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Briefing paper

Needle in a haystack: searching for the impact of tax cuts on consumer spending and economic growth

Consumer behaviour Economic indicators Retail trade Tax cuts Economic growth Australia

Economic data for the September quarter confirm that Australia’s economy continues to barely inch along. Expansion in GDP slowed to 0.4% during the quarter. Continuing weakness was evident in falling business investment and dwelling construction. Consumer spending flagged to its slowest pace since December 2008 – eking out just a 0.1% increase in the quarter. Modest increases in government activity (both current services and capital investment) partly offset private sector weakness. A $1 billion improvement in the quarterly trade balance was the only bright light in an otherwise pessimistic GDP report. But even that was a mixed blessing: the larger trade surplus reflected both higher exports and lower imports – the latter being another sign of weak domestic spending.

Key points:

  • New economic data confirm Australia’s economy has slowed to almost a standstill. Growth in the September quarter fell to 0.4%, held back by declines in business and dwelling investment, and near-zero growth in consumer spending.
  • Consumer spending growth was the weakest since December 2008 – when Australians were grappling with the worst moments of the Global Financial Crisis.
  • Consumer spending stagnated despite expensive tax cuts provided by the newlyreelected Coalition government. Income taxes paid by Australians declined by over $4 billion in the quarter. But fearing future recession, Australians socked away those savings: personal savings grew by $6 billion in the quarter, more than taxes fell.
  • Because of the sharp increase in the saving rate, none of the aggregate tax savings showed up in new consumer spending. The propensity of Australians to consume from their pre-tax income actually declined in the quarter. In other words, the effect of the tax cut had zero measurable impact on aggregate consumer spending.
  • Wage growth slowed further in the September quarter – with the Wage Price Index increasing by just 2.2% over year-ago levels. With slowing wage growth and higherthan-expected unemployment, Australian consumers simply cannot afford to boost their spending, despite the tax cuts.
  • One-time tax cuts have an insignificant effect on disposable incomes, compared to the benefits of restoring normal wage growth in Australia. In just one year, a restoration of normal wage growth would boost incomes by $12 billion – 3 times the value of the tax cuts. Compounded over just 3 years, normal wage increases would lift incomes by a cumulative total of $75 billion, and consumer spending by $50 billion. Restoring wage growth, not cutting taxes, is the key to turning around Australia’s flagging economy
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