By Sue Boland
Prime Minister John Howard arrived back from holidays in January, loudly proclaiming the generosity of his government's planned income tax cuts.
However, the value of the income tax cuts has already evaporated for most people, as a result of the "Timor tax" levy, announced by the government last year, and the 0.5% increase in interest rates, announced by the Reserve Bank on February 2. This rise comes on top of the 0.25% interest rate increase announced by the Reserve Bank in November.
Add in the likely impact on prices of the GST and the vast majority of workers, as well as those people living on pensions, benefits, workers' compensation payments or redundancy payouts, will be worse off once the GST comes into effect.
Worse off
The National Tax and Accountants' Association (NTAA) has analysed the likely impact of the interest rate increase, the income tax cuts and the increased prices that will result from the GST.
Their analysis demonstrates that workers who earn $40,000 or less and who have a mortgage of $100,000 or more will be worse off because the income tax cuts won't cover the increase in interest rates.
The average home loan (according to the Australian Bureau of Statistics) is $135,000. The two interest rate increases, totalling 0.75%, are likely to increase repayments by just under $15 a week on a $135,000 standard variable mortgage.
The NTAA analysis shows that, as a result, a single person on an income of $30,000 (just below the median income for full-time employees) with a $120,000 home loan would suffer a $17.84 loss in income each month. If a person was earning $40,000 (just above the average income for all full-time employees) and had a $120,000 home loan, they would be $9.50 each month worse off.
Modelling done by the University of Canberra, reported in the Sydney Morning Herald on February 3, also shows that single people earning $40,000 or less and who have a $135,000 mortgage will be worse off after the tax cuts and the interest rate rise.
Ray Regan, the president of the NTAA, said on February 6, "John Howard's Tax Reform election pledge was to provide the most financial assistance to those taxpayers earning between $20,000 and $50,000. Some five and a half million employees.
"However, over four million taxpayers earning between $20,000 and $40,000 have now been placed in a desperate financial position, as a result of the half a percentage point interest rate rise announced this week by the Reserve Bank, including the emergence of additional GST costs, which the public weren't originally told about.
"For example, this week the Australian public became aware that petrol, weddings, funerals, car parking and tip fees etc, will be hit by the GST. Last week it was tampons, caravan park tenants' GST rent rise, lay-bys, movie tickets and gift vouchers etc. And no doubt each week additional 'GST living expense sleepers' will continue to emerge, which John Howard didn't take into account when determining employees' coveted tax cuts.
"These taxpayers will need additional compensation from the Howard government, if not, ordinary Australians will be worse off under John Howard's GST regime."
Distance
The government has been doing its best to distance itself from the Reserve Bank's decision to lift interest rates, claiming that the Reserve Bank is independent of the government and that therefore the government has no say in what interest rates should be.
It is very handy to blame the Reserve Bank, especially when recent opinion polls show a drop in support for the Coalition.
Even more worrying for the government is a Bulletin-Morgan Poll conducted for the 12 months to September 1999. It showed that only 27% of the 24,738 people polled trusted the government. Forty-seven per cent didn't trust the government and 26% were undecided.
Despite what it claims, the government does have a say in Reserve Bank decisions on interest rates. The government has its own representative on Reserve Bank board, Ted Evans, the secretary to the Treasury. Given that Reserve Bank board decisions are usually by consensus, Evans, and therefore the government, probably supported the interest rate rise.
If the government was genuine in its criticism of the increase in interest rates, it could overturn the decision. Section 11 of the Reserve Bank Act gives the government the power to overturn board decisions by going to the governor-general.
Howard and treasurer Peter Costello have been desperate to create the public impression that the Reserve Bank decision has nothing to do with the inflationary impact of the GST, claiming that the decision was based purely on overseas economic factors.
Reserve Bank governor Ian Macfarlane's response to Howard was reported in the Australian Financial Review on February 10. He said that interest rates were generally determined by the needs of the Australian economy and that was "certainly the case" with its February 2 decision.
At senate committee hearings held since February 2, both Macfarlane and Evans have threatened that the Reserve Bank would be forced to increase interest rates again if unions pursue wage increases to compensate members for the increased cost of living resulting from the GST.
This system is clearly rigged against the worker. A GST is introduced to strip you of your income by taxing you on everything you buy. The government claims that it is compensating you by giving you tax cuts.
Then it strips the value of your tax cuts by increasing interest rates. Then, it threatens that you will be penalised with higher interest rates if you seek wage rises to compensate for the increased cost of living.
It's obvious that the Reserve Bank and the government are on the same side — and it's not our side.