Australia Speeding Up Tax Cuts Set to Release Savings, CBA Says

(Bloomberg) -- Australia bringing forward tax cuts to next month’s budget will spur households to part with some of their recently built up savings and boost consumption, Commonwealth Bank of Australia says.

Accelerating tax reductions currently scheduled for July 2022 would lift the income threshold for low and middle income earners and provide “additional firepower to the consumer,” driving increased spending and jobs growth, Belinda Allen, a senior economist at CBA, said in a research note Friday. The boost would come as government income support programs taper off.

Still, this only resolves one part of the problem as sustained wage growth is needed to keep consumption ticking along, she said. Indeed, Allen suggests one reason for the recent surge in savings is households rebuilding funds depleted through 2016-19, when pay gains were limited.

Australians’ balance sheets are in good shape six months into the pandemic as households have taken the opportunity to access pension savings and use massive government support to rebuild savings buffers or pay down debt. The household savings ratio spiked to 19.8% in the second quarter, the highest level since 1974, and would have been nearly 25% if superannuation-fund withdrawals were included.

“It is important to remember that prior to Covid‑19 consumer spending was soft due to persistently weak income growth,” Allen said. “Households may be looking forward to when income support rolls off by saving now and to help smooth out income and consumption in coming years.”

Wage growth is already sputtering, she notes, and pay cuts and wage freezes are expected to shrink real wages.

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