Tue, 1st July 2008

Rising costs erode Rudd's tax handouts

Extract from the Australian Financial Review, 27/6/08, Page 1

Adrian Rollins and David Crowe

Rising interest rates, petrol prices and living costs have slashed the benefit of the tax cuts and welfare payments that will flow to voters next week, in a damaging outcome for Prime Minister Kevin Rudd as he embarks on a winter campaign to sell his government’s achievements.

The average family will be almost $30 a week worse off than it was when Labor won the federal election last November as generous new tax cuts and allowances that come into effect next Tuesday are swallowed up by higher costs of living, an Australian Financial Review analysis shows.

The impact on ordinary voters comes as Mr Rudd hits back at coalition accusations that his government has achieved little during its seven months in office and as both sides of politics face a test at the ballot box in the Gippsland byelection tomorrow.

In a fiery debate in parliament yesterday ahead of a two-month break, Mr- Rudd vowed to proceed with major reform including an emissions trading scheme despite the coalition’s “fear campaign” over oil prices.

But Opposition Leader Brendan Nelson attacked the Prime Minister as a leader who used stunts and reviews to avoid hard decisions, including monitoring petrol, grocery and childcare prices without cutting them in the way he had led voters to expect.

“What we have had in seven months, it is now clear, is a government led by a prime minister who is more concerned about his popularity, that is more concerned about his image in the media, that is more concerned about micromanaging every decision,” Dr Nelson said.

The government ended the budget session of parliament with a solid showing in the opinion polls but under increasing pressure on whether it would include petrol in an emissions trading scheme, while also suffering from the attacks on backbencher Belinda Neal.

Mr Rudd is seeking to shore up the government’s position by heading to marginal electorates over the coming week, including a community cabinet this Sunday in the Queensland city of Mackay, the site of a 13.2 per cent swing to Labor last November.

However, the mixed outcome from the budget measures to take effect on July 1 threaten to undercut the government’s message as backbenchers act on Mr Rudd’s instructions to use the tax and welfare changes to sell the government’s merits.

A raft of new measures covering superannuation, share options, agribusiness managed-investment schemes, salary packaging and family trusts also come into effect from July 1 as policy changes from the Howard government combine with new Labor measures.

The first instalment of the federal government’s multibillion-dollar package of tax cuts and family support is set to kick in from July 1, boosting the disposable income of a family earning about $105,000 a year by up to $88 a week.

But couples on a median income of about $58,000 with two young children are set to see their weekly budget increase by a more modest $53.12, well short of the average $82.30 jump in expenses experienced in the past eight months as mortgage repayments and household bills for fuel, food and basic services have surged.

Those planning to splurge on a new car or overseas travel are set to be hit with extra costs after the Senate approved a $9.47 increase in the passenger movement charge for air and sea travellers from July 1, while an 8 per cent increase in the tax on cars worth more than $57,000 is likely to apply from the same date even if legislation is delayed until later in the year.

The figures highlight the political pressure Mr Rudd and his senior ministers are likely to find themselves under from families struggling with rising living costs and high interest rates when they criss-cross the country in coming weeks to sell the government’s reform agenda.

While the government can point to the tax cuts and increased assistance for child care and education costs, Mr Rudd admitted this week: “This does not solve all cost of living challenges at all, but we believe that it is a responsible course of action to assist families and individuals under financial pressure at this time.”

And the government has yet to win parliamentary approval for a number of key budget measures after the opposition, exploiting the final days of its Senate majority, sent several proposed laws off to committees for inquiry, increasing confusion and uncertainty for taxpayers.

Among these is the proposed increase in the luxury car tax to 33 per cent, which has been referred to a committee for report no earlier than August 26.

The Australian Taxation Office has advised that, in its current form, the proposed law would apply from July 1 even if its enactment is delayed, but the coalition has vowed to prevent it being applied retrospectively to people who ordered their new car before May 14.

Another measure in limbo is the government’s plan to increase the Medicare levy surcharge thresholds from $50,000 to $100,000 for singles and $100,000 to $150,000 for couples, with a Senate committee inquiry not due to be completed before parliament resumes in late August.

Other budget initiatives that have been delayed and remain under a cloud include the controversial proposal for a national FuelWatch scheme and a push for equal treatment for same-sex couples regarding superannuation, social security, taxation and workers’ compensation, which have been put off until at least the end of September.

Despite the uncertainty hanging over some measures, extra support for families coming into effect from July 1 includes a 50 per cent refund for education expenses worth up to $375 a year for each child in primary school, and $750 for secondary students, as well as a 50 per cent tax rebate of up to $7500 for child-care expenses. The controversial baby bonus will be increased by $742 to $5000.

Higher income earners will receive some tax relief, with the 40 per cent income tax threshold lifted to $80,000 a year and the 45 per cent margin increased by $30,000 to $180,000, and the low income tax offset will be raised from $750 to $1200.

The amount that seniors can earn before they begin incurring a tax liability will increase to $28,867 for singles and $24,680 for each member of a couple.

Transport Minister Anthony Albanese last night told reporters the government did not expect to wrest Gippsland from the Nationals, saying byelections held shortly after general elections usually showed a swing against the government.