Frugal response to tax cuts should be music to Reserve Bank’s ears

If you start receiving a bit more cash in your bank account with each pay packet, how much of the extra money do you spend, and how much do you save?

How millions of households respond to these questions will be a key influence on the economy for the rest of this year, as the stage 3 tax cuts feed into millions of household budgets.

Evidence so far suggests this year’s tax cuts have had a limited impact on household spending.Credit: Nikki Short

Economists expect the cuts will gradually help to revive spending from its lacklustre levels, as consumers slowly loosen their purse strings. But so far, it’s been close to three months since the tax cuts kicked in and the response from punters looks muted.

That won’t please retailers – and it sits awkwardly with a sharemarket that this week hit record highs. However, the frugal response from consumers should be welcome news to Reserve Bank governor Michele Bullock and the board when they meet to set interest rates next week.

Economists think the Reserve Bank will keep rates on hold at 4.35 per cent next week, but some expect it will leave open the possibility of future rises. Yet this tough talk should be seen as just that. The lack of a tax-cut–induced spending spree confirms there’s no need for any further Reserve Bank rises – that would only inflict unnecessary pain on households who have already put the brakes on discretionary spending.

The extent to which tax cuts might fuel more spending has been a recurring theme in recent research from economists and stock analysts.

Consumer surveys, banks’ internal data, and reports by analysts who pored over big retailers’ recent results all suggest households have remained cautious with the extra cash they’ve received since the multibillion-dollar stage 3 tax cuts took effect on July 1.

In the past, tax cuts or cash handouts have often sparked a jump in gambling, but JP Morgan analysts recently reported there had been no jump in poker machine turnover in July, either.

Jarden analyst Ben Gilbert says it appears that some part of the stage 3 tax cut proceeds appear to have been spent by households, but “maybe not as much as we would have expected or hoped”.

“We saw spending pick up a little through July and August, but not materially. Some of the categories that we might have seen a bit of a bounce, such as in fast food, have not seen an uptick,” he says.

Overall, the picture emerging is that households remain pretty tight with their cash.

Gilbert points to the weaker performance at KFC operators Collins Foods and the owner of Dan Murphy’s, Endeavour Group.

Importantly, it’s not a case of weakness across the board. Gilbert says that in general terms, the tax cuts probably affected spending patterns differently across different age groups.

For older generations living off their super, the tax cuts would have had a pretty small impact, in many cases. Families with big mortgages would often have received substantial savings from the tax cuts, but equally, many of them may have needed to use the cash to get their finances in order, rather than to increase their spending. Younger shoppers may have spent a bit more of the tax cuts, he says, pointing to decent results at youth-focused retailer Universal Store and electronics powerhouse JB Hi-Fi.

It is still early days since those tax cuts arrived, and spending may yet pick up over Black Friday and in the lead-up to Christmas.

Overall, however, the picture emerging is that households remain pretty tight with their cash. That’s important because household spending accounts for about 60 per cent of all economic activity, and most economists expect this spending to rebound this half, as inflation cools. If that spending recovery is weak, it would flow into softer economic growth.

As far as the Reserve Bank is concerned, weaker growth should helpful bring inflation down back towards the central bank’s target range of 2 to 3 per cent. That’s because the Reserve’s basic problem is demand (spending) is outstripping supply (the economy’s capacity to create enough goods and services to meet that spending), leading to inflation.

So, if households generally choose not to lift spending much, even after tax cuts, that should make it easier to get demand and supply back in balance.

To be sure, many economists still doubt Reserve Bank rate cuts are coming soon, despite the US Federal Reserve’s historic 0.5 percentage point cut this week. Surprisingly strong jobs data this week – unemployment was unchanged at 4.2 per cent in August – made many economists more confident that the Reserve Bank probably won’t cut rates this year.

All the same, the cautious consumer response to this year’s tax cuts should reassure the Reserve Bank that consumers have well and truly got the message about tightening spending.

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