Tax cuts in Australia could stop interest rates coming down

Tax cuts designed to put money back in Australians’ pockets could increase inflation and slow down interest rate cuts, economists have warned.

While most economists expected two interest rate cuts in 2024 after months of brutal hikes left many with unaffordable mortgage payments, this relief could now stall.

Deloitte Access Economics partner Stephen Smith told news.com.au any expected interest rate cuts “could become one, or perhaps none” due to the potential for the revised tax cuts to put upward pressure on inflation.

This is because the new plan will put more money into the pockets of low and middle income earners, who tend to spend any additional money they receive.

By contrast, the original stage three tax cuts would have been more beneficial to those on higher income earners, who tend to save any additional money they get.

Under the proposed changes, Aussies earning $45,000 will get a tax cut of $804 from July 1 this year, which equates to an extra $15.46 per week, while those on $75,000 will get a cut of $1,554, or $29.88 a week.

Workers earning $100,000 will get a cut of $2,179 or $41.90 a week while those on $150,000 will get a tax cut of $3,729, which equates to an extra $71.71 per week.

Mr Smith said that the revised tax cuts will pump an additional $2.6 billion into the economy and that “in the current environment, the government shouldn’t be putting additional money into the economy when inflation is already a problem”.

He added that while the figure wasn’t “a huge amount” the “RBA will be watching it pretty closely”.

It’s a view echoed by other economists.

Dr Brendan Rynne, KPMG chief economist, described the suggestion that the new tax cuts will be non-inflationary as “optimistic”.

“The changes are likely to be marginally more inflationary than the original stage three proposals,” he said.

Dr Rynne added that with inflation is “already coming down fairly quickly”, stoking demand may lead to cost of living pressures to continue for longer.

AMP head of investment strategy and chief economist Shane Oliver said the revised tax cuts risk adding to inflation in the second half of 2024 and have the potential to delay interest rate cuts, according to Reuters.

NAB’s chief economist, Alan Oster, said that while NAB doesn’t expect the tax cut changes to affect the chances of another RBA rate rise, when it comes to interest rate cuts it “won’t hurry them up”, according to The Guardian.

Anthony Albanese has denied the revised tax cuts will drive inflation up.

“It’s the best way to help Australians struggling with their cost of living without putting pressure on inflation,” he said in his address to the National Press Club today.

The prime minister added that the government had consulted with the RBA ahead of formulating the tax changes, and it had advised that the changes wouldn’t add to inflation.

He said that the RBA had told the government that “this option is broadly revenue neutral and will not add to inflationary pressures”.

Economists and financial markets have been betting on 2024 to bring long-awaited relief to millions of Aussies in the form of falling interest rates.

The official cash rate ended 2023 at 4.35 per cent, and forecasts of a cut in interest rates by June have been widespread, with finance traders betting on the RBA to slash the cash rate twice before the end of 2024.

Economists have also added that due to the stage three tax cuts, and their potential to drive inflation, Aussies should not expect further cost of living relief in the federal budget – to be announced in May.

“They could hand money out but would need to find savings elsewhere in the budget,” Mr Smith said.

Read related topics:Anthony Albanese

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