Households bank on tax cuts and anti-inflation budget plans

The average Australian household will be almost $1900 a year better off once the stage 3 tax cuts start from July 1, with Treasurer Jim Chalmers to argue new cost-of-living measures in next week’s federal budget will help ease inflation.

This masthead can reveal Chalmers has told the states and territories that the new measures – expected to be an extension of last year’s energy price subsidy and a lift in Commonwealth rent assistance – will have a measurable impact on the official inflation rate.

The average tax cut for Australians will be $1888 when the stage 3 tax cuts start from July 1.Credit: James Davies

On top of the re-jigged stage 3 tax cuts, real household disposable income will be forecast to grow by 3.5 per cent in the coming financial year. Much of that increase, the biggest outside the COVID pandemic period of cash handouts, will be due to higher wages, but a full percentage point will come from the tax cuts.

In dollar terms, across all Australians the average tax cut for the coming year will be $1888.

This week, the Reserve Bank used its quarterly monetary policy statement to note that much of the weakness in consumer spending over the past year was due to a combination of “high inflation, tax payments growing faster than incomes and higher interest rates”.

It noted that real disposable income had declined “sharply” over the past 18 months, with the stage 3 tax cuts likely to result in real incomes “growing strongly” in the second half of this year.

Chalmers said the budget would not add to inflation pressures in the economy, but it would deliver important relief to consumers through the tax cuts and other cost-of-living measures.

“We know people are under pressure and that’s why our wages policies and tax cuts for every taxpayer are so important. This is all part of a big focus in the budget on helping to ease cost-of-living pressures,” he said.

“Decent wages and bigger tax cuts for more people are a big part of helping people earn what they need and deserve to provide for their loved ones.”

While the Reserve Bank held the official cash rate steady at 4.35 per cent at its meeting this week, it revealed it expects inflation to edge up to 3.8 per cent through the final six months of this year. The forecasts do not consider measures that may be announced in the budget on May 14.

Last year, the government’s energy subsidies were expected to keep electricity prices 25 percentage points lower than forecast while price caps were predicted to keep gas prices 16 percentage points lower.

Westpac senior economist Justin Smirk said on Wednesday he assumed there would be a return of electricity rebates in the second half of this year.

These rebates would lead to the inflation measure for utilities, covering electricity, water and gas, to fall by 7.9 per cent in the September quarter.

Next year, Smirk expects energy prices to be flat or fall while rent inflation is tipped to moderate.

Commonwealth rent assistance was increased by 15 per cent in last year’s budget. The Australian Bureau of Statistics estimates that rents would have climbed by 9.5 per cent over the past 12 months without the lift in rent assistance. Instead, they have increased by 7.8 per cent.

Treasurer Jim Chalmers takes a light-hearted moment before he hands down the budget.Credit: Alex Ellinghausen

Chalmers, pressed on whether the government would lift rent assistance again, said last year’s increase had ensured rents were lower than they would have been for many people.

“People know our bona fides here. They know that we’ve been prepared in the past to step in and help renters. We know that renters are under pressure,” he told ABC Radio.

In a sign the budget is not finished with tax reform, Chalmers is expected to announce new tax incentives for businesses. Prime Minister Anthony Albanese will hold a meeting of national cabinet on Friday to discuss elements of the government’s payments to the states for housing.

Opposition Leader Peter Dutton, who will deliver his budget-in-reply speech on May 16, accused the government of squandering its last two budgets that had added to the nation’s inflation pressures.

He said people were paying the price of the government’s policies through higher mortgage repayments.

“If you drive inflation up, then you increase interest rates and you keep them higher for longer. The average family in Australia at the moment is paying $24,000 more each year for their mortgage. That’s after-tax dollars,” he said.

“That’s a lot of money on top of the increases in electricity prices, what you’re seeing at the supermarket when you go to the checkout, your insurance premiums – everything continues to go up and up under this government.”

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