the passage of time also imposes constraint. The closer a government gets to an election, the harder it becomes to take risky decisions. Especially decisions that go to the question of trust.</p><img src="https://counter.theconversation.com/content/189790/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The final stage of the Coalition’s tax cuts, worth more than $240 billion over a decade, is now in the gun sights of many critics, who are calling on Anthony Albanese to dump his promise to deliver it.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1882872022-08-30T19:05:04Z2022-08-30T19:05:04ZFeeling that fiscal drag? Why you could be worse off even if your pay has gone up<figure><img src="https://images.theconversation.com/files/481683/original/file-20220830-8758-sb7zy3.jpg?ixlib=rb-1.1.0&rect=8%2C58%2C5590%2C3657&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Tax has again become <a href="https://www.rnz.co.nz/news/political/472333/taxing-new-zealanders-national-promises-cuts-warns-of-labour-hikes">an election issue</a>, more than 12 months before voters go to the polls. Part of the current debate centres around tax brackets and whether the <a href="https://www.stuff.co.nz/business/money/300519291/minimum-wage-workers-pushed-near-middle-tax-bracket">current cut-off points are fair</a>. </p>
<p>New Zealand’s income tax system <a href="https://www.ird.govt.nz/income-tax/income-tax-for-individuals/tax-codes-and-tax-rates-for-individuals/tax-rates-for-individuals">uses progressive rates</a>. Higher slices of income are taxed at higher rates. Every dollar earned up to NZ$14,000 is taxed at 10.5%. Income above that level is progressively taxed higher until the final tax rate of 39% applies to every dollar earned over $180,000.</p>
<p>“Fiscal drag”, sometimes known as “<a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Publications/Budget_explainers/Bracket_creep">bracket creep</a>”, occurs when an increase in a taxpayer’s income takes their highest slice of income into a higher tax bracket without an increase in real income. This often happens when wages rise to compensate for inflation but tax bands are not adjusted. </p>
<h2>The return of inflation</h2>
<p>Addressing fiscal drag was an important policy focus <a href="https://ifs.org.uk/publications/2190">in the last decades of the 20th century</a> as countries tried to manage persistent inflation. But since 2000, most economically developed countries have experienced no or low inflation, putting fiscal drag on the back burner. </p>
<p>The COVID pandemic, however, led to supply chain interruptions and labour shortages. As a consequence, many countries are experiencing rates of inflation not seen for decades. </p>
<p>Arguments for linking income tax brackets to rising costs of living, also known as index linking, didn’t disappear <a href="https://www.stuff.co.nz/business/110327695/its-time-to-end-tax-by-stealth-taking-more-money-from-new-zealanders-each-year">in the era of low or no inflation</a> but have recently been revived, <a href="https://www.stuff.co.nz/national/politics/129480016/national-reaffirms-pledge-to-adjust-tax-rates-to-cost-of-living">including by the National Party</a>. </p>
<p>While fiscal drag could be considered tax increase by stealth, when the <a href="https://taxworkinggroup.govt.nz/sites/default/files/2018-09/twg-bg-3985468-appendix-b--changes-to-tax-rates-and-thresholds.pdf">Tax Working Group</a> delivered its final report in 2019 the authors noted that “whether fiscal drag is of sufficient concern is a value judgement”. </p>
<figure class="align-center ">
<img alt="Woman doing her taxes" src="https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480693/original/file-20220824-18-ux2o6c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Years of low inflation have meant governments have not had to address fiscal drag.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com.au/detail/photo/accountant-or-banker-calculate-the-cash-bill-royalty-free-image/1197360897?adppopup=true">Getty Images</a></span>
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<h2>Responding to fiscal fiscal drag</h2>
<p>While the decision to address fiscal drag may be a value judgement, it’s worth understanding what it is and why successive governments have not fixed what intuitively appears to be an unfairness in the tax system. </p>
<p>Governments have long relied on inflation to reduce the real value of government debt. This allows them to take advantage of fiscal drag in times of economic rebuilding – notably when debt is high in comparison with gross domestic product, as they are now in many countries (though not currently in <a href="https://budget.govt.nz/budget/2022/wellbeing/fiscal-strategy/nz-lowest-public-debt.htm#:%7E:text=The%20IMF%20publishes%20an%20internationally,94.9%20percent%20in%20the%20US.">New Zealand</a>). </p>
<p>However, if a government considers fiscal drag to be of sufficient concern, the most direct ways of overcoming the problem are to have a flat rate of income tax or to link tax brackets to an inflation measure, such as a consumer price index. </p>
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Read more:
<a href="https://theconversation.com/inflation-is-2022s-boogeyman-how-can-we-address-rising-living-costs-while-helping-bring-it-down-187154">Inflation is 2022’s boogeyman. How can we address rising living costs, while helping bring it down?</a>
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<p>A flat rate of income tax would skew the overall tax system away from the usual expectation of ability to pay, with the wealthy benefiting the most. But index linking is, in effect, a tax cut that reduces a government’s capacity to provide public services. </p>
<p>The National-led government of John Key considered changing tax bands but recognised this would affect the funding of public services. In effect, they <a href="https://www.odt.co.nz/opinion/bracket-creep-or-fiscal-drag-brings-tax-cuts">opted for fiscal drag</a>. At the same time, Key’s government increased the rate of GST. If consumers keep spending during periods of rising inflation, the government’s GST take will also increase. </p>
<p>Current revenue minister David Parker has a different approach. He opposes readjustment of tax brackets in favour of <a href="https://www.nzherald.co.nz/business/income-tax-bracket-creep-not-the-big-issue-parker-says/T3TMBJM7X3FGGWIALIL3CLOGK4/">identifying untaxed income</a>, although it’s not obvious these are mutually exclusive.</p>
<h2>Focusing on the middle</h2>
