Tax Cuts and Inflation

[ernie]

With another rate rise expected in February, what is your opinion regarding further tax cuts in next year's budget? I would think that if the government was serious in tackling inflation - and thus future rate rises - then it should be thinking twice about tax cuts for now. Basic economics tells us that putting more money into people's pockets will increase spending and correspondingly inflation.

I'm not saying that I wouldn't appreciate more tax cuts, especially since that would mean more money to pay off my mortgage/investment debts. Just thinking more of the "big picture". If the current give with one hand (tax cuts) and take with the other (rate rises) continues, us taxpayers are none the better anyway. Once inflation is under control then the govt can get back to tax reform mode.

Your thoughts?

 

[alexlee]

With another rate rise expected in February, what is your opinion regarding further tax cuts in next year's budget? I would think that if the government was serious in tackling inflation - and thus future rate rises - then it should be thinking twice about tax cuts for now. Basic economics tells us that putting more money into people's pockets will increase spending and correspondingly inflation.

Pollies also want to get elected. The RBA is generally understood to be independent, and therefore the government can blame the RBA for rate rises. However, especially after Howard era tax cuts, if voters perceive Rudd to be causing financial hardship to the good ol' aussie battler......

I'm not saying that I wouldn't appreciate more tax cuts, especially since that would mean more money to pay off my mortgage/investment debts. Just thinking more of the "big picture". If the current give with one hand (tax cuts) and take with the other (rate rises) continues, us taxpayers are none the better anyway. Once inflation is under control then the govt can get back to tax reform mode.

What makes you think pollies think about the big picture?
Alex

 

[marg4000]

There is no way Rudd will reneg on the tax cuts.

A labour government did it in the 1990's, promised tax cuts then did not give them. They have never lived it down.

But I bet this time they come with some way of giving with one hand and taking it back with another.

Ah, politicians!!
Marg

 

[LynnH]

Agree! After Keating's "L - A - W" tax cuts that didn't eventuate, it would be political suicide for a Labor government not to give tax cuts that had already been 'promised'.

Cheers
LynnH

 

[Ausprop]

ernie why do you feel the govt can look after your money better than you can? I say stop taking my dam money if you dont plan to spend it on anything useful and I will decide if I want to go out and borrow, pay off my home loan, burn it on the street or whatever.

 

[ianvestor]

Good point Ausprop, and to add to that, why shouldn't the people who are not paying off a mortgage, and who are uninterested in the cash rate, not get a tax cut?

 

[dave99]

What point is a $20/week tax cut if it causes prices to increase $20/week?

"More money in my pocket" is pointless if the economy is at capacity, which is the current situation.

- Dave99

 

[Ausprop]

all I am told is that working families are struggling and are more debt laden than ever before. if times are so bad, tax cuts can be used to reduce debt, decreasing foreign liabilities in the process and thus reducing inflationary pressures and the balance of trade and interest rates. The argument that it is inflationary assumes that we will spend it on cr@p... who is the govt to dictate what we spend on? it was never their money in the first place.

Signed,
over taxed, over burdened, over governed.

 

[dave99]

You're right - if people would save tax cuts rather than spend on consumption, tax cuts would not be so inflationary. But the savings rate is what it is - wishing for people to save more doesn't make it happen. The Government needs to operate to this reality.

It's true that it's hard when rates rise. But the alternative is to keep them low in the face of high inflation, the inflation becomes entrenched at 7-10%, a bubble forms and then we get a crash. I reckon it's better to suffer a little now rather than be unemployed later. An independent RBA (unlike government) can follow this method even when it's unpopular - like now.

- Dave99

 

[ianvestor]

What point is a $20/week tax cut if it causes prices to increase $20/week?

"More money in my pocket" is pointless if the economy is at capacity, which is the current situation.

- Dave99

Because those are just averages, so why shouldn't someone who only spends on things that will rise by $5 per week be entitled to his tax cut worth $20/week?

Not everyone earns the same, and not everyone spends the same.

 

[ernie]

ernie why do you feel the govt can look after your money better than you can?

Hi Ausprop,

Not sure how you came to the above conclusion, but that is not what I meant. Personally I would be happy with more money in my pocket. The point I was trying to make is that in a general sense by providing further tax cuts, more money is put into the system which correspondingly drives up inflation. Look at what the Americans are doing now -- cutting their taxes to encourage spending to fight off a possible recession. If our biggest threat at the moment is inflation, surely putting more money into the system through any means (not just tax cuts) is not the best way forward.

Of course I recognize that the Rudd government has already committed themselves to this so to go back on it would be political suicide. They will have to rely on the RBA to do the tough job for them. Ah pollies...

Cheers,

e

 

[ernie]

Because those are just averages, so why shouldn't someone who only spends on things that will rise by $5 per week be entitled to his tax cut worth $20/week?

Not everyone earns the same, and not everyone spends the same.

Ah but his * repayments will rise as well, since the RBA will continue to raise rates as long as inflation remains a threat. What are the chances that a rise in rates wipes out whatever benefit the tax cuts provided?

*insert all that apply:
home loan
IP loan
personal loan
margin loan
credit card
etc, etc

 

[ernie]

What makes you think pollies think about the big picture?
Alex

Hi Alex,

I'm the one thinking of the big picture here. Not sure about the pollies though

Cheers,

e

 

[JoannaK]

The problem I have with the tax cuts is that it is inflationary, and will put upward pressure on rates. But the govt is quite happy for us to spend the extra $20/week or whatever it is....why? because they recoup it back anyway via GST revenue!

why doesn't the govt say to the people...we will give you something back, but we will put it into your super account...that way the nation grows stronger by way of savings, there's no extra inflationary pressures, and people are still getting something back.

I think that's a great way of going about it.

 

[ernie]

snap!

snap!

http://business.brisbanetimes.com.a...ting-inflation-is-so-vital/20080211-1rlo.html

 

[FHB]

Tax cuts aren't necessarily inflationary, they can be used for consumption, or for savings, etc. The bonus to providing tax cuts is increasing labor supply. More people work if they get more money, this is what the Howard govt argued.

The question is what effect will dropping the tax cuts have on interest rates? Some economists are suggesting 50 points, but remember tax cuts increase money in consumers hands over time, the tax changes are scheduled to take effect over the next 5 years, so the full stimulatory effect of this money won't be felt for some time. If the US slow down hits Australia sometime down the track, the tax cuts just might save us.

BTW, putting tax cuts in super is still inflationary, the money is spent buying stocks on the market, which then goes back into circulation, it won't increase labor supply like tax cuts might.