Homer nodded, gadzooks. Access Economics has asserted that “big tax cuts in the May budget could force interest rates up half a per cent, leaving home owners paying higher mortgage repayments.”

Henry took particular pains to discuss this issue in his latest advice for the board of the Reserve. The relevant paras are as follows:

The budget is in surplus, and pressure is building on Treasurer Peter Costello to start the hard grind of another round of tax reform. So far he is resisting this pressure manfully, and one can only admire his fortitude as virtually every galah in the pet-shop, including Henry, believes he should give in gracefully. One recognizes, of course that the Treasurer wishes to avoid adding fuel to an already buoyant economy which the latest data says is already picking up speed.

The answer here is to announce some goalposts for real tax reform, including a 30 per cent top marginal rate of income tax and the number of years in which it will responsibly be achieved – such as 5 to 8 years. Simple arithmetic suggests that the annual reduction in the top rate should be manageable in a buoyant economy.

In Henry’s judgment, these favourable supply side effects might well outweigh the effect of tax cuts in raising aggregate demand even if the effect of the tax cuts on demand were not offset by other budgetary changes.

… the big question for Australian economic policy remains as it has been for some time. When will the Treasurer grasp the nettle of serious tax reform?

Access Economics has avoided being typecast as galahs. Henry suspects that its heart is with the other party in any case. So one has to wonder if this venerable non-galah is setting out to cause mischief for Cossie and the gummint.

Read more at Henry Thornton.

Peter Fray

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