<p>Different taxpayers are affected differently by tax increases, <a href="https://www.oecd.org/ctp/fiscaldraghitssometaxpayersharderthanothersnewoecdstudyshows.htm">including fiscal drag</a>. While many people will focus on their marginal tax rate – the tax rate paid on every extra dollar they earn – the focus should lie with average tax paid. </p>
<p>Let’s take the example of Anna who earns an income of $48,000. Her salary puts her right at the upper limit of the $14,000–$48,000 tax bracket. Her marginal tax rate is 17.5% but her average tax rate is 15.46%. If she receives a 5% salary increase, her marginal tax rate will rise to 30% and her average rate will be 16.15%. </p>
<p>Compare this with Bella who earns an income of $65,000 – placing her under the upper limit of $70,000 for the 30% tax bracket. Her marginal rate is also 30% but her average rate is 20.76%. So, crossing a bracket threshold and having more of your income taxed in a higher band increases your average tax rate. Fiscal drag affects both.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/with-their-conservative-promises-labour-and-national-lock-in-existing-unfairness-in-new-zealands-tax-system-145916">With their conservative promises, Labour and National lock in existing unfairness in New Zealand's tax system</a>
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<p>Employees have little scope for reducing their taxable income and so may be affected more than some other earners. Research into tax <a href="https://eml.berkeley.edu/%7Esaez/saezAEJ10bunching.pdf">bunching around so-called “kink points”</a> (income levels just below a higher tax rate) indicates that non-employees – business people and contractors – are able to manipulate their incomes to ensure they fall below a higher tax bracket. </p>
<p>A tradie, for example, may inflate their expenses. A company director may retain funds within the company which is taxed at a flat rate of 28%. </p>
<p>From a policy perspective, therefore, it’s important to understand who is most affected by fiscal drag. Such an understanding might lead to increases in lower tax bands but not higher ones. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1503104636542418944"}"></div></p>
<h2>Drag less noticeable than a tax increase</h2>
<p>Why do many employees not seem to care about fiscal drag? Perhaps it’s because, psychologically, it doesn’t feel the same as an overt tax increase. Even if the real value of your pay decreases, the amount you take home is stable. </p>
<p>Conversely, index linking may not feel like a tax cut. People understand that prices are rising but they may not necessarily link inflation to their tax levels. </p>
<p>We may hope for full transparency on the part of government, but some obscurity is inherent in the tax system. As Louis XIV’s finance minister Jean-Baptiste Colbert once <a href="https://quoteinvestigator.com/2018/04/16/tax/">observed</a>, “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” </p>
<p>That hissing may grow louder as taxpayers increasingly experience fiscal drag.</p><img src="https://counter.theconversation.com/content/188287/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Barrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For decades fiscal drag has largely been ignored. But rising inflation has put New Zealand’s tax brackets, and what the government is going to do about them, under the spotlight.Jonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1864842022-07-07T10:41:40Z2022-07-07T10:41:40ZInflation, recession fears and tax cuts: any new UK chancellor faces an unenviable in-tray<p><em>The flood of ministerial resignations from UK prime minister Boris Johnson’s government in recent days started with Rishi Sunak’s resignation as UK chancellor of the exchequer on July 5 2022, alongside health secretary Sajid Javid’s. His <a href="https://www.gov.uk/government/publications/rishi-sunaks-resignation-letter-and-the-prime-ministers-response">resignation letter</a> cited differences of opinion over the economy, saying that a “low-tax, high-growth economy and world-class public services” could only be “responsibly delivered if we are prepared to work hard, make sacrifices and take difficult decisions”.</em></p>
<p><em>Sunak’s swift replacement, former education secretary Nadhim Zahawi, <a href="https://www.telegraph.co.uk/politics/2022/07/07/boris-johnson-resign-news-government-resignations-gove-zahawi/">joined</a> a growing group of ministers calling on Johnson to quit within days. But in his first interviews as chancellor, he immediately teased the idea of tax cuts, saying “nothing is off the table”.</em></p>
<p><em>Johnson has since bowed to pressure and <a href="https://www.reuters.com/world/uk/uks-johnson-digs-ministers-desert-government-2022-07-07/">resigned</a>. The tax cut strategy, which was clearly off the table for Sunak, could underpin a potential <a href="https://www.thetimes.co.uk/article/nadhim-zahawi-assembled-team-to-set-up-secret-leadership-campaign-hvk678p3h">leadership bid</a> by Zahawi - and perhaps other Conservative hopefuls. But are tax cuts a reasonable way forward for the economy and, if so, will it be an effective measure as the UK faces a cost of living crisis?</em></p>
<p><em>We asked two experts to explain the challenges facing the chancellor and whether a programme of tax cuts could work:</em></p>
<p><strong>Phil Tomlinson, Professor of Industrial Strategy, Deputy Director Centre for Governance, Regulation and Industrial Strategy, University of Bath</strong></p>
<p>The <a href="https://www.independent.co.uk/news/uk/politics/boris-johnson-resign-michael-gove-liaison-committee-today-b2117632.html">dramatic political events</a> in Westminster have left <a href="https://www.reuters.com/world/uk/five-facts-about-britains-new-finance-minister-nadhim-zahawi-2022-07-05/">Nadhim Zahawi</a> currently holding the reins at the Treasury. But any honeymoon period for the new chancellor is likely to be short-lived. The UK’s economic circumstances are dire – the worst in living memory (at least since the <a href="https://www.omfif.org/2021/10/repeat-of-70s-in-store-as-uk-heads-towards-stagflation/">early 1970s</a>). </p>
