Australia PM to modify proposed tax cuts, stoking fears of inflation

Australian Prime Minister Anthony Albanese considers modifying proposed tax cuts for higher earners, potentially breaking an election pledge and raising concerns about inflation.

Australia Prime Minister Anthony Albanese said on Wednesday, January 25, 2024, that he would consult lawmakers to modify proposed tax cuts for higher earners, potentially breaking an election pledge in a decision some economists worry could stoke inflation.

The already-legislated tax cuts were due to abolish a 37% tax band for those earning A$1,20,000 to A$1,80,000, as well as applying a 30% tax rate to income between A$45,000 and A$2,00,000 which currently begins at 32.5%.

Local media reported the 37% band would be retained under the new proposal, with the saving redirected to those on middle and low incomes.

Mr. Albanese told a news conference that he would be taking a revised proposal to Labour parliamentarians later on Wednesday, without elaborating further. “We understand that Australians are under pressure. And we’re providing support through the plan that I will take to the Party room this afternoon,” focusing on middle Australians, he said. The Australian Financial Review reported the country’s Finance Ministry has advised the modifications would be budget and inflation neutral, without citing its sources.

Shane Oliver, chief economist at AMP, said the proposed changes benefit low — and middle-income earners, who tend to spend rather than save, risk adding to inflation in the second half of the year and potentially delaying interest rate cuts. “The (central) bank will be a bit nervous about it, and we’re thinking the first cut could come as early as June, and the risk is this could delay that,” he said.

Mr. Albanese has faced criticism over his repeated promise to retain the tax cuts, as many in the country suffer surging living costs where outgoings including rents and food prices have far outstripped wage growth. But reneging on his election promise also comes with political risk, with his approval ratings close to their lowest levels since taking power in May 2022.