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L.A.W tax cuts backfire again

Greg Combet claimed the promised tax cuts are being put off. AAP/Dean Lewins

When senior ministers decided to scrap the proposed 2015 tax cuts, the dark shadow of the L.A.W affair must have crossed their minds.

Paul Keating legislated tax cuts before the 1993 election, talking them up as L.A.W. But he scuppered the second round afterwards, because of budget difficulties. He then said he’d divert them into superannuation but didn’t last long enough to implement his grand plan, which was scuttled by the Howard government.

The Gillard government legislated the 2015 tax cuts as part of its carbon compensation package. It has already delivered the first round but now it has confirmed the second round is “deferred”.

It desperately needs the money. And, with the carbon price having crashed in Europe, people are not going to require the extra compensation.

Climate Change minister Greg Combet tried to make the best of the latest difficult iteration of the carbon debate, but he stretched credibility to breaking point.

Faced with the European price (around A$4-A$6), to which the Australian scheme will be linked from mid 2015, Treasury has revised its price estimate (previously $29 a tonne) for that year.

Getting these 2015 tax cuts out of the budget is a sensible fiscal decision. Even if the European price rises, there is no chance of it reaching anywhere near the original assumption on which compensation was based. The compensation package will be out of kilter from 2015.

So it’s prudent to make what changes are possible, both to get the package better balanced and to help address the budget woes. The government may be still aiming for a surplus at the back end of the forward estimates period.

It is planning other cuts to the carbon package, with Combet saying it wanted it “broadly budget neutral” but declining to give detail of these or the assumed 2015 carbon price.

The government feels that it can’t change the welfare increases due in 2015. Too hard politically. The $1.4 billion tax cuts are easier to stop. They are a fair way away; Combet said they amounted to only $1.59 a week for most taxpayers earning up to $80,000 a year.

But instead of admitting the tax cuts are gone, Combet claimed they are just being put off. “I say they are deferred because when the carbon price rises again in the future… those tax cuts will still be implemented at that point of time”, he said. “They’ll be deferred until such time as the carbon price exceeds $25.40, whenever that may be”.

The “deferral” description is spin. Even in the improbable circumstances that Labor survived and the European carbon price rose dramatically, the “deferred” tax cut would be overtaken by other imperatives.

The opposition gains every which way. It can attack the government over its reversal but gets the advantage for its bottom line. And its own pledge to give people a tax cut while at the same time abolishing the carbon tax becomes somewhat more manageable.

Julia Gillard recently seemed to assure a people’s forum in Melbourne that people would get all the compensation that had been promised, despite what was happening to the European price.

But when her words are carefully parsed there is a get-out-of-jail phrase. “You will see all of the household assistance that is being delivered staying, absolutely”, she said.

The tax decision is yet another broken promise. But who is counting now? Anyway, better to break a promise just before an election than just afterwards, as Keating did following what, at the time, was considered the “unwinnable election”, and Gillard herself did many years later.

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