Westpac chief economist Luci Ellis says tax bracket creep pressuring households

Westpac chief economist Luci Ellis says tax bracket creep is pressuring households more than interest rate hikes.

Westpac chief economist Luci Ellis. Picture: Jane Dempster

Westpac economist Luci Ellis has backed up claims by economist Warren Hogan that tax bracket creep is putting more pressure on Australian households than rising interest rates.

Speaking at the Morningstar Investor conference in Sydney on Wednesday, Ms Ellis, who was the Reserve Bank assistant governor (economic) until October last year, said household incomes in Australia were under pressure, with bracket creep now playing an increasing role in reducing income.

“High inflation has been an enormous drag on spending power (but) less appreciated is tax,” she said.

“In Australia, tax brackets are not indexed to CPI.

“The share of household income going to tax has increased and it has been a much bigger drag on incomes than the drag from interest rates.

“Fiscal policy has done more to drag spending power out of the household sector than monetary policy.”

Dr Ellis’s comments echoed those of economist Warren Hogan, managing director of EQ Economics, who told the Australian Shareholders’ Association conference on Tuesday that government driven narrative which was blaming monetary policy for the pressure on Australian households while bracket creep was “having just as much if not more of an impact.”

“I’m increasingly of the view that it’s not interest rates that are driving the broad pressure on household incomes, it’s bracket creep,” Mr Hogan said.

Dr Ellis told the Morningstar conference that the Stage Three tax cuts which come into force on July 1 would go some way to relieving the pressure on households.

But she said they would only give back to households the equivalent of the last 18 months of bracket creep.

“The Stage Three tax cuts will ameliorate (the pressure on households) but they are only going to give back the last 18 months of bracket creep,” she said.

“We will still have an above average tax drag in Australia relative to prior history once that has happened.”

She said the situation in Australia was in contrast to the US where tax brackets were indexed to the Consumer Price Index.

“Neither fiscal policy nor monetary policy are touching the sides there,” she said.

“No wonder they are increasing their spending.”

Dr Ellis said Westpac’s forecasts of when the Reserve Bank was going to cut interest rates had been “pushed back” from September to November this year.

“We are expecting rate cuts towards the end of the year.”

“I know not all my counterparts are thinking the same way, but we have been pretty consistent right through the year the Reserve Bank is looking to make sure that inflation is coming down to the trajectory they want and they are just waiting for the right information to confirm this.”

She said she expected the US Federal Funds rate to stay above the RBA’s cash rate “for a considerable period of time.”