<p>Zahawi inherits an unenviable in-tray with a <a href="https://theconversation.com/april-will-be-cruel-to-uk-households-but-the-economys-problems-are-much-longer-term-179526">cost of living crisis</a> (fuelled largely by <a href="https://theconversation.com/soaring-energy-costs-fuel-fastest-inflation-in-40-years-3-essential-reads-181140">high energy prices</a>, <a href="https://www.bloomberg.com/news/articles/2022-06-22/brexit-s-legacy-is-hotter-uk-inflation-risk-for-years-to-come">Brexit disruption</a> and ongoing supply chain bottlenecks), <a href="https://www.bbc.co.uk/news/business-57764601">rising interest and mortgage rates</a>, and the <a href="https://inews.co.uk/opinion/rishi-sunak-tax-cutter-ukraine-covid-inflation-made-choice-1509761">highest tax burden</a> and <a href="https://www.nationalworld.com/news/politics/uk-national-debt-2022-debt-gdp-interest-government-pay-owe-money-3630526">public debt to GDP ratio</a> in over 70 years. No wonder consumer confidence has <a href="https://www.cityam.com/cocktail-of-problems-plunges-uk-consumer-confidence-to-record-low/">plunged to record lows</a>, raising fears the UK is already <a href="https://www.dailymail.co.uk/news/article-10782021/Britain-recession-Bank-England-CUT-rates-says-economist.html">in recession</a>. The UK is forecast to be the <a href="https://www.independent.co.uk/news/business/news/oecd-economy-zero-growth-forecast-g20-b2096438.html">worst performing economy</a> – bar sanctions-hit Russia – in the G20 next year. </p>
<p>Recent falls in the <a href="https://www.theguardian.com/business/live/2022/jul/05/cost-of-living-sainsburys-uk-car-sales-bank-of-england-inflation-business-live">stock market and the value of sterling</a> only add to the gloom, with the latter likely to stoke further inflationary pressures. </p>
<p>Also, the government’s political gesturing with the EU over the <a href="https://www.bbc.co.uk/news/explainers-53724381">Northern Ireland protocol</a> could jeopardise the EU-UK trade and cooperation agreement. The UK’s latest trade figures are the <a href="https://www.ft.com/content/a31b4b8e-f9fc-4f1e-84c1-3632f194d05a">worst on record </a>. So a new trade war with the country’s biggest trading partner is the last thing British exporters need. </p>
<p>On top of all this, the UK’s long-standing and perennial economic problems remain: <a href="https://www.reuters.com/business/weak-investment-innovation-management-hamper-uk-productivity-2021-11-15/">low business investment, low productivity</a>, impoverished public services and the <a href="https://www.sheffield.ac.uk/news/nr/uk-higher-regional-inequality-large-wealthy-country-1.862262">widest regional inequalities</a> among advanced economies. </p>
<p>Initial musings from the new chancellor are that he will seek to prioritise <a href="https://www.msn.com/en-us/money/markets/new-chancellor-nadhim-zahawi-dangles-more-tax-cuts-as-boris-johnson-battles-to-stay-in-no10/ar-AAZfnTW">tax cuts</a> for business and households to get the economy going again. This will be music to the ears of the Tory backbenches. </p>
<p>But any such tax cuts are likely to be small and largely ineffective. The UK’s economic model is fundamentally broken. Addressing the scale and deep-rooted nature of the economy’s problems will require a <a href="https://www.theguardian.com/business/2022/mar/13/incessant-crises-show-old-economic-model-is-running-on-empty-financial-crisis-covid-inflation-war">radical reset</a> and a move away from the neoliberal model that has dominated policy since 1979. The new chancellor though is known to be a <a href="https://www.spectator.co.uk/article/nadhim-zahawi-appointed-chancellor">committed free marketeer</a> and so, overall, economic policy is likely to be “more of the same”. </p>
<p><strong>Alan Shipman, Senior Lecturer in Economics, The Open University</strong></p>
<p>Rishi Sunak’s <a href="https://www.gov.uk/government/publications/rishi-sunaks-resignation-letter-and-the-prime-ministers-response">resignation letter</a> sums up the dilemma of all modern chancellors: people want a low-tax, high-growth economy and world-class public services. </p>
<p>In the current economic environment, however, state-provided services <a href="https://www.bma.org.uk/advice-and-support/nhs-delivery-and-workforce/pressures/nhs-backlog-data-analysis">led by the NHS</a> are pleading for more funds following a decade of cuts or unusually low spending rises in the wake of the 2008 global financial crisis. Defence is also <a href="https://www.bbc.co.uk/news/uk-61961675">demanding more money</a> to confront new threats from the east. </p>
<p>The wider <a href="https://commonslibrary.parliament.uk/research-briefings/sn06167/">budget deficits</a> that have appeared as a result, alongside unusually slow economic growth, have pushed <a href="https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/september2021">public debt</a> to record peacetime levels. </p>
<p>Conservative economists have <a href="https://www.nationalaffairs.com/publications/detail/inflation-and-debt">traditionally argued</a> that fiscal deficits raise inflation and undermine growth. So Sunak, even while continually restating his <a href="https://www.politico.eu/article/rishi-sunak-low-tax-uk-wages-finance/">low-tax ambitions</a>, used his two years as chancellor to <a href="https://ifs.org.uk/publications/15996">raise</a> the overall tax take. The prime minister’s unease over this deficit-cutting strategy played a role in the chancellor’s decision to quit, according to his resignation letter.</p>
<p>Nadhim Zahawi arrives at Number 11 with a record similar to Sunak’s. He views <a href="https://www.heraldscotland.com/politics/20259457.chancellor-nadhim-zahawi-hints-tax-cuts-insists-nothing-off-table/">tax cuts</a> as key to an economic revival. The idea here is that <a href="https://taxfoundation.org/what-evidence-taxes-and-growth/">people and businesses</a> work harder, invest more and innovate faster when government takes less of their income. </p>
<p>It worked – electorally if not economically – the last time the UK encountered <a href="https://www.thetimes.co.uk/money-mentor/article/stagflation/">stagflation</a> (when high inflation meets low economic growth), propelling Margaret Thatcher to power on the <a href="https://www.bbc.co.uk/news/business-22064354">promise</a> of lower income tax. Zahawi can draw on <a href="https://policyexchange.org.uk/sunaks-task-tomorrow-the-best-way-of-reducing-the-deficit-is-to-go-for-growth/">supportive economists</a> who blame the current high inflation on a wrong-footed Bank of England, and argue that debt is best curbed by making GDP grow faster. A tax cut might promote this, if it leaves cash-strapped households a bit more to spend.</p>
