New Possibilities, New Priorities II:

What lessons can this government learn about fiscal policy from Labor governments past? (ABC News: Luke Stephenson)

Nearly two months after the federal election, it remains unclear what the Albanese government’s agenda is on taxation and spending. In other areas — campaign finance, electoral reform, the Indigenous Voice to Parliament, climate change and foreign affairs — the government is eager to enact change. But there is a real and worrying risk that the Albanese government is opting to wear a fiscal straitjacket that prevents it from making substantial and much needed changes to taxation and spending.

The two main factors behind this potential fiscal straitjacket are the massive income tax cuts scheduled for 2024, and the large budget deficit. Both these factors may prompt the government to baulk at making substantial spending commitments that are unfunded; that is, new spending that is not offset by spending cuts or tax hikes, and therefore increases the budget deficit. The absence of an electoral ‘mandate’ to raise taxes or cut spending could also lead Labor to think it politically necessary to avoid progressive but unpopular tax changes.

If the above scenario comes to pass, the Albanese government will be able to do very little to address economic inequality, which, along with climate change, is surely the greatest political challenge of our time. The real tragedy, if this scenario occurs, is that it would be a case of history repeating itself. The Rudd government in 2009–2010 also had a large budget deficit (courtesy of its successful response to the GFC), and had similarly committed itself to implementing huge regressive tax cuts first proposed by its predecessor. It then committed itself to an unrealistically quick return to surplus.

The real tragedy, if this scenario occurs, is that it would be a case of history repeating itself.

As a result of these decisions, the post-2009 Rudd-Gillard governments had limited ability to initiate new social spending. The two main new spending programs of this period — new school funding and the NDIS — only came into effect years after they were announced, so as not to blow out the budget deficit. The problem with this approach was twofold. First, because Labor was not in power to implement these spending programs, it meant they were undermined and diluted by the Abbott-Turnbull-Morrison governments. Second, voters had no lived experience of these spending programs before the 2013 election, which made it much harder for the Rudd-Gillard governments to campaign on their policy record.

What is the takeaway lesson of this for the Albanese government? First, it is better to actually implement new social spending during their current term, and before the next election, rather than years after a spending announcement is made. When voters have lived experience of cheaper mental health or dental care, or free childcare, then it is much easier to make the case that progressive politics materially improves people’s lives. Second, to be bold like this means getting rid of the fiscal straitjacket. That means either fully or partially scrapping the regressive income tax cuts, being willing to increase the budget deficit, increasing taxes or reducing tax expenditures, or a combination of all three.

To be bold like this means getting rid of the fiscal straitjacket…

I sought to refute in a previous article the argument that Labor is bound to avoid substantial tax and spending reform because of its small-target policy agenda in Opposition. I want to now refute a slightly different argument, which is that it would be politically wise for Labor to be cautious in its first term and more ambitious on tax and spending in its second term. I would say three things to this.

Read now: New Possibilities, New Priorities I: Is Labor constrained by its small target strategy?

Firstly, while unlikely, there may not be a second term for Labor. Secondly, even if Labor wins again, there may not be a progressive majority in the Senate. In the last 26 years since the defeat of the Keating government, there has not been a simultaneous progressive majority in the lower house and the Senate. While the Rudd government had a clear lower house majority, legislation opposed by the Opposition required the support of both the Greens and the hard-right Family First party. And while the Greens and Labor had a Senate majority in the Gillard government, centrist independents from conservative electorates jointly held the balance of power in the lower house

Thirdly, without a strong progressive policy record on tax and spending in this term of Parliament, Labor will struggle to retain several inner-city seats against the Greens. We’ve seen an analogous situation the last time Labor was in power; in the leadup to the 2010 election, Labor had a weak, watered-down tax reform package that they avoided talking about. Disillusionment with the Gillard government led to a then record vote for the Greens. In 2025, five Labor seats are particularly vulnerable, especially if the Coalition changes their preferencing policy to favour the Greens. Aside from losing office, the worst-case scenario for the Albanese government at the next election is if Labor enters minority government with the Greens in the lower house, but the Greens and progressive independent David Pocock lose the balance of power in the Senate.

With a guaranteed progressive Senate majority in this term, the Albanese government has the rare opportunity to swiftly implement progressive tax and spending changes. There is then ample time for voters to have lived experience of these reforms, ensuring the Albanese government can campaign on their reform record at the next election. In short, the 47th Parliament must be recognised for what it is: a small window of opportunity to make the progressive tax and spending reforms Australia needs.

Connor Harvey is a semi-regular contributor to Statecraft, and a member of the Australian Labor Party. This article is the second in a three-part series by Connor on the possibilities and priorities for the new Albanese Government. You can read the first installment here, and when we publish the final installment, you’ll be able to find it linked here, and on our home page.

Thanks to Djarah Koops-Gill and Genevieve Campbell for editing this piece.