With Australia’s economy at a turning point, are the stage 3 tax cuts enough to lift the government’s political fortunes?
The Australian economy is at a turning point. When the Reserve Bank meets this week for the first time in 2024, it will be assessing a different landscape to last year.
Inflation is much lower. Retail is spending down. Housing costs are biting households harder still.
The political landscape has changed, too. The Albanese government is banking on its revised stage 3 tax cuts to deliver a modicum of relief and a major electoral dividend.
But the changing economic conditions could undermine that political effort to escape the mid-term doldrums.
Crunching the numbers
Inflation is now running at 4.1 per cent for the year, down from 7.8 per cent a year ago.
The RBA had thought not so long ago it would be 4.5 per cent at this point, which tells us inflation is easing quicker than anticipated.
The spectre of one last rate rise that had been lingering as a remote possibility has now vanished; the blunt hammer of rate rises can be left on the shelf.
Instead, the central bank is widely expected by markets and economists to drop interest rates multiple times this year: the current estimate is by a total of half a percentage point by the end of 2025.
That would save households with a mortgage an order of magnitude more than the tinkered stage 3 tax cuts.
For a household with an average mortgage of $600,000, that would be a saving of more than $2,000 a year, compared with $804 over the course of a year that most income tax payers will get from the rejigged stage 3 tax cuts.
For renters, the effect would be more subtle, but investor landlords under less pressure is surely a positive.
Would the public credit the federal government with successful economic management for that outcome? Or would the additional cash from a tax cut be quickly forgotten and any relief attributed to changing economic winds?
Do better economic times = happier voters?
Many Coalition MPs privately lament they received no credit from low and middle income earners for stages 1 and 2 of their tax cuts in years past.
Their hope is that Labor will experience the same in changing stage 3 – that extra money will be spent quickly and forgotten with the same speed, but the memory of a broken promise will linger.
They’ll be doing their best to try to make sure it does.
But if interest rates come down and pressure eases on households with mortgages, Labor may benefit from the simple equation of better economic times leads to happier voters.
But, as always, it’s not that simple.
The economy is at a vertex: having hit peak inflation and interest rates having been cranked up, growth in prices is now easing and the next interest rate moves should be down.
But there is a real risk it may not be a gentle ride back to earth.
The effect of the most recent, and likely last, rate rise in November has not yet been fully absorbed by households.
Recent figures show retail spending is down, which could be early evidence of a cooling economy.
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A soft landing could become a hard dismount
If the trend of consumers keeping their wallets in their pockets — or their digital shopping carts empty – continues, it could lead to a broader slowdown that affects retail businesses and retail jobs.
The desired “soft landing” could turn into a hard dismount for myriad reasons.
Australia is always subject to global economic trends and another supply shock is not out of the realms of possibility thanks to conflicts abroad.
So, regardless of whether the economic picture is improving or heading for a crash, it’s unlikely voters will have stage 3 tax cuts front of mind come the next general election, due in 2025.
The by-election in the Melbourne bayside seat of Dunkley on March 2 is Labor’s best chance of capitalising on its political gamble.
Once autumn arrives, the economics and politics become a lot more uncertain.
