Budget tax cuts tipped to boost household saving rather than lift us out of COVID recession
Before the pandemic, Ruza Zivkusic-Aftasi was one of many working mothers who would have benefitted from the Government’s latest income tax cuts for middle-income earners.
She and her husband Sam were both working full time before COVID-19 hit.
She worked as an online journalist, while he worked in sales.
But in June they joined more than a million other workers who had lost their jobs during the crisis.
“We had to seek welfare support from the Government — and that in itself, having worked in the professional environment for the last 18 years, that was a little bit confronting,” Ms Zivkusic-Aftasi says.
“As parents of two young kids [Mila, aged 6, and Sara, aged 3] not knowing where and when we will get a job — that’s been a huge cloud.”
Ms Aftasi says the family had some savings, and with the JobSeeker payment, have been able to stay afloat.
“But in the meantime, we’ve had to pull our youngest daughter from child care.”
Ms Aftasi does not think billions of dollars in tax cuts brought forward in Tuesday’s budget is the best way to lift the economy out of recession.
“Tax cuts will not help families like ourselves who are unemployed,” she says.
“Having tax cuts is definitely not going to help you pay your bills.”
Ms Aftasi would prefer to see the JobSeeker payment extended for those who need it.
“There needs to be a system in place to help those families in need — like ourselves — to make ends meet,” she says.
“We need something to take us from month-to-month by supporting us through this time of uncertainty.”
How much more you get in your pocket
In the 2018 and 2019 budgets, the Federal Government announced three stages of income tax cuts over a seven-year period.
Together, the tax cuts are valued at $300 billion over 10 years.
The first stage was already delivered in mid-2018. It gave a tax cut of up to $1,080 a year to low-and-middle-income earners using a tax offset.
Under Tuesday’s federal budget changes, the second stage of previously legislated income tax cuts has been backdated to July 1.
It lifts the income threshold at which the 37 per cent tax rate applies from $90,000 to $120,000.
The Government will also retain the Low and Middle Income Tax Offset for an additional year.
The changes announced amount to about $20 per week extra for a worker earning between $48,000 and $90,000, with people earning more than that getting a larger benefit, up to a maximum of $2,430 per year.
Then there’s stage 3. It’s still possible the Government could bring forward its stage 3 cuts for higher-income earners.
Currently, the third tranche is due to kick in in 2024, and applies a flat 30 per cent rate to all earnings between $45,000 and $200,000.
Treasurer Josh Frydenberg noted both stage 2 and stage 3 cuts were previously legislated.
“This economy needs the boost,” Mr Frydenberg said.
“[It will] create 50,000 jobs and put more money into people’s pockets.”
But Shadow Treasurer Jim Chalmers said tax cuts would not help people who do not have a job in this crisis, and has called for a further extension of the JobKeeper wage subsidy.
“An average worker will get $50 a fortnight at the same time millions of workers are losing $300 a fortnight with the cuts to JobKeeper, so we need to factor that in,” Mr Chalmers said.
Are tax cuts the best bang for the buck?
Some argue that the latest tax cuts will not revive the economy, since during a recession middle and high-income people are more likely to save rather than spend the extra money.
The Australia Institute’s Matt Grudnoff argues the income tax changes will disproportionately advantage wealthy Australians both now and into the future.
“In 2020-21, 41 per cent of the Government’s tax plan will go to the top 20 per cent of income earners, while the bottom 20 per cent gets only 4 per cent,” he says.
“In 2021-22, 88 per cent of the Government’s tax plan will go to the top 20 per cent of income earners, while the bottom 20 per cent get nothing.”
Grattan Institute chief executive Danielle Wood argues bringing forward tax cuts may not result in an immediate spending boost when compared to policies like childcare subsidies and welfare support.
“I’m not against tax cuts per se, but what I would say is that the tax cuts as proposed will not give the same bang for buck in terms of stimulating the economy as some of the other options that were on the table,” she says.
Ms Wood also argues that now that wages are not growing, people are less at risk of being taxed more heavily, as they will not move up into a higher tax bracket.
“Those tax cuts were calibrated off an expected rate of wage growth and bracket creep which hasn’t materialised,” she says.
Ms Wood says alternative policies such as reducing out-of-pocket childcare costs puts money into the pockets of families who are likely to spend it.
“And importantly would support women’s workforce participation for the economic recovery,” she says.
She also wants to see a boost to JobSeeker and more direct support for some of the hardest-hit sectors including hospitality, tourism and the arts.
Treasury has forecast Australia’s unemployment rate will peak at about 8 per cent this year and drop slightly next year.
“We’re talking about a slow [economic] recovery — one that take place over a number of years,” Ms Wood says.
“And I’m not convinced that what was announced in the budget is going to be sufficient to ensure a really strong rebound.”
Tax cuts help address ‘bracket creep’
But Melbourne University Professor John Freebairn says having people save is not such a bad thing, as it brings down household debt.
“One of the problems in Australia is we have this very high household debt-to-income ratio,” he says.
“In the medium term, using some of the tax cuts to produce savings — to get our household balance sheet in order — will contribute to a more robust economy.”
Professor Freebairn also argues that regardless of whether people spend or save, tax cuts address the historical problem of bracket creep — where wage inflation pushes people into higher tax brackets and so they end up paying more tax.
“Income tax brackets have not really been changed since about 2010,” he says.
“And so with the effect of general inflation and increases in wages, the average tax rate for every person has been slowly creeping up over time.”
Professor Freebairn says while wage increases may be fairly slow for the next year or two, “they’re certainly not going to be zero”.
“I would say in the next couple of years, we will be back up into some wage increases and some inflation,” he says.
“That continues bracket creep. And if governments refuse to automatically index the brackets for inflation, then we have to rely on these infrequent arbitrary tax cuts.”
Professor Freebairn also argues that tax cuts incentivise people to work and invest.
“By dropping marginal tax rates, it improves the incentive for people all along the workforce to work a bit harder, to study a bit harder, and also to incentivise investment,” he says.
“In the end, the only way we’re going to pay back this deficit is to have a larger and more productive economy.”