Caucus dismay as economists issue inflation warning on surcharge ban

A ban on credit card surcharges touted by the prime minister and treasurer as cost-of-living relief could raise inflation and put upward pressure on interest rates, economists say, as frustration grows among Labor MPs and ministers over the economic competence of the cabinet’s top brass.

Opposition Leader Angus Taylor called on Treasurer Jim Chalmers to resign after the latest backdown on economic policy announced on Friday when the tax office was instructed to delay its ban on credit card payments, which would hurt small business owners who rely on them to pay tax instalments while maintaining cash flow. The ban will now come into effect at the end of the financial year.

The ATO reversal followed a week of widespread reports that cafes, restaurants and other businesses had increased prices to absorb the cost of an RBA decision, championed by Labor MPs, to ban surcharge fees, a prohibition that came into effect on October 1.

The $1.6 billion in yearly fees can no longer be charged to consumers. But banks still charge a fee, so businesses are passing on the cost and, in some instances, increasing prices by more than the surcharge because companies took the opportunity to compensate for shrinking profit margins.

The ATO sparked controversy when it said it would ban credit card payments because the $200 million in fees was not an appropriate cost to pass on to the taxpayer, when it was unable to raise tax charges to cover the cost. The government will now provide additional funds to the tax office to extend the transitional period. This means taxpayers are effectively subsidising the tax office so that other taxpayers don’t pay the surcharge.

“We’ve stepped in to ensure that the tax office can take credit card payments until the end of June next year,” Chalmers told reporters on Friday.

“This will give them the time to consult more with small business and to get it right. We try not to interfere with the RBA or the ATO … but it’s really important that we have stepped in today.”

The mishandling has exacerbated tension within caucus over the messaging and sharpened internal criticism of the government’s broader economic agenda, first reported by this masthead last month. The drawn-out debate prompted MPs to argue that Prime Minister Anthony Albanese and Chalmers seemed blind to the likely price rises.

One MP, who sought anonymity to speak openly, said: “I don’t think it’s acceptable for us to say it was the ATO’s decision, not ours.”

“If that’s the case, then there’s something seriously wrong with our government. There is no one in cabinet with any small business experience. We have a small business minister [Anne Aly] who knows nothing about small business.”

Aly was the first government minister to raise concerns over the ATO’s move on Wednesday, urging the tax office to consult more widely about the ban’s implementation.

Backbenchers Mike Freelander and Rob Mitchell also questioned the surcharge decision, while two ministers told this masthead the issue had been poorly handled and underlined the government’s penchant for short-term solutions to lower prices when a holistic inflation strategy was needed.

“A total shambles,” one minister said.

Other MPs were critical of the tax office’s management of the matter and communication with businesses.

Independent economist Saul Eslake and UNSW professor Richard Holden both said inflation could rise as a result of the changes, though the extent was difficult to predict.

Eslake said a conservative guess was that the inflation rate would grow by 0.1 per cent, though “it could be bigger” if many firms increased costs by more than the surcharge fee, for example raising the price of a coffee from $6 to $6.50.

Holden said businesses did not like to change prices too often, and now had an ability to blame the government for rising prices. He said it should not have come as a surprise that firms would raise prices and cited the “menu costs” principle in economics, which suggests that firms would want to increase prices by a significant amount given the costs of changing menus.

“Are the people doing these things just so disconnected from the real world?” he said, noting the fiasco would probably make the RBA’s job harder in battling sticky inflation. Australia’s cash rate is the second highest in the OECD after Iceland.

Holden said the policy appeared designed to “make cute vertical videos” and said it was another example of decision-making that demonstrated a lack of commercial understanding among ministers and bureaucrats.

The genesis of the saga was a 2024 Reserve Bank review that led to a surcharge ban, urged on by a campaign led by Labor backbenchers. Credit card surcharges were banned, and interchange fees lowered, on October 1 of this year. The bank said the combination of moves would have a minimal impact of around 0.1 per cent in consumer costs.

The general anxiety about price rises was compounded by the ATO credit payment ban, which came as a blow to small businesses.

Chalmers spoke with Taxation Commissioner Rob Heferen early on Friday morning, before briefing government colleagues on the delay until next year. The treasurer was unable to recall when the government first became aware of the ATO’s credit card ban, but said Labor “insisted” on a transitional period.

Taylor said the ATO should reverse its ban rather than delaying it until mid-next year, and that Labor should not be thanked for the reversal because it “imposed this in the first place”.

“It’s his tax office. He’s the treasurer,” the opposition leader told News24.

“This is a treasurer who is out of his depth. He’s wrecking the economy, and he should go.”

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