Fiscal challenges spark controversy
The government’s plan to implement full tax cuts in the upcoming budget is now under scrutiny due to a faltering economy and a worsening fiscal position. according to Infometrics’ Gareth Kiernan (pictured above).
“The deficit is tracking to be $1.8 billion larger than forecast,” Kiernan said, emphasising the significant drop in corporate tax revenue, which has fallen about $3.1bn below last year’s expectations. This financial backdrop sets a complex stage for the tax cut discussions.
Evaluating the wisdom of tax cuts
Kiernan questioned the prudence of implementing tax cuts while already in a budget deficit.
“Aren’t tax cuts stupid when we’re already in deficit?” he said, pointing to the Treasury’s prediction of a prolonged return to a budget surplus. This perspective challenges the government’s current approach, suggesting that alternative fiscal strategies might be more responsible in the current economic climate.
The inflation argument and fiscal policy
Contrary to some arguments, Kiernan believes that tax cuts would not necessarily fuel longer-term inflation.
“No, tax cuts won’t just keep inflation higher for longer,” he said, suggesting that if tax cuts are balanced by equivalent reductions in government spending, the overall money flow in the economy remains unchanged.
This view proposes that the right kind of tax cuts could potentially align with monetary policy objectives by encouraging saving and debt reduction among households, rather than unchecked spending.
Reassessing the nature of tax cuts
Kiernan also touched upon the concept of “fixing fiscal drag” rather than traditional tax cuts.
He explained that the adjustments proposed are essentially meant to realign tax thresholds to the real purchasing power they represented in the past, considering significant inflation since their last setting.
“The ‘tax cut’ phrasing is all a bit peculiar anyway,” Kiernan said, indicating that these adjustments might be more about correcting fiscal discrepancies caused by inflation rather than cutting taxes in the conventional sense.
Political and economic trade-offs
Ultimately, Kiernan hinted at the political nature of the tax cut debate, recognising that while economically questionable, the promise of tax cuts can be a powerful tool for winning votes.
He suggested that given the current fiscal conditions, a staggered approach or delaying tax relief might be a more prudent compromise that aligns political goals with fiscal responsibility.
“Like the politicians’ pay freeze of the last seven years, the current dilemma highlights the need for settings to be adjusted gradually with inflation,” Kiernan said, advocating for a more thoughtful and transparent approach to tax policy adjustments.
Kiernan’s opinion piece, first published on Stuff, can also be accessed on Infometrics’ website.
Get the hottest and freshest mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
