Better wages and public services should come before tax cuts

| May 11, 2018

The Coalition government’s 2018 budget features a plan to cut personal income taxes for many Australians over the next few years.

The government claims it wants to reward lower- and middle-income wage-earners with tax savings.  However, the biggest personal tax reductions would not be experienced until 2022 and beyond, after at least two more federal elections.  Furthermore the biggest savings go to those with incomes over $200,000 per year – the richest 3 percent of tax-filers.

Our analysis at the Australian Centre for Future Work on the 2018 Budget explores the relationships between wages and taxes, and shows that working to reverse recent unprecedented wage stagnation is the key to achieving ongoing improvements in living standards – rather than pre-election tweaks in the tax code.

Our budget analysis finds that the boost in disposable incomes for most Australians from these changes will be miniscule, not making any measurable difference to their standard of living

The biggest cause of stagnating living standards in Australia has been the deceleration of wage increases since 2012. The budget assumes that wage growth will suddenly rebound in coming years to more traditional rates of 3.5 percent per year. This assumption underpins the government’s revenue forecasts – but there is no plan for achieving faster wage growth.

To the contrary, the government’s continuing labour policies will suppress future wage increases. This includes its own 2 percent cap on wage increases for federal public sector workers; the government is restraining wage growth for its own employees to barely half of what it hopes for the whole economy.

Restoring normal wage patterns would therefore boost disposable incomes for Australian workers many times more than tweaks to personal tax rates and thresholds.

For example, for a worker earning $60,000 per year, higher than the median income of Australians, the Coalition tax plan will increase disposable income by $530 by the last year of the budget period in 2021-22.  In contrast, annual normal wage increases, of 3.5 percent per year, would boost disposable income that same year by almost $6000 – 11 times as much.

Supporting public services

The importance of public services to quality of life must always be kept front and centre in any discussion about tax cuts as a strategy for “supporting workers.”

After all, the total material standard of living of Australians depends both on the private consumption they purchase with their personal incomes, and on the collective consumption which they can access via publicly-provided goods and services.

Those public services make up a significant portion of total consumption – all the more so for lower-income Australians whose private consumption is limited by their incomes.

In Australia in 2017, total household personal consumption was slightly more than $1 trillion. That consumption was concentrated disproportionately among high-income households due to their greater purchasing power.

Consumption of public services at all levels of government, meanwhile, equaled $332 billion. And consumption of public services is distributed relatively equally across society; if anything, lower-income households may receive a slightly greater-than-proportional share of public health care, education, and other services.

Public consumption – or what is sometimes called the “social wage” – thus represents one-third of the value of private consumption. And for lower-income households, that proportion is greater.

Ultimately, of course, governments must collect taxes to pay for those public services. When governments deliberately undermine the revenue base for the delivery of those services – even if done through measures which are promoted as “helpful” to working people – the necessary trade-off will be a reduction in consumption of public services that will match or exceed the seeming “savings” delivered through a tax cut.

This article was written by Jim Stanford and Troy Henderson. Read the full report here.