Needle in a Haystack

Searching for the Impact of Tax Cuts on Consumer Spending and Economic Growth
by Jim Stanford

The latest economic statistics have confirmed that Australia’s economy is barely limping along – with quarterly GDP growth of just 0.4%. One of the weakest spots in the report was consumer spending, which recorded its weakest performance since December 2008 (amidst the worst days of the Global Financial Crisis). This was despite the supposed benefit of recent Commonwealth government tax cuts in boosting disposable income and stimulating more spending.

Analysis from Dr. Jim Stanford shows that the tax cut is in fact completely invisible in the macroeconomic data.

Among the major findings of the report:

  • Consumer spending stagnated despite expensive tax cuts provided by the newly-reelected 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 higher-than-expected unemployment, Australian consumers simply cannot afford to boost their spending, despite the tax cuts.
  • One-tax 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.

Full report