Economy will gain little from tax cuts

The government's recently announced personal income tax cuts included proposed changes to three tax brackets and the abolition of the 37.5 per cent tax bracket by 2024, over a seven-year period.

The Opposition in its budget reply speech announced plans to deliver a Working Australians Tax Refund over four years to about 10 million people.

However, the effect of the proposed tax cuts - should they eventuate - seems unlikely to be felt throughout the economy for a number of reasons. First, Australia is continuing to experience persistently low wage growth of about 2.1 per cent, well below long-term historical averages. With inflation only marginally below this, workers have not felt much, if any, of an increase in real wages in some time. This negligible growth in real wages comes at a time when there are signs that various cost of living pressures will continue.

Some of these pressures are more obvious than others. As has been flagged by a number of market analysts and noted by the RBA, there is a significant proportion of existing interest-only loans that will face refinancing over the next few years. For those loans that reset to principal and interest repayments, the typical Australian would see their home loan repayments increase by $7000 a year.

Further compounding the potential for increases in mortgage repayments is the potential for out of cycle rate hikes from banks should the Bank Bill Swap Rate continue to remain at an elevated spread to the RBA cash rate (banks borrow about 40 per cent of their total funding requirement from the wholesale market).

Conversely however, some cost of living pressures are less obvious. As US rates continue to rise, we have seen a weakening of the Australian dollar in recent months, pulling back from as high as US81¢ to now sitting just shy of US75¢, with continued ongoing weakness possible. While a lower Australian dollar tends to provide a boost to export and tourism sectors, it conversely increases the costs of goods imported from overseas.

A combination of this lower Australian dollar and high oil prices has most recently been evident in the surge in petrol prices. The national average is now above $1.50 per litre, levels not seen since the 2008 spike. If current prices are sustained, this could be a $6 billion hit to Australian consumers.

While any future tax cuts will be welcomed by consumers, it is likely this additional income would be absorbed by any number of cost pressures facing consumers over the coming years.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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