Does the economy need a tax cut?

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November 12 2019
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Despite interest rates falling to record-low levels, retail sales fell by 0.1 per cent in the September quarter, leading to an economist calling for future tax cuts to be brought forward.

According to Westpac’s chief economist, Bill Evans, the Reserve Bank of Australia needs fiscal support to lift consumer spending. Bringing planned tax cuts forward could support the economy, he noted.

While highlighting the constraint of the government’s commitment to a budget surplus, the economist believes a middle ground could be found.

“To boost demand, it would be better to accelerate the second stage of personal income tax cuts, which the government has already legislated for July 2022,” Mr Evans explained.

The economist advocates for splitting stage two income tax changes across two years, costing $7 billion in year two.

“The point at which households move from the 19 per cent tax rate to 32.5 per cent could lift from $37,000 to $41,000 in the first year and then $45,000 in the following year.”

“Similarly, the move from 32.5 per cent tax rate to 37 per cent could occur at $105,000 in the first year and then $120,000 a year later,” Mr Evans explained.

However, H&R Blocks’ director of tax communications, Mark Chapman, has warned against expecting tax cuts to be a silver bullet for the economy.

“People don’t always behave as you’d expect when they receive a tax cut and – depending on the overall state of the economy at the time – many taxpayers may simply choose to bank the tax cut by paying down debt or investing in savings rather than spending it on consumer goods like cars, holidays and homewares,” Mr Chapman said.

Mr Evans argued the tax cuts will have a larger effect on household spending than the recent tax cuts, which have done very little to stimulate the economy due to it being added to weekly after-tax income, instead of a lump sum.

While Mr Chapman does not believe pay cycle decreases are more effective than one-off offsets, he does believe moving the income tax cuts forward could help the economy.

“Given the fragile state of the economy and the repeated hints from the RBA that more action is required to boost growth, it would certainly make sense to move the stage two tax cuts from 2022 to 2020,” concluded Mr Chapman.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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