National Australia Bank modelling has cast doubt on the belief the tax refunds that will soon start flowing into taxpayers’ bank accounts will stimulate the economy in a meaningful way.
The Government’s tax cuts passed through Parliament last week, with stage one soon to be seen in bank accounts as people lodge their tax returns.
On past behaviour, UBS economists estimate that half the returns will be lodged by the end of September, another quarter by the end of this year and the remaining quarter over the first half of 2020.
Treasurer Josh Frydenberg is hoping taxpayers will pass much of the cash they receive straight into the tills of their local stores.
“I’m very confident this money will be used to ensure greater economic activity. It will be used at the local shop. It will be supporting local employers and local businesses,” he said.
“There are a number of things that are happening together with these tax cuts that will continue to see strong economic activity across the Australian economy.”
But NAB’s economists, using similar modelling to Treasury and the Reserve Bank, predict that the $7.5 billion in tax offsets is likely to have “only a marginal effect on the economy”.
NAB’s chief economist Alan Oster said the amount of cash being splashed was small in a roughly $2 trillion economy.
“So it’s about 0.3 per cent of the economy, in terms of the cash,” he told The Business.
“When we run our macro[economic] models we get very small impacts there, because half the money gets spent, half gets saved.”
Economists at UBS expect that retailer sales could be about 1.1 percentage points higher than they would be otherwise over the next year.
“Based on the 08/09 cash handouts, we assume (approximately) 50 per cent of these tax cuts will be spent on retail — with likely another (approximately) 20 per cent on other non-retail consumption,” UBS noted.
“Following cash handouts in 08/09, clothing, department stores, and eating out showed the largest improvement. A similar pattern could be expected with ‘windfall’ money spent on discretionary consumption.”
In a recent analysis, ANZ’s economic team suggested that retail may not see as much of the cash as it did back in 2008/09.
‘You need infrastructure … now’
Regardless of where the money from the tax cuts is spent, Mr Oster said the overall economic boost from the Reserve Bank’s interest rate cuts would be much larger, but later.
“You don’t get much impact from the rate cuts until next year. The cash into the economy is good but it’s tiny — it’s probably worth about 0.1 per cent over a 12-month growth number,” he added.
That has led to NAB forecasting economic growth of just 1.7 per cent this calendar year, recovering only slightly to 2.3 per cent per annum over the two following years.
AMP’s Shane Oliver is a little more confident that the tax cuts will boost retail spending over the second half of the year but agrees that boost will not be large.
“The total $7.5 billion payment being around 0.6 per cent of household disposable income is equivalent to around two RBA rate cuts.”
“However, the $7.5 billion boost to households is much smaller than the $19 billion in GFC stimulus payments (in fact it’s around one quarter the size in real terms) and is likely to only add around 0.2 per cent to GDP over a year.”
Mr Oster said the economy needed more stimulus now.
“You need the consumer to feel more stable, more income coming in,” he argued.
“Or, alternatively, you need infrastructure — but you don’t want infrastructure that’s going to occur in two to three years time, you want it now.
“I have a lot of sympathy for the idea of micro[economic] reform and productivity, but that takes a long time. We need something now.”