Hard choices for Labor - social justice and inflation

One of the most notable aspects of the recent past Federal election campaign was Labor’s swift emulation of the Coalition’s tax policy. Labor promised $34 billion in tax breaks, with much of the largesse being transferred to those on higher incomes.

The deferral of $3 billion in cuts for those on incomes of over $180,000 a year, here, is best understood as an ineffective and empty gesture.

The “simplification” of PAYG tax, with a reduction in the number of tax brackets from four to three also promises to “flatten” the system, rendering it significantly less progressive.

Now, in the wake of the election campaign, Labor is facing a raft of hard choices. Economic forecasters are warning of the prospect of inflation, and already official interest rates have risen once this year. It is likely that this will be the first official interest rise of many in the year ahead for the fledgling Labor government.

High rates of inflation threaten uncertainty and economic instability: providing a disincentive for savings and investment.

What is neglected, though, in popular neo-liberal responses to inflation, is a balanced assessment that takes into consideration impacts on equity, wage justice and unemployment.

There are many possible responses to inflation: including wage restraint, tax reform and austerity. Labor is also looking to respond to “capacity constraints” which can feed into a vicious cycle of inflation. Particularly, the government is looking to fund education and training: to counter skills shortages, and to invest in infrastructure: removing “infrastructure bottlenecks”.

Australians are well-justified, however, to ask whether or not Labor has “backed itself into a corner” on the issues of tax reform and inflation.

According to The Age, Labor “is looking for another $3 billion to $4 billion in cuts for the May budget, on top of the $10 billion Labor identified before the election”.

But while Labor Finance Minister, Lindsay Tanner rightly belittles the Coalition for its economic irresponsibility, Labor’s own culpability in raising expectations of sweeping tax cuts must be admitted. Labor now faces the inpalatable prospect of wide-ranging austerity; and of struggling families being forced “to the wall” as a result of the housing bubble and continuing interest rate hikes.

At this point, there are a number of questions that are worthy of consideration.

If demand must be reduced in order to counter inflation, surely it is better to do so through a targeted expansion in taxation, and by more severe means testing of programs such as Family Tax Benefit B and the Private Health Insurance Rebate.