The Government should bring forward the personal tax cuts to boost demand in 2020: Bill Evans

EXPERT OBSERVER

The recent Retail Sales Report for September has highlighted the state of demand in the Australian economy.

Real retail sales fell by 0.1% in the September quarter to be down by 0.2% over the year – the weakest result since 1991, when Australia was last in recession.

This Report is also consistent with the contraction in private domestic demand which we saw in the national accounts for the year to the June quarter.

That is despite consecutive rate cuts from the Reserve Bank in June and July and a $7.7 billion income tax cut for households (in the form of adjusting the tax offset, with a one-off lump sum payment) which started to become available from late in July.

A notable headwind to household spending is the fragility of Consumer Confidence. The Westpac MI Index of Consumer Sentiment slumped by 4.1% in July to 96.5. A rebound in August was short-lived. The latest print, for October, has the index down by 5.5% to a four year low of 92.5.

This weakness in Consumer Confidence is mirrored by weakness in Business Confidence and Conditions, which has extended throughout the September quarter, as evident in the NAB Survey.

We assess that the very low interest rates which the Reserve Bank has had to implement are now impacting confidence as consumers equate low interest rates with disturbing weakness in the economy.

The Reserve Bank has recognised that issue and is trying to balance the impact of lower rates on confidence with the benefits of lower rates through the traditional channels of lowering the AUD and boosting households’ disposable income.

A lift in spending through that second channel is being impacted by the confidence effect and the policies of some banks to adjust mortgage repayments with a lag – meaning that initially households pay down debt more rapidly rather than benefitting from improved cash flows.

We expect the RBA will persist with lower rates with one more cut to the cash rate next February. That decision may be represented as a package with additional stimulus taking the form of quantitative easing through a program of purchases of CGS; RMBS and other corporate securities and, possibly, long term funding for financial institutions.

It will be necessary to signal further stimulus through a program to maintain downward pressure on the AUD. With other central banks including the Federal Reserve; the ECB; the BOJ and the PBOC continuing to ease financial conditions the AUD will be at risk of unwelcome upward pressure if the RBA signals an end to its easing cycle.

Those monetary policies will reflect a difficult year in 2020 for the world economy as trade disputes, complemented by uncertainty around the US Presidential election, continue to impact investment and confidence.

However, as the RBA and other commentators have been highlighting, this need to boost demand also requires some support from fiscal policy.

Westpac acknowledges that there are supply constraints, particularly in Sydney and Melbourne, for new large infrastructure projects. Boosting productivity of existing infrastructure through repairs and maintenance should be considered by the authorities as well as bringing forward appropriate projects in the Commonwealth Government’s current infrastructure plans.

The Federal Government’s mid-year budget update to be released in December, the MYEFO, is also likely to include further commitments to drought relief and aged care.

We are less supportive of further business investment allowances which have been mooted for the 2020 Budget. The instant write-off threshold has already been boosted to $30,000 and extended to companies with turnover of up to $50 million, covering 3.4 million businesses, employing around 7.7 million workers.

Business investment, particularly for big business, is being held back by concerns around the global economy; weak domestic demand and, in some cases, credit availability. Boosting investment allowances is unlikely to make a marked difference to investment given these ongoing constraints.

BILL EVANS is the Chief Economist at Westpac.

This article was first published on Westpac IQ.