ANZ expert says Stage 3 tax cuts are equivalent to two quarter-point interest rate reductions

Australia’s tax cuts due to begin on July 1 will add around 0.4 percentage point to gross domestic product in the following 12 months and are equivalent to about two quarter-point interest-rate reductions, according to ANZ Banking Group Ltd.

The impact of the tax cuts on economic growth will be blunted somewhat by higher income earners saving part of the windfall, ANZ’s Adam Boyton said in a research note on Tuesday. He expects the household savings ratio to rebound to 3.2 per cent in the second quarter of 2025, compared with 1.1 per cent in the latest GDP data.

Under the Stage 3 tax cuts, Australia’s 32.5 per cent and 37 per cent brackets will be scrapped in favor of a uniform 30 per cent rate for incomes between $45,000 and $200,000. The tax cuts are the third stage of a series legislated by the previous Morrison Coalition government. Prime Minister Anthony Albanese’s Labor government pledged to stick with the tax cuts ahead of its 2022 election victory.

But Labor has been under pressure to redirect some of the tax reductions away from high-income earners and toward people struggling with inflation and the impact of the Reserve Bank of Australia’s 13 rate hikes since May 2022.

The Labor government is reportedly considering potential changes to the tax cuts that include boosting the tax-free threshold, increasing the windfall for those on low incomes and pulling back some of the benefits for people earning over $200,000.

While opposition parties say such a move would be a broken promise, the government hopes the changes will help some of its core voters.

Meanwhile, ANZ’s Mr Boyton reckons the government will stick with the tax cuts while providing additional fiscal support for lower-income households. This may be designed to reduce headline inflation via household rebates and subsidies and could begin as soon as next quarter, he said.

“The likely size of the overall stimulus in the federal budget - Stage 3 tax cuts plus additional fiscal easing for lower income households - means the RBA will likely take some time to assess the impact of these policy changes,” said Mr Boyton, head of Australian economics at ANZ.

“For that reason, we see easing in Australia this year being fiscal first and monetary policy second.”