Stimulus could be a ‘drop in the ocean’

As confidence in the economy flags, the government is pinning hopes on its legislated tax cuts to boost growth and spending.

For all the fanfare, though, the cuts are small, and evidence suggests taxpayers will save a big chunk of the extra cash.

ANZ estimates the impact this year at $7.2 billion — equivalent to an annual increase in disposable household income of 0.6 per cent. This is less than a quarter the size of the Rudd government’s fiscal stimulus payments rolled out from the end of 2008, the efficacy of which economists furiously debate.

The tax changes will see lump sum tax offsets of up to $1080 per taxpayer kick in from this month, at a cost of about $9bn over each of the next four years, according to recent Parliamentary Budget Office analysis. After that, the rebates are replaced with lower tax rates and higher thresholds.

“Evidence from the US, Australia and other countries suggests that, on average, households tend to save a large chunk of temporary tax rebates — between 60 per cent and 80 per cent,” said Greg Kaplan, an economist at University of Chicago.

If households save 80 per cent of the $9bn cut, that would leave a $1.8bn boost to spending in the second half of the year, which is a drop in the ocean in a $1.9 trillion economy. The outcome for the retail sector might be worse still. “Hand-to-mouth households — those with limited access to disposable liquid resources — account for almost all of the spending, while households with liquid wealth tend to save almost all of the rebate,” Professor Kaplan said.

“Australia has fewer hand-to-mouth households than other OECD countries, which suggests that the spending response to the tax rebates is likely to be at the lower end of existing estimates.”

ANZ economists were optimistic about the impact, suggesting the cuts could “materially impact consumer spending over the rest of 2019”.

Yet their own analysis notes how changes in the economy since the financial crisis might weigh on consumers’ propensity to spend the tax cuts.

First, the share of spending flowing to the job-intensive retail sector has been falling as consumers spend more on travel. Retail trade has been steadily shrinking as a share of household budgets from about 35 per cent of household expenditure in 2003 to less than 30 per cent in 2018.

Second, household debt has increased from 106 per cent to 120 per cent of GDP since 2008.

Moreover, in the absence of an economic crisis, few would spend out of patriotic duty as they might have in 2009.

As for back-to-back interest rate cuts, “there is a large degree of uncertainty about the timing and size of the impact on the economy”, the RBA said this year.

It would take “between one and two years for monetary policy to have its maximum effect”.