July 1 is the start of the new financial year, and for the Rudd government two important pieces of public policy created as a result of promises made by the Labor party in the 2007 federal election also apply for the first time.
The first of these is another round of tax cuts. Promised by Mr Rudd as a counter to the tax cuts offered by the then prime minister John Howard, these cuts replicate the Liberal approach to tax cuts.
In short, this involved giving very significant cuts to high income earners, small tax cuts to middle income earners, and almost nothing to low income earners.
The Liberals did this partly to reward their high income earning core constituents, and partly as a result of Treasury advice.
Given that there are far fewer high income earners than low income earners, a tax cut for high salary earners exposes the government to a much smaller fiscal liability than if a middling tax cut was given to low income earners.
Besides which, the Howard government gave tax cuts during the good economic times when inflation was a problem.
Giving high income earners tax cuts poses less of an inflationary threat, as high income earners are more likely to save their windfall than low income earners.
It was interesting to see shadow treasurer Joe Hockey repudiate the tax cut policy in a recent speech to the CEDA organisation.
Hockey was, of course, actually criticising the Rudd government’s decision to go through with its tax cuts despite the major change in the prevailing economic environment.
With the government now concerned about maintaining revenue amidst a serious recession, the case for giving tax cuts now has been substantially weakened. The Rudd government has persisted with the commitment, however, for political reasons.
No doubt mindful of the trouble Paul Keating got in to with his ‘LAW tax cuts’ after the 1993 election, Rudd would be anxious to avoid being seen to be mean and tricky on tax matters.
The need to be seen to be delivering on an election promise is all the more necessary if the government goes to an early election – and there is every indication that that is what Rudd intends to do.
In the meantime, Labor’s ‘Work Fair’ industrial relations program also kicked in on 1 July – the second important election commitment to now become policy.
Rather like the tax cut, the commitment to bringing in a Labor approach to industrial relations that returns a form of unfair dismissal laws, reinstates the judiciary as an important arbitrator in industrial matters, and returns collective bargaining and a role for the unions reflects a triumph of politics over economics.
A run to the new industrial relations tribunal to seek pay increases especially for the lower paid seems inevitable with the new scheme, and this has worried Mr Rudd who last week called on unions to exercise restraint.
The government’s fear is that wage increases occur amidst the Global Financial Crisis-induced recession, and that high unemployment will be the result.
Rather like the tax cuts, one can imagine the government’s economic advisers urging the government to deflect this reform in the interests of sound economic policy. The political reality, however, is that Work Fair was going to have to be instituted regardless of the economic consequences.
This was due to more than just a concession to Labor’s affiliated trades union. A promise to do away with the Howard government’s laws and replace them with something else was the cornerstone of the Rudd Labor party’s 2007 election campaign.
There is a sense, then, that Labor has delivered on two policy commitments made during the 2007 election when the Australian economy was booming and before the Global Financial Crisis hit.
There may well be economic reasons why the tax cuts and, indeed, Work Fair might have been delayed. In this case, however, political imperatives have displaced economic rationality.
In the meantime, the third major commitment – to achieve a major climate change policy based on an Emissions Trading Scheme – has yet to be resolved.
This, too, will have major economic consequences, although the fate of the ETS will in fact be decided by political considerations. The fate of the ETS needs to be watched carefully, for this could be the issue that sends Australia to an early federal election.
Dr Economou is a senior lecturer in Politics at Monash University.