On tax cuts news, latest data shows Australians are spending their extra cash from interest rates and tax cuts on household debts instead of goods and services.
This worsens the retail downturn and affects the economy, according to the analysis of global investment bank Morgan Stanley.
Soft Retail Conditions After Tax Cuts
Companies and retailers are reporting insufficient consumer pickup even after an estimated of $7.5 billion tax cuts have been paid out.
The report analysis says the “deleveraging consumer” may limit pass-through of tax cuts which are expected to flow through to about 10 million households.
The tax cut package puts $7.5 billion into the pockets of 10 million people. That is worth 0.6 per cent of disposable income or to put into perspective, an extra $1080 cash for individuals earning between $48,000 and $90,000 per year.
In contrast with interest rate cuts, the benefits of which accrue gradually as household pay less mortgages, tax rate cuts impact is immediate. It should be immediate because when taxes are lodged, tax cuts are given in the form of a rebate.
However, even though half the rebates have already been paid out, with tax lodgements running 17 per cent ahead of last year, there are no considerable signs of pickup in Australia’s retail and macroeconomy yet. And it may never, according to the report.
“We remain cautious on the extent to which consumers will spend their income windfall, and think the deleveraging headwind still remains.”
Tax Cuts from the Federal Government Isn’t Helping
Consumer demand is not peaking as the federal government hoped it would with the tax cuts provisions.
Morgan Stanley acknowledges reports of “green shoots” or signs of economic recovery some companies are reporting but maintains it is inconsistent with macroeconomic data. The latest NAB Cashless Retail Sales Index, for instance, shows little sign of upturn in consumer spending.
NAB Chief Economist, Alan Oster said, “There is little to celebrate in these figures.” He added that even though there are people yet to submit their tax returns and they are watching closely for signs of improvement in consumer spending, they remain unconvinced consumer spending will change markedly, even with tax cuts or the interest rate cuts from the RBA.
A Case of “Debt Overhang”
Recent research from the Reserve Bank of Australia (RBA) showed evidence of “debt overhang effect” in Australian households.
A debt overhang effect happens when a household cut back on spending due to mortgage debts.
Apparently, Australian households with high levels of outstanding mortgage debt reduce their spending by more than other households during macroeconomic crisis.
The overhang effect, though, is not exclusive to financially constrained households and those with strong “precautionary saving motives.”
The research showed that even when housing wealth remains constant, households still reduce their spending when the gross value of both their debt and assets increases.
So, whether the reason is weak household wealth growth, income growth or high debt, what is certain is that Australian consumers aren’t inclined to increase their spending, particularly on items they consider non-essential.
The retail sector may remain weak for some time and Australians may continue using extra cash to pay off debts.
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