ON THE first day of his final election campaign John Howard made a claim that no prime minister could have contemplated for 30 years. He said the unemployment rate could soon have "a three in front of it". The last time the jobless rate was in that range Gough Whitlam was PM.
On the second day, Mr Howard stood beside Peter Costello to unveil tax cuts worth $34 billion over the next three years and with an additional, unspecified amount to come beyond that. That enormous election pledge comes just five months after the $31.5 billion worth of personal income tax cuts in the May budget which, in turn, had built on $36.7 billion in tax cuts the previous year.
By promising even more jobs and yet another tax cut, the Coalition has pulled out heavy economic artillery at the beginning of the election battle. But the Prime Minister's jobs prediction on day one foretold danger in his tax plan of day two: higher interest rates.
Can Australia have further falls in unemployment and more tax relief, without putting upward pressure on interest rates?
The very low rate of unemployment shows the economy is already at the limits of its capacity. That's why the underlying rate of inflation is near the top of the Reserve Bank's target band of between 2 and 3 per cent despite nine successive interest rate rises since 2002. In these circumstances, further economic stimulus in the form of tax cuts threatens to put more upward pressure on inflation and, therefore, more medium-term pressure on interest rates.
Mr Howard claims that the structure of the tax relief announced yesterday will help alleviate the shortage of labour by encouraging more people to work. Treasury modelling shows the plan to lift the tax-free threshold and raise the threshold at which the 30 per cent tax rate cuts in will prompt an additional 65,000 people to enter the workforce over the next three years. But will that be enough?
Australia's long run of economic growth has been underpinned by modest wage growth. But as the unemployment rate continues to plumb new depths, the pressure on wages may build.
The official budget report released with yesterday's tax cut plan predicted a lift in the inflation rate. The Government's official inflation forecast for this financial year was increased from 2.5 per cent to 2.75 per cent. It also lifted its prediction for employment growth this financial year from 1.5 per cent to 2.25 per cent, flagging a drop in the the current jobless rate of 4.2 per cent.
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.