Tax Cuts Can't Compensate for Flat Wages

This week's pre-election Commonwealth budget will feature reductions in personal income taxes, as the Coalition government tries to overcome a disadvantage in the polls in the coming federal election. Public debate in recent weeks has been focused on the economic and social hardship caused by the unprecedented slowdown since 2013 in Australian wage growth. It is likely that the government will portray its personal tax cuts as a form of "compensation" for slower wage growth.

But new analysis from the Centre for Future Work shows it is mathematically impossible for personal income tax cuts to offset the loss in family incomes resulting from years of wage stagnation. The report simulates the effects of ongoing regular wage increases on household incomes, compared to the "savings" of personal income tax cuts. Regular, compounding wage increases provide boosts in disposable income dozens of times larger than tax cuts. Moreover, tax cuts always come with a "cost" for households - in the form of foregone public services and income supports that also contribute to workers' standard of living.

Highlights of the new research include:

  • Every one of the government's budgets since its first (in 2014-15) has wildly overestimated the growth of wages in its official forecasts. Every single year-forecast in every budget (14 year-forecasts in total) has overestimated actual wage growth. If workers' wages had actually grown as fast as government budgets predicted, the average full-time worker would have $4000 per year in additional income today than they actually do.
  • Wage increases in Australia, already inching along at record-low rates, slowed down further in the December quarter – to an annualised rate of less than 2%. A temporary rebound in wage growth earlier in 2018 was mostly due to a stronger increase in the minimum wage (3.5%), which came into effect on July 1, but has now been absorbed by the labour market.
  • Personal tax cuts likely to be included in the 2019-20 Commonwealth budget will have only a small impact on disposable incomes for workers: worth less than 0.5% for most workers (and worth nothing for many workers). Moreover, the “savings” of tax cuts are offset by the cost of foregone public services, infrastructure and income supports which inevitably accompany shrinkage of the government revenue base.
  • In contrast, annual wage increases at traditional rates (around 3.5% per year, such as prevailed in most years prior to 2013) deliver much greater benefits to workers. Even after deducting taxes on their extra incomes, workers at various income levels receive much larger gains from normal wage increases than tax cuts – especially when those increases are compounded over consecutive years.
  • For example, a worker earning $60,000 per year would see a $210 increase in disposable income from the simulated tax cuts. But they would receive almost $1400 extra disposable income (almost 7 times as much) from a single 3.5% wage increase. And close to $6000 (over 20 times as much) from 3 consecutive years of normal wage increases.

It is mathematically impossible for tax cuts to deliver ongoing improvements in disposable incomes, let alone of a scale comparable to the benefits of normal wage growth. To genuinely achieve rising living standards for working Australians, the emphasis of economic and budget policies should be shifted to strengthening the institutions (like minimum wages, the awards system, and collective bargaining) that could rekindle normal wage growth.

The full pre-budget briefing paper, Wages, Taxes and the Budget: How to Genuinely Improve Living Standards, by Dr. Jim Stanford and Troy Henderson, can be downloaded here.


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