Federal Budget tax cuts — will they help our coronavirus recovery?
Presented with the challenge of trying to get more cash rolling through the economy, there’s talk the Government bring forward its planned tax cuts in today’s budget.
According to one behavioural economist, it’s a good idea for more than one reason.
Behavioural economics is where the fields of psychology and economics meet and takes into account the fact that humans aren’t always rational decision-makers, and that our behaviour is often motivated by a range of cultural, personal and emotional factors.
It is used to by policy makers to gauge whether their ideas, including things like tax cuts or stimulus payments, will have the desired effect.
For Melburnian Amy Merrick, two of the major factors influencing her spending and saving are that, as well as expecting her second child, she’s been stuck at home during the city’s lockdown with her two-year-old son Edward, and husband.
“If anything, we’ve saved a lot because we’re not doing anything … but we still have a mortgage, bills, we have another child and a lot of out-of-pocket costs there,” she said.
She said if she were given an extra $100 a week in stimulus measures, it’d all go towards savings, but $500 a week would leave room for a bit more spending on non-essentials.
According to University of Technology Sydney behavioural economist Michelle Baddeley, what people think they would do with extra cash can often be very different to what they ultimately do — even in times of great uncertainty.
Planning self vs doing self
Professor Baddeley, who is also the Associate Dean of Research at UTS, said while it was well proven that stimulus or tax cuts were readily spent by low income earners, behavioural economics showed people were actually more likely to spend, regardless of income level.
“There’s a planning self and a doing self,” she said.
“The planning self would say, ‘Yeah I need to save, what’s the future going to be like, I might need the money’, but that planning self is more patient, more deliberative and thinks more logically.
“But does the doing self get in the way? Impulsively thinking, ‘Yeah I should save this money’ but in fact I’m not able to control myself enough to stop me spending money.”
Professor Baddeley also noted it was important to consider people of different socioeconomic, education and cultural backgrounds have different approaches to risk and savings.
‘Present bias’ at play
As well as the difference between what we might say and do, Professor Baddeley said there was another factor at play, a behavioural economics theory described as “present bias”.
“[This is] where people are disproportionately focused on short-term benefits,” she said.
“People are very focused on tangible costs and rewards, so if they’re offered an option to have something here and now as opposed to putting the money away … that’s more intangible and distant so people are less focused on it.
“So the likelihood is that [people will spend] for two sets of reasons: economically people need to spend the money and behaviourally they’re more inclined to spend the money.”
Ms Merrick and her husband have been able to work from home during the pandemic, something she said was “incredibly lucky”, so don’t have the same pressure on their finances others around the country are facing.
But even as a self-described “frugal” saver, Ms Merrick said there was no way she was going to keep stashing when the opportunity came about to spend a little more.
“I’ve saved a lot of money, more than I have in years because going into the office there’d be coffees and lunches out,” she said.
“I’m really excited, when the community opens back up, to pump money into the economy.
“If our jobs were a little precarious or hanging in the balance maybe it’d be a different story.”
But Professor Baddeley said the present bias could have consequences for people withdrawing their superannuation under the Government’s emergency coronavirus measure.
“That maybe was less than well thought through from a behavioural perspective,” Professor Baddeley said.
“It was meant to help people get by, there is some evidence that people weren’t just spending that money to help them get by, they were spending on luxury goods they didn’t need.”
Making up for lost time
While present bias might’ve made people more likely to spend in a pre-coronavirus world, for Ms Merrick, being under lockdown for an extended period of time has also had a big impact.
“It’s been so tough mentally and socially isolating and everything else, I think we’ll reward ourselves and the community,” she said.
“Even just around Victoria, to travel with my family and actually spend the money on food and wine and activities.
“I really want to do that, everything from hair to nails to art to food and gigs, festivals and it’ll be funny because I’ll get back down to not having a lot of spending money but I think it’s really worth it.”
Professor Baddeley said Ms Merrick’s attitude was probably one a lot of people could relate to.
“I think with COVID there’s also been much more focus on our mortality, so you know, enjoying the moment and supporting local businesses is incredibly important as well,” she said.