Tax Cuts in Australia Fail to Spark Spending Surge, Inflation Likely to Continue Falling – Sydney Auction Clearance Rate at 68%

Week’s Key Focus

Latest data shows that despite inflation potentially dropping to its lowest levels in years due to government subsidies and lower petrol prices, Australians have not yet used the stage 3 tax cuts to engage in significant spending.

Data collected by Westpac from 1 million customers indicates that since the tax cuts were implemented on July 1, most of the additional income has been saved. The tax cuts provide an additional $17.90 per week for individuals earning $50,000 per year and nearly $42 per week for those earning $100,000 per year. These increases had raised concerns about a potential surge in spending and inflation.

However, Westpac economist Jameson Coombs says the current data suggests that most of the tax cut income has been saved rather than spent. He pointed out that in July, tax cuts increased post-tax income by an average of $220 per person, with other income sources adding another $860. Yet, 70% of this extra income flowed into savings accounts. While there was a noticeable increase in income in July, there was no significant spike in spending beyond normal monthly fluctuations. Savings inflows in July were the highest since mid-2021.

If households continue to save rather than spend their tax cut windfall, it could ease concerns about inflation rising in the second half of this year. Data expected from the Australian Bureau of Statistics this week is likely to show monthly inflation dropping to its lowest level since 2021 when the economy was emerging from the COVID-19 pandemic. Prices fell last month, and the overall inflation rate is expected to decrease from 3.8% in June to around 3.3%.

ANZ senior economist Catherine Birch expects the annual inflation rate to drop to 3.3%, mainly due to sharp declines in electricity prices, a 3.1% month-on-month decrease in fuel prices, and a fall in fruit and vegetable prices. However, she noted that rents, new home construction costs, gas, clothing, and holiday prices have increased. Birch also pointed out that the Olympics, which started on July 26, may have driven up international holiday prices. Since July, petrol prices have continued to decline, with average weekly prices falling by 14 cents per litre in Sydney and 25 cents per litre in Melbourne.

Commonwealth Bank economist Stephen Wu believes that government energy subsidies are another reason for the significant decline in annual inflation. With the full implementation of federal subsidies, electricity prices could drop by up to 20% in August. However, end-of-financial-year sales are likely to push up the prices of clothing and footwear.

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Auction Results Last Week

Sydney: 859 houses were listed for auction, 518 auction results reported, 351 sold, with a clearance rate of 68%. The total auction value was AUD 413,499,276, with a median house price of AUD 1,580,000.
Melbourne: 942 houses were listed for auction, 700 auction results reported, 437 sold, with a clearance rate of 62%. The total auction value was AUD 346,978,436, with a median house price of AUD 901,125.