The federal government's tax cuts won't do much for Australia's weak consumption outlook

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  • Captial Economics says the windfall from income tax will amount to just 0.4% of total consumption in 2018/19.
  • CE expects growth in domestic consumption to slow from 3% to 2% in 2019 and 2020.

Income tax cuts were the centrepiece of Tuesday’s federal budget.

But analysis from Capital Economics (CE) notes the back-weighted nature of the cuts means no near-term help will be forthcoming for beleaguered Australian consumers.

CE economist Kate Hickie said signs are still pointing to an ongoing decline in domestic consumption, the biggest component of GDP.

“It appears unlikely that the income tax cuts are large enough to give consumption a decent kick in the next couple of years,” Hickie said.

“We are sticking to our forecast that it will slow from around 3.0% currently to 2.0% by the end of this year and to stay there in 2019 and 2020.”

A weak consumption outlook has been a consistent them in Australian financial markets, as consumers struggle amid the combination of high household debt and low wage growth.

Add to that a cooling housing market, with Sydney homes values posting seven straight months of declines and key leading indicators pointing to further headwinds in store.

“All told, while the income tax cuts will provide some support to spending, we don’t think they are a game changer for the outlook for consumption,” Hickie said.

Threats to the consumption outlook were highlighted this week by an unexpected miss in retail sales data.

Hickie noted that the early-round tax cuts are aimed more at low-to-middle income earners, who typically have a higher propensity to spend any gains in net income.

But she said the relative size of those cuts can hardly be expected to move the needle on consumption.

“In the 2019 financial year, the total windfall for households will be equivalent to just 0.04% of total consumption,” Hickie said.

She said the cuts will then increase each year from 2019/20 to 2021/22, but even then the expected gains will still only amount of 0.4% of consumption.

“Admittedly, the impact beyond 2021/22 could be more meaningful as the biggest tax cuts start to take effect.

“But five years is a long time in politics, not least because the coalition will need to win the next Federal election (due to be held before May 2019) to have any chance of implementing the third phase of its income tax plan.”

For now, the government will have to rely on Australian households to hold the fort in order to meet the optimistic economic growth projections underlying its budget forecasts.

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