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As Australians anticipate padded pocketbooks from Stage 3 tax cuts, emerging concerns involve the risk of increased inflation that could pressure mortgage holders with steeper interest rates, posits an economist.
Dr. Nalini Prasad from the UNSW School of Economics highlights the pivotal role of family spending habits in shaping the future economic scenario.
"Receiving more income is always welcome," Dr. Prasad remarks.
She points out that the average weekly take-home pay will rise by $42.
"If individuals opt to spend the majority of their increased income, it could trigger inflation, placing upward pressure on the cash rate," she explains.
The cash rate, determined by the Reserve Bank of Australia (RBA), acts as a benchmark for mortgage rates across the nation.
The rate currently stands at 4.35 percent, following an assertive rate hike cycle by the RBA aimed at curbing mounting inflation.
RBA Governor Michele Bullock has cautioned that the Board will raise rates further if needed to bring inflation down to the 2-3 percent target range. The latest inflation report from June offers little comfort to homeowners.
The consumer price index surged to 4 percent in the year leading up to May, as reported by the Australian Bureau of Statistics, a hike from April's 3.6 percent inflation.
Economists had forecast a more conservative increase of 3.8 percent.
Deutsche Group chief economist for Australia, Phil O’Donaghoe, believes this unexpected hike will likely prompt the RBA to increase rates by an additional 25 basis points to 4.6 percent in August.
Evaluating Long-Term Outcomes
"Underlying inflation remains excessively high in Australia," asserts O'Donaghoe.
Dr. Prasad emphasizes that the long-range benefits of the tax cuts will hinge on successfully mitigating current inflation issues.
"In the longer run, if the economy can bolster its productive capacity, we could see more investment resulting from the tax cuts. However, tackling short-term inflationary problems is essential first," she notes.
"Without an increase in productive capacity, the immediate effects of the tax cuts may be constrained to heightened inflation, with minimal economic growth gains," she warns.
Some data, however, suggests that the tax cuts might not significantly contribute to inflationary pressures.
For instance, a study by banking giant NAB indicates that over a third of Australians, approximately 36 percent, intend to save their additional income rather than splurging on non-essentials.
The report also reveals that a significant portion of Gen Z Australians, around 53 percent, plan to save rather than spend, and 49 percent of those earning between $100,000 and $150,000 prefer saving to spending.
"Despite the challenges of rising living costs, Australians have been making savings a priority wherever possible over the past year or so," observes Paul Riley, NAB's personal banking executive.
"The funds from Stage 3 tax cuts are expected to significantly boost their savings or rainy-day funds," Riley adds, emphasizing that this tendency to save will assist in combating inflation.
The content of this article has been adapted from an original news piece titled "UNSW Economics Expert Warns of Stage 3 Tax Cut Inflation Risks," published by NewsWire.
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Knowledgebase
Cost of Capital: The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile.
