Economists warn of ‘real problem’ to inflation from impending Stage 3 tax cuts

Impending income tax cuts are a “real problem” for the Federal Government and may even pose a bigger threat to inflation than the Reserve Bank has factored in, economists say.

The Stage 3 tax cuts — first mooted in 2018 and now adjusted from the original Coalition design — come into effect from July 1 and move five tax bands into four.

Most people will pay less on tax each year, but economist Angela Jackson, lead economist at Impact Economics and Policy, on Wednesday warned it was likely to add to aggregate demand and therefore add to the inflation problem.

“They are a real problem for the Government,” Dr Jackson told the National Press Club in Canberra as part of an annual pre-Federal Budget address by the Women in Economics Network. Dr Jackson is the network’s chair.

“They could cause more headaches than the RBA was hoping for.”

RBA governor Michele Bullock has previously said the tax cuts had been baked in to the central bank’s forecasts, but after March quarter inflation data came in hotter than expected, economists widely expect the RBA will substantially alter its forecasts next week in its next scheduled release.

Though inflation moderated over the year to March to 3.6 per cent, it increased on a quarterly basis by one per cent, a much higher rise than had been expected. Treasurer Jim Chalmers is therefore under greater pressure to deliver a Federal Budget that is not inflationary.

Westpac Business Bank chief economist Besa Deda said financial markets had largely appeared to have overreacted to the inflation data, adding markets had at the start of the year expected six interest rate cuts in the US but now expected about one given its higher than expected inflation.

Dr Jackson agreed it was important people be careful about claiming the higher inflation was a disaster, but it was also crucial that people were aware inflation may well be much stickier and persistent than had been expected.

“It is a terrible, wicked problem,” she said of inflation, emphasising that price stability was vital to ensure stable living standards and for the economy’s ongoing health.

Dr Chalmers earlier on Wednesday said major priorities for the Budget were to “land a second surplus” and to “run a tight ship”. Inflation would be a primary but not sole focus.

“There’ll be cost-of-living support in the Budget. We’ll design it so that it helps with inflation rather than makes the problem worse,” he told Seven’s Sunrise, but would not include a boost to JobSeeker or Youth Allowance.

“The Budget will focus on other ways to provide help for people who are doing it especially tough.

“We do acknowledge that even with the best efforts in those first two Budgets to give people a bit more help that we can do more. We can do that in a responsible and a meaningful way and people will see that on Budget night.”

Ms Deda also told the Press Club that Australia was over-reliant on income-based tax and needed to look at more consumption-based taxes.

She also urged measures in the Budget — and from Governments overall — that would help to meaningfully shift the dial on home ownership, encompassing tenancy law, planning restrictions and tax, describing anything else as “tinkering — and we have done that for four decades”.

Australian house values hit fresh highs in April, CoreLogic data released on Wednesday showed, and with supply limited, affordability was likely to remain a serious challenge for years.