Economic solutions part 1 – laying the groundwork

The tax cuts for mid to high-income earners passed this month, demonstrating that the Federal Government either doesn’t understand how the economy works, or it is playing the Australian people for fools.

Economists might explain how complex the economy is, with lots of moving parts that need constant monitoring and maintenance. If any of those parts is neglected the fallout could range from fairly minor to stopping the engine altogether, as in the Global Financial Crisis. 

The problem is that for years the vast majority of these moving parts have been badly managed or completely ignored. Both sides of politics are to blame but the Liberal Party stands out as grossly negligent because of their obsession with deregulation, cutting red and green tape, and loosening credit regulations on financial services. 

This hands-off, head-in-the-sand approach guarantees economic failure. It’s an insidious strategy of responsibility avoidance. Who’s to blame if you ignore the oil leaking out of your engine when it eventually seizes up? Yes, it’s you. In this case, government incompetence, pandering to vested interests, or probably both, is the cause. 


Sticking with the engine analogy, engines need a constant, reliable supply of fuel to keep running. In an economy, that fuel is money in the form of consumption.

Indeed  60% of GDP is household spending and it is this sector that governments must focus on to fuel the economy. 

And the fuel that gets into the economy with the highest efficiency generally comes from consumers who are lower-income earners. This is because they spend almost twice as much of every dollar they receive as high-income earners.

In fact, the Liberal Government’s budget, especially the tax cuts, will act as a brake on consumption.

It is clear that most of this tax cut will go to those who are far more likely to save it.

Matt Grudnoff, Senior Economist at The Australia Institute

This brake will be ongoing and means permanent impairment of the economy as it limps its way into the next financial crisis.  

One problem is that the Government has no clear purpose for the economy, leaving it at the mercy of vested interests, as also illustrated by the Government’s economically absurd gas-led recovery, developed by the secretive and exclusive Covid Commission.

We say that, for the economy to be robust, efficient, and effective, it must lift standards of living for those on low incomes – a fairer distribution of wealth. It must support a fair and stable environment for business and worthwhile employment. And it must do all this whilst providing excellent services, real and urgent action on climate change, and conserving natural assets for future generations.

Above all, economic levers must be transparently based on evidence which is far from the case with this government. 

Photo top by Michael on Unsplash

Photo by Hans Ripa on Unsplash

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