Australian leader could backtrack on proposed tax cuts for the wealthy

Sydney — Australian Prime Minister Anthony Albanese said on Wednesday he would consult legislators to modify proposed tax cuts for higher earners, potentially breaking an election pledge in a decision some economists worry could stoke inflation.

The already-legislated tax cuts were due to abolish a 37% tax band for those earning A$120,000 ($78,960) to A$180,000, as well as applying a 30% tax rate to income between A$45,000 and A$200,000 which currently begins at 32.5%.

Local media reported the 37% band would be retained under the new proposal, with the saving redirected to those on middle and low incomes.

Albanese told a news conference he would be taking a revised proposal to Labour parliamentarians later on Wednesday, without elaborating further.

“We understand that Australians are under pressure. And we're providing support through the plan that I’ll take to the party room this afternoon,” focusing on middle Australians, he said.

The Australian Financial Review reported the country’s finance ministry has advised the modifications would be budget and inflation neutral, without citing its sources.

AMP chief economist Shane Oliver said the proposed changes benefited low- and middle-income earners, who tended to spend rather than save and risked adding to inflation in the second half of the year, potentially delaying interest rate cuts.

“The [central] bank will be a bit nervous about it, and we’re thinking the first cut could come as early as June, and the risk is this could delay that,” he said.

Markets are wagering Australia’s interest rates have peaked but do not expect the Reserve Bank of Australia to start cutting until November.

Political risk

Albanese has faced criticism over his repeated promise to retain the tax cuts, as many in the country suffer surging living costs where outgoings including rents and food prices have far outstripped wage growth.

But reneging on his election promise also comes with political risk, with Albanese’s approval ratings close to their lowest levels since taking power in May 2022.

Albanese’s Labor Party has a majority in the country’s lower house of parliament, but will need support of the minority Greens to pass any changes to the tax cuts through the upper house.

The opposition coalition strongly supports the tax cuts, which it first proposed while in government.

Reuters