Should you spend or save your stage 3 tax cash?

If, after two years of sustained cost-of-living pressures, you’ve found yourself with a bit of extra cash each week and have been fastidiously squirrelling it away, please let me give you a round of applause for doing such a good job.

Chances are, this extra money is coming your way because of the stage 3 tax cuts that came into effect on July 1 of this year. If you earn $50,000 a year, it equates to roughly $17.87 extra each week ($929 per year), and if you’re earning $100,000, that figure goes up to an extra $41.90 each week ($2179 per year).

While all of us have benefited from the recent cuts to the tax rate, confused messaging from the government may have you wondering what to do with it.Credit: Dionne Gain

If you’re feeling slightly confused about whether you should be running out and spending this newfound bonus or tucking it away, though, you’re not alone. To figure out how the hell we got here, and what it is exactly you’re supposed to be doing, let’s go back in time.

When announced in January, Treasurer Jim Chalmers said the change to stage 3 tax cuts was a “way to provide more cost-of-living relief to more people”, explaining, “this is about middle Australia, it’s about helping people deal with these cost-of-living pressures”.

Listening to Chalmers at the time, you could be forgiven for thinking the government’s aim was to put more money in the pockets of Australians for us to then go out and spend.

But as July 1 drew closer, the messages started to feel mixed, as some economists began to sound the alarm of what more disposable income and more discretionary spending could do to inflation and the pressure it would potentially put on interest rates.

Saving can feel like a chore, up there with deep cleaning the kitchen bin, chopping onions and updating your resume.

Thankfully, the worst hasn’t happened, and it seems that for the most part, we’re proving ourselves to be fiscally sensible – with some people spending and others saving.

Following the stage 3 rollout, Westpac data compiled from 1 million customers showed that, on average, customers enjoyed a $220 boost to their savings throughout July. As Westpac economist Jameson Coombs told this masthead at the time, “in both seasonally adjusted and original terms, savings inflows in July were the largest since mid-to-late 2021”.

And earlier this month, spending data from most of the major Australian banks showed that the trend had continued for another month, with savings being seen across different age groups and the tax cuts not leading to any sizeable lift in spending in the month of August. As I said earlier, a round of applause for you all.

Saving money is one of those things that, to so many of us, can feel like a chore. If you’re not yet converted to the “savings is the greatest” camp, it’s up there with deep-cleaning the kitchen bin, chopping onions and updating your resume.

Spending, on the other hand, is almost always accompanied by a dopamine hit that makes us want to do it again and again – whether it’s buying a coffee or a new car. So, had we begun to splash our stage 3 cash, it would be understandable.

But the fact that we are, for the most part, now saving it away for a rainy day says a lot about where so many of us are at with our savings right now, and our relationship with money overall.

Despite the collective psychological hell we were all going through at the time, at the height of the COVID-19 pandemic, our savings accounts did pretty well. The Reserve Bank of Australia estimates that across all age groups, we managed to amass an excess of around $300 billion in savings.

It turns out not being able to travel further than five kilometres for months on end – while interest rates were still low – will go a long way in building up that rainy-day buffer.

But, three years on from the period no one wants to remember – and multiple interest rate rises later – the rainy day has come and gone. New research from Yarra Capital Management shows that the majority of households had spent their COVID savings by March of this year.

Even worse, the data shows that contrary to what Westpac found in August, many Australians aged under 65 have not only spent the entirety of their COVID buffer savings, their accounts are also now below pre-COVID savings levels.

All of which brings us back to the question: should you be spending or saving this new stage 3 cash?

With little to no emergency fund to fall back on, no certainty as to when mortgage rates might go down or rental prices will settle, or when the cost-of-living vice will ease its crippling grip, it’s little wonder Australians on low and middle incomes are now saving every cent they can. Having savings is essential at any time in your life, but particularly when there is economic uncertainty. Whether it’s a small amount or abundant, every cent saved counts.

If you’re a household with high-interest forms of debt like credit cards, personal loans or outstanding buy-now-pay-later fees, paying those down as quickly as possible and clearing that debt should be a priority.

Any opportunity to save, though, should be acted on – and quickly, as recent research indicates this tax relief is worryingly temporary.

Despite the 2024 cut, the average tax rate for 80 per cent of Australians will be back to current levels – or even higher – by 2027. Meaning this opportunity to put aside a little bit extra is disappointingly fleeting.

Of course, a lot could still happen between now and then. But at a time when inflation is still wreaking havoc, the economy teeters on the verge of a recession and interest rates remain high, some clarity from those running the show wouldn’t go astray.

Victoria Devine is an award-winning retired financial adviser, best-selling author, and host of Australia’s number one finance podcast, She’s on the Money. Victoria is also the founder and co-director of Zella Money.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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