The hot topic these days – in economic circles anyway – is the ‘should they or shouldn’t they’ discussion surrounding the Stage 3 tax cuts.

On the one hand, the cuts are legislated changes that are anticipated by individuals and businesses alike. Going back on this promise may undermine political credibility.

On the other hand, this was part of a package negotiated five years ago which raises the question of whether this type of reform is still fit for purpose? While the politics of the issue are one thing, there are some solid economic reasons why a rethink may be in order.

First, the world in which these tax cuts were negotiated no longer exists. When the tax cuts were voted on, no one had ever even heard of the word ‘COVID’. That alone should warrant a rethink. But what happened since then is equally important. During the pandemic the Australian government pumped nearly $300 billion into the economy to ensure the effects of the ‘unprecedented’ pandemic did not push the country into an equally unprecedented recession.

As the country emerges from the crisis, it is reasonable to expect that there may be difficult transitions, such as the worker and supply shortages we are currently experiencing, and the resulting price increases we’re all facing. Add to this a war in Ukraine and continued uncertainty around the economy, and policymakers now see inflation as Enemy #1. Thus, it is pertinent to ask whether it makes sense to implement a stimulus policy (which is what a tax cut is – it ‘stimulates’ spending by increasing the amount of money people have access to) when we are still trying to digest the COVID stimulus?

The second issue with the Stage 3 tax cuts is where they are going. The argument is that as Australian’s incomes increased, more and more households were being pushed into higher tax brackets (so-called ‘bracket creep’). What this meant was that a larger share of that increased income was being taxed at a higher rate.

Indeed, the tax cut – estimated to mainly benefit those earning over $180,000 – has been described as a break for the ‘middle’ class. However, if we define the middle class as those earning a median, or middle of the road income, $180,000 is not the right target. The average Australian earns roughly $90,000 while the average South Australian earns a bit less than that, or around $81,000. Even the median taxable income – that is, the income level where there are the same number of people earning more than that as are earning less – is closer to $50,000. So, these tax cuts won’t impact a great number of people who live in South Australia (or in Australia for that matter).

When the tax cuts were voted on, no one had ever even heard of the word ‘COVID’. That alone should warrant a rethink

Another interesting observation about cutting higher-end earner’s taxes is the degree to which they stimulate spending, especially for local businesses. Across different income levels, people tend to spend differently. If someone in a lower tax bracket, say making $40,000 a year, gets a raise, they usually spend it on food, household costs or maybe to pay down some debt. When someone at the top end gets a raise, they buy similar things, just not as much. They tend to spend more on travel or save more of it. This type of spending isn’t going to make a big difference to the South Australian business community.

Finally, it seems ill-advised to cut revenue when there are so many pressing issues facing both the State and Federal governments. The list is long and illustrious including affordable housing; raising the working age benefit for those on government incomes; investing in the development of our non-metropolitan regions; reforming the Aged Care system and strengthening the child protection system, not to mention the need to retrain and support workers exiting carbon-intensive industries.

On this last point, the need to equip our workers and students with the skills required to not just get, but keep the jobs of the future, is of great urgency. The Productivity Commission’s interim report on productivity has pointed to the increasing need to invest in schooling for all Australians as the demand for workers who can perform non-routine skills is at an all-time high.

And to accomplish this, we need more innovation and new ideas for freeing up teachers to spend more time in the classroom and adopting proven technology or new ways of schooling to meet the needs of workers and students. The Commission also notes that there are changes needed across the universities/VET landscape to ensure the number of needed student places are available.

Addressing the current and future challenges facing our workplace, there needs to be a rethink of the way we provide educational opportunities throughout a worker’s lifetime. If governments find they have capacity for tax cuts, perhaps it would be wiser to channel that funding potential to our education system to ensure it delivers the skills essential for driving future prosperity. This means investing in the strong foundation that comes from schooling is even more important than for past generations. Surely the use of funds to assist all Australians in these areas outweighs the need to cut taxes for a relative few.

No doubt, these are all issues that will have weighed on the mind of the Federal Treasurer in his ‘should we or shouldn’t we?’ debate in the lead up to this month’s updated Federal Budget.

Dr Susan Stone is the University of South Australia’s inaugural Credit Union SA Professorial Chair in Economics