<p>The risk for the new chancellor, if he sticks to the low-tax mantra, is that budget deficits mainly drive up prices, as production hits new <a href="https://www.instituteforgovernment.org.uk/publication/supply-chains">supply-side</a> constraints. The government’s borrowing costs could also <a href="https://www.reuters.com/world/uk/uk-government-borrows-1399-billion-pounds-may-2022-06-23/#:%7E:text=LONDON%2C%20June%2023%20(Reuters),official%20data%20published%20on%20Thursday.">rise more steeply</a> as investors start to wonder how much more debt the UK can take on if it won’t impose more taxes. And unless tax cuts quickly unleash faster growth – reversing the present <a href="https://www.dailymail.co.uk/news/article-10909553/Anger-interfering-CBI-urges-ministers-ditch-revamp-Northern-Ireland-trade-deal.html">slide towards recession</a> – the loss of revenue might just make rising demands on the public sector even harder to fund.</p><img src="https://counter.theconversation.com/content/186484/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Phil Tomlinson currently receives funding from the Engineering and Physical Sciences Research Council (EPSRC) for the Made Smarter Innovation: Centre for People-Led Digitalisation.</span></em></p><p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As the Johnson government ends, here’s what lies ahead for a new UK chancellorPhil Tomlinson, Professor of Industrial Strategy, Deputy Director Centre for Governance, Regulation and Industrial Strategy (CGR&IS), University of BathAlan Shipman, Senior Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1827512022-05-10T05:39:44Z2022-05-10T05:39:44ZStand by for the oddly designed Stage 3 tax cut that will send middle earners backwards and give high earners thousands<figure><img src="https://images.theconversation.com/files/462180/original/file-20220510-26-ggtz8z.png?ixlib=rb-1.1.0&rect=431%2C1191%2C3023%2C1467&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Reserve Bank is pushing up interest rates to take money out of our hands.</p>
<p>The first increase in the current round will add about <a href="https://theconversation.com/rba-governor-philip-lowe-is-hiking-interest-rates-worst-case-itll-mean-an-extra-600-per-month-on-a-500-000-mortgage-182241">A$65 a month</a> to the cost of paying off a $500,000 mortgage. </p>
<p>The second will add a bit more. If, as the bank’s forecasts assume, there are another <a href="https://www.rba.gov.au/speeches/2022/sp-gov-2022-05-03-q-and-a-transcript.html">four</a> such increases this year, that’s a further $275 a month, and so on.</p>
<p>The point, in the words of the Reserve Bank Governor Philip Lowe, is to “<a href="https://www.rba.gov.au/monetary-policy/">slow the economy, to get things back onto an even keel</a>”. </p>
<p>In a helpful video, the Governor <a href="https://www.rba.gov.au/monetary-policy/">explains</a> that rate rises take money out of mortgagee’s hands directly, make it harder to borrow, make people “feel less happy”, and hit the prices of houses and other assets so people “don’t feel as confident and they don’t spend as much”.</p>
<p>Which is fair enough, if the Governor decides that’s what’s needed.</p>
<p>So why on earth are we scheduled to do the opposite?</p>
<h2>As the RBA takes, the government will give</h2>
<p>From mid-2024 the government will put an awful lot of money <em>in</em> to people’s hands. Stage 3 of the income tax cuts will cost <a href="https://cdn.theconversation.com/static_files/files/2097/Distributional_analysis_of_the_stage_3_tax_cuts_PDF.pdf">$15.7 billion</a> in its first year. </p>
<p>By way of comparison, that’s almost as much as the <a href="https://images.theconversation.com/files/462128/original/file-20220510-15-yzfek4.GIF">$16.3 billion</a> will be spent on the Pharmaceutical Benefits Scheme that year, and more than the <a href="https://budget.gov.au/2022-23/content/bp1/download/bp1_bs5.pdf">$10.5 billion</a> that will be spent on higher education.</p>
<p>That it is mistimed ought not be a surprise. Stage 3 was legislated <a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6111">in 2018</a>. </p>
<p>The treasurer at the time, back in the year Grant Denyer won the Gold Logie, was Scott Morrison, who said he was legislating Stages 1, 2 and 3 of the tax cuts all at once (and Stage 3 six years ahead of time) in order to provide “<a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2Fb2994e5f-9876-4d4d-9f28-b446debf14ff%2F0014%22">certainty</a>”.</p>
<h2>A tax switch settled years ahead of time</h2>
<p>So uncertain was the treasury about the future back then that it only forecast the economy two years ahead, and produced less reliable and more mechanical “projections” for the following two years, neither of which <a href="https://images.theconversation.com/files/462135/original/file-20220510-11-q59h4d.GIF">extended to 2024</a>.</p>
<p>At the time the Reserve Bank had been cutting interest rates (12 times in a row), at the time inflation was 1.9%. It looked as if the economy could do with a bit of a boost, albeit a boost which wouldn’t be delivered for six years.</p>
<p>In saying that things have changed, it’s fair to also acknowledge that things might change back again. We can’t be sure what will be needed in 2024, although we can be a good deal more sure than we were back then.</p>
<h2>Backed by Labor</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/462170/original/file-20220510-16-qefie2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Labor’s Jim Chalmers, now backs Stage 3.</span>
<span class="attribution"><span class="source">Lukas Coch/AAP</span></span>
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<p>The Stage 3 tax cuts were opposed by Labor at first, but are now backed by Labor treasury spokesman Jim Chalmers after “<a href="https://www.abc.net.au/news/2021-07-26/labor-keep-stage-three-tax-cuts/100323164">weighing up a whole range of considerations</a>”.</p>
<p>They are overwhelmingly directed at high earners.</p>
<p>Of the $184.2 billion the parliamentary budget office believes Stage 3 will cost in its first seven years, <a href="https://cdn.theconversation.com/static_files/files/2097/Distributional_analysis_of_the_stage_3_tax_cuts_PDF.pdf">$137.9 billion</a> is directed to Australians on $120,000 or more.</p>
<p>Part of Stage 3, the part that cuts the rate applying to incomes over $45,000 from 32.5 cents in the dollar to 30 cents, will benefit most taxpayers. </p>
<p>The bigger part extends that low rate all the way up to $200,000, abolishing an entire rung of the tax ladder paid by the highest earners.</p>
<p>For those very high earners, the part of their income that was taxed at 37 cents will be taxed at 30, as will part of the rest that was taxed at 45 cents.</p>
<p>A politician, on a base salary of <a href="https://www.remtribunal.gov.au/sites/default/files/2021-06/MP%20Principal%20Determination%202021.pdf">$211,250</a>, will get a tax cut of $9,075. A registered nurse on $72,235 will get a tax cut of <a href="https://australiainstitute.org.au/wp-content/uploads/2022/03/Fair-go-gone-FINAL.pdf">$681</a> according to calculations prepared by the Australia Institute.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/stages-1-and-2-should-pass-stage-3-would-return-tax-to-the-1950s-119637">Stages 1 and 2 should pass. Stage 3 would return tax to the 1950s</a>
