Tax cuts to kick in and boost the economy

Millions of Australians will be up to $47 a week better off as the Morrison government's early tax cuts kick in over the next week, with economists expecting the money to deliver a vital boost to the economy as it reopens from coronavirus shutdown.


From November 16, all employers have to ensure the cuts - worth $7 billion this financial year and which were brought forward in last month's budget - are passed on to their staff.


While the tax cuts, which had been planned to start in mid-2022, were fast-tracked through Parliament, it has taken closer to a month for businesses to update their payroll systems that will see extra take-home pay for workers.

Under the changes, the top threshold for the 32.5 per cent tax rate will increase to $120,000 from $90,000 while the top threshold for the 19 per cent rate will climb to $45,000 from $37,000.

While the tax cuts, which had been planned to start in mid-2022, were fast-tracked through Parliament, it has taken closer to a month for businesses to update their payroll systems that will see extra take-home pay for workers.

Under the changes, the top threshold for the 32.5 per cent tax rate will increase to $120,000 from $90,000 while the top threshold for the 19 per cent rate will climb to $45,000 from $37,000.


"The saving rate is already ultra-high and it's hard to see it going back up again. And Australians have been paying down their debts at or around record levels anyway," he said.


"All of which suggests that much of it will actually be spent particularly given that the tax saving is permanent as opposed to a one-off payment.


"This in turn will help offset the negative impact on household spending power overall of the tapering in JobKeeper and JobSeeker supplement payments."


ANZ's head of Australian economics, David Plank, said there were signs people were becoming more concerned about their own financial circumstances, partly because of the drop in JobKeeper and JobSeeker payments.


"Some tax relief will help in this regard and so is very welcome. But the boost from tax cuts will be less than the reduction in direct support, over this quarter and the first half of next year," he said.


"Of course, there is a lot else going on, with Victoria opening up and the housing market being boosted by the RBA’s strong signal that interest rates are staying low for a number of years. All of which makes reading the ‘tea leaves’ even more complicated than usual."


In its quarterly monetary policy statement released last week, the Reserve Bank - which has cut official interest rates to 0.1 per cent and started a $100 billion buying program of government debt - signalled the importance of the tax cuts to the overall economy.


The bank estimates the cuts will reduce household tax by $24 billion over the next two years, with much of that delivered in 2021-22. That is on top of $250 payments to pensioners and some other welfare recipients.


The bank believes consumer spending will be vital to Australia's economic recovery, with the tax cuts necessary to offset the expiry of temporary support such as the JobKeeper wage subsidy.


"Some households have already built up significant financial buffers over recent quarters, and if economic conditions continue to improve, could choose to draw on these buffers to fund consumption," it said.

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