Revised Tax Cuts May Impact RBA Forecasts & Easing Cycle Start

Today at 1230 AEDT PM Albanese will announce changes to the promised stage 3 tax cuts. According to press reports, the amended package will now benefit lower- to middle-income earners more than the original legislation was going to, which was focussed on higher earners after parts 1 and 2 helped the former. The RBA has already factored in the original tax cuts into its forecasts but will now need to incorporate these changes as they will impact households with a higher propensity to spend.

• The return to target is already at the edge of the RBA’s “reasonable timeframe” and if it is pushed out into 2026, then another rate hike is likely, which would likely impact the government’s support. The updated forecasts and the January 31 Q4 CPI are key to the outcome of the February meeting. The tax cuts will be implemented on July 1 and so may not necessarily result in further tightening but could delay easing into 2025.
• In MNI: Tax Cuts, Fiscal Policy Seen Complicating RBA's Job, our policy team speak to economic commentators. They say that the tax cuts will keep inflation high and are worth 50-75bp of monetary easing. Given the shift to people who are more likely to spend, the revised programme may result in an upward revision to the RBA’s projections, which are scheduled on February 6.
• The Australian is reporting that the revised tax cut package will reduce tax revenue by $20bn over the coming 10 years, while the government is saying that the changes won’t be inflationary. Given this development, data watching in H2 this year will become even more important.
• The Australian is reporting that the 37% rate for those earning more than $135k will be retained in the PM’s revised plan, while it will be reduced to 30% for those earning $45k-135k. The top 45% band will now start at $190k down from $200k. The tax rate for those earning less than $45k will be reduced 3pp.