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<p>More broadly, a typical middle earner can expect <a href="https://cdn.theconversation.com/static_files/files/2097/Distributional_analysis_of_the_stage_3_tax_cuts_PDF.pdf">$250</a> a year, whereas a typical earner in the top fifth can expect <a href="https://cdn.theconversation.com/static_files/files/2097/Distributional_analysis_of_the_stage_3_tax_cuts_PDF.pdf">$4,230</a> according to a separate analysis by the parliamentary budget office.</p>
<p>The fate of the middle earner will be made worse by the loss of the $1,000+ middle income tax offset which <a href="https://theconversation.com/budget-2022-frydenberg-has-spent-big-but-on-the-whole-responsibly-180122">wasn’t extended in this year’s budget</a>, sending the middle earner backwards.</p>
<p>The typical female earner will go backwards too after the loss of the offset, getting <a href="https://cdn.theconversation.com/static_files/files/2097/Distributional_analysis_of_the_stage_3_tax_cuts_PDF.pdf">half as much</a> as the typical (higher earning) male, according to the budget office. </p>
<h2>A tax switch that’ll send some backwards</h2>
<p>The logic is (or was) that middle and higher earners would need big tax cuts to compensate them for <a href="https://www.investopedia.com/terms/b/bracketcreep.asp">bracket creep</a> (which is wage rises pushing them into higher tax brackets), though there’s been a lot less of that than expected.</p>
<p>Were it not for the fact that Labor supports and will implement it, Stage 3 would provide a stark contrast with Labor leader Anthony Albanese’s approach unveiled on Tuesday of asking the Fair Work Commission to lift the minimum wage to <a href="https://www.theguardian.com/australia-news/2022/may/10/election-2022-anthony-albanese-backs-51-minimum-wage-rise-to-keep-pace-with-inflation">compensate for inflation</a>.</p>
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<em>
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Read more:
<a href="https://theconversation.com/why-the-rba-should-go-easy-on-interest-rate-hikes-inflation-may-already-be-retreating-and-going-too-hard-risks-a-recession-182273">Why the RBA should go easy on interest rate hikes: inflation may already be retreating and going too hard risks a recession</a>
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<p>Such an increase would go to low wage earners first, and flow through more slowly to award wages. It would give the greatest help to those who needed it the most when they needed it, rather than years in the future when things might be quite different.</p><img src="https://counter.theconversation.com/content/182751/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Some earners will take home less after a tax switch legislated years ago and now supported by both sides of parliament.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1650842021-07-26T06:46:48Z2021-07-26T06:46:48ZView from The Hill: Labor wouldn’t disturb tax cuts, negative gearing in ‘small target’ strategy<p>After making itself a mega target in 2019, Labor has confirmed it will be a small one in 2022 by promising an Albanese government would keep the 2024 income tax cuts and not disturb negative gearing and capital gains tax.</p>
<p>This decision essentially completes the “de-Shortening” of Labor’s controversial policy pitch. The plan to scrap franking credit cash refunds, which saw a Coalition <a href="https://theconversation.com/grattan-on-friday-what-labor-has-to-fear-is-the-big-scare-110910">scare campaign</a> at the last election, was ditched some time ago.</p>
<p>With the Coalition having limited scope to make big promises, and the opposition determined to confine itself to a fairly narrow agenda, the election seems likely to be centrally about the exit from COVID.</p>
<p>A special virtual caucus meeting was held on Monday to approve a shadow cabinet decision on the tax measures. Caucus members were only given a few minutes to read the material.</p>
<p>Some in Labor will be unhappy at the decision, especially as the opposition has consistently criticised the tax cuts as favouring people on higher incomes. The decision also means Labor has constrained the amount of money it will have to spend on promises.</p>
<p>But with polls showing Prime Minister Scott Morrison in a trough, Labor has become more optimistic about its election prospects and opposition leader Anthony Albanese is determined to ditch any baggage in pursuit of a win.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/election-surprise-negative-gearing-isnt-a-rort-but-something-else-is-117247">Election surprise. Negative gearing isn’t a rort — but something else is</a>
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<h2>A focus on the PM’s COVID response</h2>
<p>The government will counter with Labor’s past statements on the issues.</p>
<p>At the caucus meeting, shadow Treasurer Jim Chalmers, facing questioning about the likely attitude of Labor party members to the package of tax decisions, said parts of the political spectrum “would not applaud” it. He said it had been an “on balance” decision.</p>
<p>Albanese emphasised Labor’s unity, contrasting it with disunity in the Liberal party, mentioning Campbell Newman, a former Liberal National Party Queensland premier, quitting the party.</p>
<p>The opposition leader told his troops Labor was “cutting through” with its message that Morrison had two jobs – the vaccine rollout and putting in place an effective quarantine system.</p>
<p>Albanese and Chalmers said in a statement that with its decisions, Labor was <a href="https://www.canberratimes.com.au/story/7357118/labor-pledges-support-for-income-tax-cuts/?cs=14264&utm_source=website&utm_medium=index&utm_campaign=sidebar">providing certainty to working families</a>.</p>
<blockquote>
<p>When it comes to the economy, the next election will be about the prime minister’s dangerous and costly failures to manage the pandemic. </p>
<p>His failures on vaccines and quarantines have caused lockdowns 18 months into this pandemic, and those lockdowns are causing billions of dollars in damage to the economy. </p>
</blockquote>
<p>The cost of the <a href="https://www.afr.com/policy/economy/stage-three-tax-cuts-are-on-a-collision-course-with-political-reality-20210512-p57r33">stage three tax cuts</a> is about $17 billion in their first year, and $130 billion over ten years. They come in from mid-2024.</p>
