Bring forward tax cuts, banks urge

Westpac and CBA’s economists have called for the acceleration of already legislated income tax cuts to help shore up the struggling economy.

Economists from Westpac and the Commonwealth Bank are calling for the government to bring forward income tax cuts. Picture: AFP

Leading economists at all four of the country’s biggest banks want the government to ditch its 2024 timetable and cut taxes next year to boost growth and take pressure off the Reserve Bank.

Westpac chief economist Bill Evans said the best way to boost household and business demand was to accelerate stage two of the legislated personal income tax cut package by bringing it forward by two years to July 2020.

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“If nothing changes [in terms of fiscal support], we risk committing the economy to below trend growth for an extended period,” Westpac chief economist Bill Evans told The Australian.

The second stage of the government’s tax cut package involves moving the income tax thresholds. Under the policy, households will move from a 19 per cent tax rate to 32 per cent when incomes reach $45,000, rather than the current $37,000.

Taxpayers’ 32.5 per cent tax rate will rise to 37 per cent when incomes move to $120,000, rather than the current $90,000.

The government is unwilling to risk its projected budget surplus this financial year. But Mr Evans said that bringing forward stage two of the tax package in a staggered fashion over two years would not risk this considerable political milestone.

In separate analysis, CBA senior economist Gareth Aird agreed that there was a “strong” case to bring forward legislated tax relief to next financial year.

“It would give the household sector and the broader economy an immediate boost,” Mr Aird said. “If it’s good policy in four years’ time, it’s good policy now.”

Mr Aird noted that tax relief is well overdue, and that taxes paid by households are growing “well ahead” of income at a time when the economy is performing below trend.

Shadow Treasurer Jim Chalmers threw his support behind the economists.

“Labor has been calling on the government for months now to bring forward stage two of the tax cuts,” Mr Chalmers said. “The economy has deteriorated while Scott Morrison and Josh Frydenberg have dithered and denied.”

Treasurer Josh Frydenberg. Picture: Kym Smith

In response, Treasurer Josh Frydenberg said the economy remained in solid shape and that the government was already providing plenty of support via existing programs.

“More money is going into people’s pockets with the biggest tax cuts in more than a decade and they are helping to create a stronger, simpler and fairer tax system,” Mr Frydenberg said.

He said as of Wednesday over $23 billion has been paid in refunds – a 30 per cent lift from the prior year.

“Whether spent or saved, the money will boost household balance sheets, supporting confidence in the economy and consumption in the future,” Mr Frydenberg said.

“[Labor] are talking about bringing forward tax cuts that they opposed.”

The call for lower taxes sooner comes amid mounting evidence this year’s higher rebate has failed to boost spending.

Data released Monday showed retail turnover contracting over the year to September – the first annual fall since the early 1990s recession.

“I think what you need is short-term stimulus to the economy,” NAB chief economist Alan Oster said. “Let’s be honest, the tax cuts haven’t done anything.”

Mr Oster said he was “keen” on bringing forward tax relief, among other possible measures, such as higher spending on such things as maintenance and repair of existing infrastructure.

Three RBA cuts since June this year have left the official interest rate target at a record low of 0.75 per cent. Mr Oster said it was much too early to gauge the impact of easier monetary policy, but early indications were that households preferred to pay down debt over freeing up income to spend more suggested an uncertain future impact.

ANZ head of Australian economics David Plank said accelerating the timing of legislated tax cuts for 2021-22 and 2023-24 would help provide a more balanced mix of monetary and fiscal support, which is currently biased in favour of the first.

“If the government did bring forward a significant amount of tax cuts then we would probably conclude the RBA is less likely to cut – and that’s a good thing,” Mr Plank said. “In many ways it’s about the mix of policy rather than the amount of stimulus.”