The September fiscal cliff will be replaced with a fiscal slope, thanks to tax cuts and a Jobkeeper ‘extension’

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Treasurer Josh Frydenberg and Prime Minister Scott Morrison. Source: AAP/Mick Tsikas.

The six-week lockdown of Australia’s second largest city and home of nearly 20% of its workers has resolved a major issue for the federal government — and allowed Scott Morrison to add to his credentials as national leader.

Even as the number of Victorian cases first crept, then leapt, up the federal government was still locked into what was universally termed the fiscal cliff, which in turn was starting to affect the confidence of business and households.

With September rapidly approaching, how would households cope with cuts to JobSeeker payments? How would businesses and workers cope with the end of JobKeeper? How many business would shut forever, sending the unemployment rate soaring?

The end of programs and support measures designed for a v-shaped contraction and recovery, deep but short-lived would undermine what was turning into a significantly shallower but longer recession.

Against that was the government’s resistance to further debt — the deficit reached $68.5 billion at the end of May, according to the parliamentary budget office yesterday — and hostility from right-wing backbenchers who still insist fiscal stimulus doesn’t work.

“There’s going to be another phase of income support,” Josh Frydenberg said yesterday.

Morrison said: “I have been consistent in saying that there’ll be a further phase of support that goes beyond September.” (He hasn’t been consistent on that at all, but anyway.)

“There will be a further phase of how we continue to provide support,” he said. “I can assure people in industries or in businesses or parts of the country that are more affected by COVID than others, then where there is the need, then there will continue to be support.

“And so this is about tailoring a national program to provide support where the support is needed and because of what has happened in Victoria, obviously the need there will be far greater than was previously and that need will be met.”

JobKeeper doesn’t need too much “tailoring” to meet the needs of Victorian businesses: the threshold test of loss of revenue means that businesses in badly affected industries or in locked-down states and regions will continue to disproportionately draw support from it.

The government is also considering bringing forward tax cuts from 2022, something Labor was calling for before the pandemic, given the deep stagnation of the economy at that point.

The problem with the tax cuts isn’t so much that by reducing the progressivity of the income tax system they increase inequality — not a minor problem — but that the last round of tax cuts handed out by this government last year achieved exactly nothing.

Those were the tax cuts that the press gallery declared a Morrison triumph that would spark the economy. Funnily enough, everyone stopped talking about them when it turned out that they coincided with a fall not a rise in consumer spending.

There’s also evidence from Labor MP Andrew Leigh that cash handouts are more likely to be spent than tax rebates (and tax cuts will appear not even as rebates but as incremental decreases in PAYG deductions in fortnightly pay).

Morrison also ignored the opportunity to attack the Andrews government created by the Victorian failure, preferring a high-minded “we’re all Melburnians now” response.

It’s a very long way from Dan Tehan attacking Andrews over school closures (and then being forced to grovel over it) at the start of May. Maybe the federal government is loath to remind people that it has been urging states to open up as quickly as possible.

More likely it has realised that on the cusp of plunging back into the lockdown we faced earlier in the year, resuming the non-partisanship that characterised that period is the way to go for the time being.

The fiscal cliff will be replaced with a fiscal slope, as it should.

This article was first published by Crikey.

NOW READ: Three things government can do to save small business as Melbourne enters its second lockdown

NOW READ: Morrison says income support will be extended, so which industries rely on JobKeeper the most?

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