<p>Under the changes, the 32.5% tax rate goes down to 30%, and the 37% rate is scrapped. From July 1, 2024, people earning between $45,000 and $200,000 will face a marginal tax rate of 30%.</p>
<p>Chalmers told a news conference: </p>
<blockquote>
<p>an Albanese Labor government will deliver the same legislated tax relief for more than nine million Australians who earn $45,000 a year or more as the Morrison government.</p>
</blockquote>
<p>As the tax cuts are already legislated, a Labor government would not necessarily have been able to get their repeal through the Senate anyway.</p>
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<p>
<em>
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Read more:
<a href="https://theconversation.com/other-australians-dont-earn-what-you-think-59-538-is-typical-162251">Other Australians don't earn what you think. $59,538, is typical</a>
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<h2>HIA welcomes Labor stance on negative gearing</h2>
<p>At the last election, Labor proposed removing negative gearing for people who bought existing properties and cutting the capital gains discount from 50% to 25%.</p>
<p>Assistant Treasurer Michael Sukkar said Labor <a href="https://www.smh.com.au/politics/federal/labor-dumps-negative-gearing-backs-tax-cuts-20210726-p58cxs.html">couldn’t be trusted</a> on negative gearing.</p>
<blockquote>
<p>In a cynical move that is unashamedly motivated by the pursuit of power, Anthony Albanese is now trying to convince voters that Labor doesn’t want to abolish negative gearing or raise taxes on capital gains.</p>
<p>However, if we are to take the Labor Party at their word, ending negative gearing is an issue that senior Labor figures are deeply committed to.</p>
</blockquote>
<p>Sukkar backed up his argument with a bunch of quotes from Labor figures, including Albanese and Chalmers, supporting the old policy.</p>
<p>But the Housing Industry Association welcomed the Labor announcement on negative gearing and capital gains tax, saying it “will provide certainty for the housing industry and for Australians that are looking to invest or rent”.</p>
<p>Albanese also announced Labor would introduce a bill into the Senate “to improve the transparency and accountability of ministerial decisions with grant programs”.</p>
<p>This is to highlight the revelations about the political rorting in the government’s car park program at the last election.</p><img src="https://counter.theconversation.com/content/165084/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With polls showing Scott Morrison in a trough, Labor has become more optimistic about its election prospects and Anthony Albanese is ditching any baggage in pursuit of a win.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1622512021-06-08T04:47:02Z2021-06-08T04:47:02ZOther Australians don’t earn what you think. $59,538, is typical<figure><img src="https://images.theconversation.com/files/461939/original/file-20220509-26-g1sgw.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">taxret</span> </figcaption></figure><p>I’m guessing you earn less than A$200,000. </p>
<p>And I’m guessing you think you’re missing out. People keep telling you so.</p>
<p>On one side of politics Labor leader <a href="https://anthonyalbanese.com.au/media-centre/transcript-of-radio-interview-2-gb-money-news-monday-24-june-2019">Anthony Albanese</a> says anyone earning $200,000 dollars a year “can’t be described as being in the top end of town”.</p>
<p>On the other, Prime Minister <a href="https://www.pm.gov.au/media/doorstop-parkhurst-qld">Scott Morrison</a> parries with interviewers when asked whether people on $180,000 to $200,000 (the biggest beneficiaries of his planned 2024 Stage 3 tax cut) are “high income”.</p>
<p>“They’re hardworking people working out on mines and difficult parts of the country,” he says. “They deserve a tax cut.”</p>
<p>Hardworking or not, Australians on more than $200,000 are rare. And an awful lot of them don’t work at all.</p>
<h2>$200,000 is unusual</h2>
<p>I’ve never quite understood why politicians are so keen to tell us such incomes are normal. It might be because they are on them. Each backbencher gets <a href="https://www.remtribunal.gov.au/sites/default/files/2021-01/Remuneration%20Tribunal%20%28Members%20of%20Parliament%29%20Determination%202020%20DOE%2001-07-2020.pdf">$211,250</a> plus a $32,000 electorate allowance (boosted by $19,500 if they turn down the use of a private-plated vehicle) plus home internet and travel allowances.</p>
<p>Very detailed tax office figures (<a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/Taxation-statistics-2018-19/?page=2#Navigating_Taxation_statistics">updated on Monday</a>) tell us what the rest of us earn, all 14.3 million of us.</p>
<p>Only 2% of those required to pay tax earned more than $211,365. Only 3% earned more than $188,667.</p>
<p>Everyone else — the other 97% — earned less than $188,667, most of them a good deal less, and many more earned even less and weren’t required to pay tax.</p>
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<a href="https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/404989/original/file-20210608-28202-o41jp1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">What you report to myGov, the ATO reports to us, with a lag.</span>
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<p>The figures released on Monday are for 2018-19, because it takes a while for the tax office to receive and process all the forms. 2019 is when Albanese said $200,000 wasn’t the “top end of town”, 2018 is when Morrison unveiled Stage 3.</p>
<p>The typical taxable income (typical in the sense that half earned more than it, half less) was $59,538. If that’s what you’re on, you’re more likely to find people who earn close to what you do than anyone who earns more or less.</p>
<p>We can get an idea of how lonely it is at the top by examining the top 1%, those Australians with a taxable income of greater than $350,134.</p>
<p>There aren’t many of them, just 110,613 — 82,258 men and 28,355 women. </p>
<p>Only 39,209 have taxable incomes of more than $500,000, and of these only 14,467 have taxable incomes of more than $1 million.</p>
<h2>Life at the top needn’t be taxed</h2>
<p>You’re probably thinking there’s a difference between taxable incomes and actual incomes, and the tax office figures show you’re right. </p>
<p>15,358 Australians reported total incomes of more than $1 million. By the time they had applied legitimate tax deductions, the number had shrunk to 14,467.</p>
<p>Some of these million-dollar earners were able to shrink their taxable incomes very low indeed. 45 cut their taxable incomes to less than the tax-free threshold of $18,200 — meaning they didn’t have to pay anything, not even the Medicare levy.</p>
