While everyone is busy retrofitting Britain’s currency meltdown into their priors on Australia’s stage three tax cuts, time to draw breath and remember: your political enemy’s enemy is not necessarily your friend.
Tempted to parley the UK financial market’s repudiation of the Truss-Kwarteng high-end tax cuts into a demand that Labor drop Morrison’s top-end-leaning tax cuts? Remember the words of Admiral Ackbar in Return of the Jedi: it’s a trap!
We don’t — or shouldn’t — want what the markets want. Pressure from the finance markets needs to be managed, not embraced.
Sure, there are good reasons for opposing the stage three cuts. Like the UK proposal, they give too much to people who don’t need it and will deepen inequality. But that’s not what the financial markets care about. They haven’t suddenly gone all a-Piketty at the overreach of the UK Tories in looting the treasury for their rich mates, demanding the sort of tax structure that will push back against inequality.
They’re the baddies. They’re fighting to shape the post-pandemic economy with an ideological yearning for that most poisonous of modern nostrums — austerity economics.
Australia’s media are slow to pick up what’s going on, busy as they are trying to keep up with what happens week by week as the world sloughs its way out of the COVID pandemic.
But let’s not look at what happened last week. Let’s look back further — not far, just a decade — to see how markets (and right-wing politics) manoeuvred their way (and their self-interests) out of the past crisis.
Remember how the dance went? Governments throw money at the crisis. The market elite — institutions, big-head economists, financial investors — raise the inflation panic coupled with the threat that the market’s “bond vigilantes” will effectively short-sell the country. The only response? Austerity.
In the wash-up of the 2008 financial crisis, the European version of the dance caused a renewed problem: the so-called sovereign debt calamity, with Germany putting its foot down hard on the debt brake and insisting the rest of the continent did the same.
Many of the traditional social democratic parties wore the blame — the French socialists, Italy’s Democratic Party, Greece’s PASOK. This opened the door for the far right to leverage the misery austerity caused into political gains, like Brexit and Trump.
Stumbling into office and casting around for an economic policy, the populist right (Trump in the US and Sebastian Kurz in Austria) reached back into the 1980s Reagan-Thatcher playbook of tax cuts for high-income earners. In the UK, the top rate was cut from 50% to 45% in the last months of the Cameron government.
Australia avoided the worst of it. In government until 2013, Labor tried to scrape and shave its way to a budget surplus but was never prepared to do the nasty work that, say, the Tory-Lib Dem coalition in the UK was prepared to do.
When Abbott tried, with the Shepherd National Committee of Audit priming the 2014 budget, he was dragged down by the “no cuts” commitments he’d been foolish enough to make live on television.
After the shock of the 2016 election, the Liberal government adopted the very Morrisonian model of modern politics: keeping your base on side by shaking enough loose change out of the treasury to keep them happy — from one-off community grants to high-end tax cuts.
Pre-COVID, the finance market didn’t care: as long as governments seemed more or less on track for surpluses (or, at least, controlled deficits), they were happy to cash the benefits the tax changes brought them personally.
The cost of COVID shattered the market’s complacency. And as 2022 brought inflation (for whatever cause), the long-silent vigilantes were roused to life, bullying central banks to raise interest rates harder and faster, encouraging opposition to the Biden government’s Build Back Better plans, and demanding “budget repair”.
The ill-conceived Truss-Kwarteng plan to cut the UK top rate to 40% provided the opportunity to make an example, and what an example it’s turned out to be. The likely result? A less equitable tax system and a harsh program of cuts to social programs.
Labor, meanwhile, will have read the lesson from reawakened market attention to budgets. Expect it to have been factored into this month’s budget review, with a dutiful nod to budget repair and a “no surprises” caution.
The UK market ructions may have helped open the door to some adjustments around the edges that are defensibly minor (Labor will want to do something about the expiring low- and middle-income tax offset, for example). But it will have locked hard the door to the Greens’ urging to replace the cuts with increased social spending.
