The Reserve Bank of Australia is likely to welcome income tax cuts, preferring this stimulus over a lower cash rate, which would not address household’s credit-supply constraints.
A bit off the top
When combined with the tax cuts announced in 2018, ANZ Research expects the tax relief unveiled to be on average around $A12 a week for workers in 2019-20 and under $A2 a week for the following financial year.
Assuming 2 per cent of this is saved (the current household saving rate) the additional tax cuts would lift nominal GDP by 0.4 percentage points in 2019-20 and 0.06 percentage points in 2020-21.
ANZ Research believes modest immediate tax cuts are appropriate given the household tax-to-income ratio has risen to a 13-year high and the consumption outlook has weakened.
Permanent tax reductions based solely on unexpected commodity price revenue bonuses may be difficult to justify, however, in ANZ Research’s view. This would erode future budgets unless future governments were willing to reverse those changes.
Modest tax cuts are arguably appropriate at the moment as household income tax is at a 13-year high of around 15 per cent of gross household income. This is not ideal given household income growth is low, household debt is high and consumer confidence is falling. Consumption forecasts are weak as a result.
As RBA Assistant Governor (Economic) Luci Ellis pointed out recently, taxes paid by households in the past year have increased by around 8 per cent, which is double the 3.5 per cent gross household income growth rate.
That has been due to bracket creep, declines in some deductions and offsets and Australian Tax Office compliance measures.