<p>Another eight managed to escape the Medicare levy even though their taxable incomes were above $18,200, and another 21 escaped income tax while paying the Medicare levy.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/yes-some-millionaires-pay-no-tax-but-crimping-deductions-mightnt-help-139279">Yes, some millionaires pay no tax, but crimping deductions mightn't help</a>
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<p>Many of these millionaires weren’t “hardworking” in the sense Morrison meant. Only 9,144 of the 14,467 Australians on taxable incomes of more than $1 million worked. Only 172,305 of the 222,813 Australians on more than $250,000 worked.</p>
<p>Only nine of the 45 million-dollar earners who cut their taxable incomes to less than the tax-free threshold worked. 27 received so-called <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">franked dividends</a> from companies that had paid tax, enabling them to cut their own tax bills or receive rebates from the tax office. On average, each received dividends of $2.25 million.</p>
<h2>Many who aren’t taxed are generous</h2>
<p>Seventeen of the 45 million-dollar earners received capital gains, on average $6.4 million each. 38 received interest, averaging $290,000 each.</p>
<p>Against that were set expenses, small and large. Three claimed for work-related car expenses averaging $27,340 each, 13 claimed expenses averaging $57,200 for assistance with tax affairs, eight claimed for previous losses from farms averaging $684,000 each, and eight for losses from other businesses averaging $408,000.</p>
<p>But by far their biggest expense was donations. 14 gave away a total of $161 million in gifts or tax-deductible donations — an extraordinary average of $11.5 million each.</p>
<p>Most of us aren’t like these people. </p>
<h2>Most of us claim more modest deductions</h2>
<p>Three-quarters of Australians in the tax system earn less than $89,173. </p>
<p>Those on that income typically claim between $1,500 and $1,900 in deductions (men claim more than women) and, thanks to negative gearing, claim losses on properties of between $1,800 and $2,600 (again, men claim more than women). </p>
<p>Such Australians typically report between $1,200 and $2,100 in capital gains (more for women than for men).</p>
<p>If higher-earning Australians are unaware of how most of us live, it’s understandable. Surgeons mix with other surgeons. On average each of Australia’s 4150 surgeons earns $394,303, making surgery our highest-paying occupation.</p>
<h2>We mix with, and marry, people like us</h2>
<p>And they increasingly marry each other. In 2010 the Productivity Commission found that 68% of Australia’s high earners were <a href="https://www.pc.gov.au/research/supporting/income-distribution-trends/income-distribution-trends.pdf">married to other high earners</a>. A decade earlier it was 49%.</p>
<p>And high earners live near each other. The average income in Sydney’s Double Bay (Australia’s highest-earning suburb) is $202,598. The average income in Ruse in Sydney’s Campbelltown is $55,100.</p>
<p>People in Double Bay don’t drive through Ruse on their way to the city.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-low-and-middle-income-tax-offset-has-been-extended-yet-again-it-delivers-help-neither-when-nor-where-its-needed-160772">The Low and Middle Income Tax Offset has been extended yet again. It delivers help neither when nor where it's needed</a>
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<p>In the United States it is often the other way around. There, low-income suburbs are more likely to be near the city, meaning that high-income Americans at least see them as they go in to town.</p>
<p>That most of us have little idea of what others earn suits those in charge when they propose tax cuts <a href="https://theconversation.com/the-low-and-middle-income-tax-offset-has-been-extended-yet-again-it-delivers-help-neither-when-nor-where-its-needed-160772">skewed to high earners</a>.</p>
<p>They can con us that most of us will be better off, and those on high incomes can con themselves they are not already better off.</p><img src="https://counter.theconversation.com/content/162251/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New tax office figures show only 2% of Australians earn more than $211,000 a year.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1477952020-10-09T04:49:10Z2020-10-09T04:49:10ZVIDEO: Michelle Grattan and Robert Tanton on the 2020 budget<p>In a special “The Week in Politics”, Michelle Grattan discusses the 2020 budget with Professor Robert Tanton, of the University of Canberra’s National Centre for Social and Economic Modelling.</p>
<p>The pair discuss the modelling of NATSEM in light of this year’s budget, the efficacy of tax cuts for individuals and tax breaks for businesses, as well as the debt and deficit forecasts, and Labor’s budget reply.</p>
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<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Michelle Grattan discusses the 2020 budget with Professor Robert Tanton of NATSEMMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1470992020-10-01T20:03:55Z2020-10-01T20:03:55ZThe 5-prong plan for a budget that will set us up for the future<p>For three decades, Australia’s economic story has been marked by abundance and wealth. Much of it has flowed from minerals, and a good deal more from earlier economic reforms.</p>
<p>COVID-19 has exposed how unprepared we are for a new uncertain reality. </p>
<p>Next week’s budget most certainly does have to address the recession we are in. But it also has to get us in shape for what’s ahead.</p>
<p>Property and resources booms have masked structural weaknesses.</p>
<p>Even before this crisis, our productivity growth had begun to lag other nations – and this was in the midst of a widespread productivity slowdown among advanced nations, dubbed “<a href="https://theconversation.com/vital-signs-if-we-fall-into-a-recession-and-we-might-well-have-ourselves-to-blame-118387">secular stagnation</a>” by former US Treasury Secretary Larry Summers.</p>
<p>Australia is ranked 22nd by Cornell University’s <a href="https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2019.pdf">Global Innovation Index</a>, 16th in competitiveness by the <a href="https://www.weforum.org/reports/the-global-competitveness-report-2018">World Economic Forum</a>, and outside the top 20 on multiple indicators of <a href="https://www.industry.gov.au/data-and-publications/australian-innovation-system-report/australian-innovation-system-report-2017">industry and business collaboration</a>.</p>
