A pre-election splurge: what lamingtons have to do with tax cuts | Tax

Governments can’t help themselves when it comes to feeding the media chooks around budget time. With a federal election looming, expect a smörgåsbord.

Over the weekend, the Murdoch tabloids delivered front-page froth with news the Morrison government was giving “serious consideration” to halving the beer excise, potentially saving 30-50 cents. Literally, hold my beer.

On Monday, a kind of reverse sweetener appeared in the Nine papers, with “increasing concerns within the government” about the potential end of an offset worth as much as $1,080 a year for taxpayers lest its extension stoke inflation.

The latter, about the low and middle income tax offset – dubbed “lamington” for its acronym, LMITO – deserves a closer look.

What is the lamington?

Apart from being a New Zealand dessert purloined by Australians, the lamington, in a fiscal sense, is a temporary tax cut for those earning less than $126,000 a year. Those eligible receive it when they file taxes.

As the Grattan Institute noted a year ago, the lamington was meant to be temporary and replaced this year by the so-called stage 2 tax cuts.

Richard Denniss, the chief economist at the Australia Institute, says the offset costs the budget about $7bn a year.

That sounds like a lot, but it goes to many workers. It compares with the $16bn a year that will mostly go to high-income earners in permanent legislated stage 3 tax cuts from 2024, rising to $30bn by 2030.

Another serving of lamingtons?

A hint at why the lamington will almost certainly be extended for another year is that it was doubled in the 2019-20 budget from $530 to $1,080.

That was the “back in black” budget wheeled out by a desperate Morrison government declaring it had a secured a surplus just prior to winning re-election in May 2019.

“We are baking into our system lower taxes,” the treasurer, Josh Frydenberg, told ABC RN Breakfast on Monday, adding piously he was “not going to preempt” what his budget would include or exclude next month.

Denniss is highly sceptical Frydenberg has any intention to dump the offset, noting how grim post-budget headlines would look if they took money from the many while locking in largesse for the wealthy starting at $9,000 a year in stage 3 tax cuts.

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“How do you get big positive news out of this pre-election budget for leaving things the same?” he says. “Presumably you tell everyone they’re about to lose it – and then go and rescue it.”

“The idea that Scott Morrison is going to choose fiscal conservatism over a populist cash splash when they’re this far behind in the polls seems quite unlikely.”

What about the inflationary effects?

A purported reason for not renewing the lamington is that the inflationary hawks at the Reserve Bank are circling.

Having that (up to) $1,080 offset for another year would only stoke more spending when consumer prices are starting to heat up, adding to the risk official interest rates will soon rise.

Yes, the low and middle earners are more likely to spend that money, but a lot of it would probably go on mortgage repayments rather than goods and services.

And if the government was really worried about extra spending, why not avoid dipping into that $16bn honeypot of yet-to-be-announced pre-election splurges?

In any case, the RBA governor, Philip Lowe, insists at every turn he’s in no hurry to lift interest rates. Last week, he said he was prepared to watch inflation for “a couple” of quarterly consumer price index “prints”, which takes you out to August at least before the rates button gets pushed.

Another serving of lamingtons, in other words, won’t make a difference.

Other views

Frydenberg, though, wasn’t only talking lamingtons today.

He also wanted to highlight analysis “based on unpublished Australian Tax Office data” (reprinted in the Nine papers and repeated on Radio National) that show 5.2m women have enjoyed average tax cuts of $3,130 since the 2018-19 budget.

Indeed women under 24 are paying 20% less tax, he says.

Cassandra Goldie, the chief executive of the Australian Council of Social Service, said the three-stage tax cuts had been regressive and “claims that young people and women – who mostly have lower incomes – are the main beneficiaries don’t withstand scrutiny”.

“The stage 3 tax cuts, which give an extra $180 a week to those with the highest incomes, are especially damaging and inequitable,” Goldie said. These cost $16bn a year, with two-thirds going to men, as they make up that share of the 10-15% of income earners above $120,000 a year.

“People on low and modest incomes (and most women) would be better off with an improved income support safety net, lower childcare costs and overdue investment in other essential services,” she said.

Labor’s shadow treasurer, Jim Chalmers, took up the theme of the lamington being on the hitlist.

“[W]orking families – millions of them – face a tax hike on the first of July, a few weeks after the next election,” he said, adding that “if Australians want cost-of-living relief, they need Labor’s plans for childcare, and cheaper and cleaner energy, and our plans to get wages growing again.”

Adam Bandt, the Greens leader, said a permanent wage rise would be better than a temporary tax cut.

“While the Greens haven’t stood in the way of support for low-income earners, people would be better off if we lifted wages, taxed the billionaires, made dental part of Medicare and abolished ‘voluntary’ school fees instead,” he said.

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