Tax cuts will 'put pressure on inflation'
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Some economists are warning sweeping tax cuts announced by the Coalition today will make the Reserve Bank nervous and could push interest rates higher.
Prime Minister John Howard and his Treasurer Peter Costello today announced income tax cuts worth $34 billion over the next three years.
Mr Costello says the plan would still mean the Government's underlying budget surplus would remain above 1 per cent of gross domestic product.
Senior economist with HSBC, John Edwards, says the tax cuts would put upward pressure on inflation.
"It certainly means interest rates would be higher than they would otherwise be," he said.
"I cannot imagine were it not for an election the Treasurer would be contemplating these tax cuts of this order.
"It means that household consumption is going to be higher than it otherwise would be, residential construction is going to be higher than it otherwise would be.
But Mr Costello says by lowering tax rates and raising thresholds, Australian's will be better off and inflation will not be pressured.
"Let me make the point if you'd have spent the money you could have inflationary consequences, but to return it to people and to help them with their bills at a time when they're facing cost of living pressures, I think is a very responsible thing to do," he said
Peter Hendy from the Australian Chamber of Commerce and Industry (ACCI) agrees.
"The fact is that the Australian economy can always easily afford income tax cuts," he said.
The Chamber of Commerce also says the proposal to reduce the top tax rate by 5 per cent will make the Australian tax system the most competitive in the world.
Election scrutiny
Democrats Senator Andrew Murray says the Coalition is only targeting low income earners because it is facing the prospect of election defeat.
"We've argued for Mr Costello to adopt a structural tax plan and he's consistently refused to do so," he said.
"I mean for years we dubbed him the no tax plan man and it is disappointing that only now, when they're under real pressure they're finally recognising the needs of lower income Australians."
Senator Murray says despite finally making some changes, the Coalition's tax policy still has some big weaknesses.
"They do little to simplify the tax system by broadening the base. Broadening the base is tax speak for getting rid of unnecessary and wasteful tax concessions and raising revenue on that basis," he said.
"That of course would help to fund the tax cuts to not just lower income Australians but higher income Australians."
Opposition treasury spokesman Wayne Swan says Labor will not be outlining its tax plan until he has had time to assess the Coalition's tax proposal.
Mr Swan says Labor will make a responsible judgement on tax cuts before the election.
"The only responsible course of action here is to study the detail. We've said we'll put out all our policies well before the election and we'll do that," he said.
"But in terms of what the Government's put forward, we will take our time to study the detail. That's the only responsible and reasonable thing to do."
World beaters
Peter Costello says the Coalition's tax cut plan announced today is economically responsible, because it is fully costed and has already been paid for in the budget.
Mr Costello says the plan will encourage more people into work and is the result of a strong economy.
"You can examine the figures, but you'll find that this is costed, funded, responsible and we will have a surplus," he said.
"There aren't that many other comparable countries in the world, that are where we are. Certainly not America, not Britain, not France, Germany, Europe, Japan."
With the election campaign just beginning, Australian Prime Minister John Howard has promised AU$34 billion in personal income tax cuts over the next three years.  That is on top of $31.5 billion announced in May, and $36.7 billion announced in 2006.

The new tax cuts are based on new projections for growth in the Australian economy.  The Treasury estimates that the economy will expand by 4.25% in the 12 months to June 2008, up from growth of 3.75% predicted in May.

The Government has challenged the Labor opposition to announce their tax policy immediately. 

"The biggest, boldest tax plan that we've seen in a long time is presented yesterday, it deals with participation, competitiveness, building capacity in the Australian economy, and what does Kevin Rudd say? Nothing," treasurer Peter Costello said. "He better have an answer today."

Costello described the government tax policy as "very responsible" and said Rudd was a "Nothing Man" because he has not revealed Labor's tax policy.

The Shadow Treasurer, Wayne Swan, replied "The only responsible course of action here is to study the detail. We've said we'll put out all our policies well before the election and we'll do that".

"But in terms of what the Government's put forward, we will take our time to study the detail. That's the only responsible and reasonable thing to do."

Economists from Access Economics, the ANZ Bank, HSBC and Macquarie Bank noted that the tax cuts will boost demand at a time when the Reserve Bank is trying to slow the economy.  The Reserve Bank has been raising interest rates to keep the inflation rate within its target range.  Households with substantial mortgages could end up worse off.

Rudd has said the Opposition will reveal its tax policy in its own time - mimicking John Howard's approach when he was Opposition Leader in 1996.