The debate on tax reform is killing consumer confidence

Australian consumer sentiment fell heavily last week, wiping out the gains seen in the previous three weeks.

The ANZ-Roy Morgan Australian consumer confidence index slid 2.6% to 111.3, leaving the index back below its long-run average of 112.7.

The decline was led by substantial deterioration in perceptions towards Australia’s economic outlook. The subindex measuring expectations for the year ahead slumped 6.3%, outpaced by an even larger 7.2% decline looking five years ahead.

Elsewhere readings on personal finances came in mixed, with perceptions towards current finances sliding 2.7%, overshadowing a 0.4% improvement in sentiment towards the year ahead.

Despite the large declines registered in perceptions towards personal finances and the economy, the subindex on whether now was a good time to buy a major household item rose by 1.2%.

According to Warren Hogan, chief economist at ANZ, the debate on tax reform, particularly towards housing, is creating heightened levels of uncertainty for households.

Confidence has dipped as concerns around the economic outlook come back into play. The heightening debate on tax policy, with its focus on negative gearing and house prices, looks to be creating some uncertainty around the outlook for households. The Government’s ability to deliver a clear and credible economic platform is clearly important for consumers, and the delivery of a coherent tax policy will be an important part of that platform.

Encouragingly, consumers remain optimistic about their current finances, with the re-energised property market a likely factor here. Auction clearance rates have begun the year on a better note even as sales volumes have returned towards more normal levels. The important question is whether this resurgence in housing translates into stronger household spending in an environment of low wages and inflation. This is critical to meet the RBA’s expectation of consumption growth returning to above trend growth.

Whether due to the proposed changes to negative gearing and the capital gains discount on housing floated by Labor, or the government’s so-called “scare campaign” that the changes will lead to lower house prices, as the bickering in Canberra continues, confidence levels are clearly suffering.

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