<p>Performing better won’t happen by itself.</p>
<p>The <a href="https://bit.ly/349MOj1">Budget Blueprint</a> we released this week suggests a five-prong plan.</p>
<h2>1. Continued financial support</h2>
<p>We need to set aside any usual concerns about public debt for the good of the nation. Providing too little support or withdrawing it too quickly would threaten our fledgling recovery. But we should prioritise support that has the best bang for buck, avoids perverse incentives, and adapts to changing circumstances.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/361028/original/file-20201001-17-11rhr5c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>We are suggesting</p>
<ul>
<li><p>Bringing forward planned personal tax cuts</p></li>
<li><p>Revenue-contingent loans for small and medium businesses.</p></li>
<li><p>Immediate capital expensing and hiring incentives for small and medium businesses</p></li>
<li><p>Investment in projects high on Infrastructure Australia’s priority list</p></li>
<li><p>Household cash stimulus payments of A$1,000 per adult earning less than $100,000 plus $500 for each dependent, and a further $750 for government payment recipients</p></li>
</ul>
<p>(The stimulus payments would hardly be a first. The Rudd government handed out two cash payments during the global financial crisis. The Morrison government handed $750 to pensioners, Newstart recipients, family tax beneficiaries, and other social security recipients early in the coronavirus crisis.)</p>
<h2>2. Medium-term fiscal discipline</h2>
<p>A ratcheting up of government debt over time poses big risks. Our existing fiscal and tax settings are ill-equipped to repay a net debt approaching A$1 trillion.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/361035/original/file-20201001-16-d28sja.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>We suggest</p>
<ul>
<li><p>Accounting separately in the budget papers for the cyclical and structural deficits</p></li>
<li><p>Credibly committing to drawing down net debt faster than through bracket creep alone</p></li>
<li><p>Increasing the cap on tax receipts from its current level of 23.9% of GDP</p></li>
<li><p>Committing to overhauling our tax and transfer system</p></li>
</ul>
<h2>3. Compassionate social initiatives</h2>
<p>During the crisis we have taken welcome steps to protect vulnerable Australians, but we need to do more. Societies are judged by how they treat their most vulnerable.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/361033/original/file-20201001-22-wn1eft.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>We suggest</p>
<ul>
<li><p>Targeted interventions and retraining to address the pandemic’s disproportionate impact on women and young people in the workforce</p></li>
<li><p>Additional funding for support services and strengthen legal protections to combat domestic violence</p></li>
<li><p>Permanent Medicare funding for bulk-billed telehealth services (psychologists, psychiatrists, and GPs) for those at risk of mental illness and suicide</p></li>
<li><p>Boosting funding for social housing to reduce the impact of homelessness and housing insecurity while supporting economic activity</p></li>
</ul>
<h2>4. Clean, cheap and reliable energy</h2>
<p>Many governments have leveraged COVID-19 stimulus to invest in clean energy. With excellent renewable resources and a strong clean-technology sector, Australia can play a key role in accelerating the transition to a low-carbon world.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/361039/original/file-20201001-21-kbx4zb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>We suggest</p>
<ul>
<li><p>Increasing funding to the Clean Energy Financing Corporation’s Innovation Fund and decrease its required rate of return</p></li>
<li><p>Creating a “Grid Expansion Fund” to publicly finance critical electricity transmission projects</p></li>
<li><p>Recasting the regulatory investment test for transmission infrastructure to include carbon emissions</p></li>
<li><p>Conducting rigorous cost-benefit analyses of investment options in the technologies other nations are investing in during the crisis such as green hydrogen and steel</p></li>
</ul>
<h2>5. Setting things up for the next boom</h2>
<p>The record-high debt incurred in World War II was followed by rapid growth that helped us pay it down. Getting us on a similar path today will require an industry policy that supports dynamism.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/361044/original/file-20201001-13-1m70all.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>We suggest</p>
<ul>
<li><p>Redesigning JobSeeker, offering more generous support in a smarter way to encourage better matches of workers to firms discourage over-reliance on welfare</p></li>
<li><p>Reforming and better funding the higher-education sector to promote competition and better prepare workers for the jobs of the future</p></li>
<li><p>Committing to supporting research, development, and deployment in science, technology, engineering, and related fields to drive innovation and productivity</p></li>
<li><p>Improving access to capital for young and fast-growing firms, learning from successful international efforts such as the Israel Innovation Fund</p></li>
</ul>
<p>Nothing focuses the mind like a crisis.</p>
<p>We think that with the right policy settings it is possible to get out of the slump we are in while creating the conditions that will ignite the next boom.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/top-economists-back-boosts-to-jobseeker-and-social-housing-over-tax-cuts-146914">Top economists back boosts to JobSeeker and social housing over tax cuts</a>
</strong>
</em>
</p>
<hr>
<p>Even better, we think it can be done while assisting the vulnerable and refashioning our energy system.</p>
<p>It’s a tall but important order. We are hoping for some first steps in the first pandemic budget on Tuesday night.</p><img src="https://counter.theconversation.com/content/147099/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Hamilton is chief economist at the Blueprint Institute.</span></em></p><p class="fine-print"><em><span>Daniel D'Hotman is a senior researcher at the Blueprint Institute.</span></em></p><p class="fine-print"><em><span>Josh Steinert is a researcher at the Blueprint Institute. </span></em></p>The budget needs to spend big, but it shouldn’t stop there.Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityDaniel D'Hotman, DPhil Candidate, University of OxfordJosh Steinert, UCLLicensed as Creative Commons – attribution, no derivatives.