Households saving 75c in the dollar on tax cuts
An update on consumer behaviour 6-months after the implementation of Stage 3 tax cuts using the Westpac-DataX consumer panel.
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Our last update from the Westpac-DataX Consumer Panel indicated that households opted to save rather than spend the initial income boost from stage 3 tax cuts in the September quarter. Admittedly, this was a short sample - just three months of tax cuts. The question at the time was whether this muted response would continue or whether it was being affected by households ‘stockpiling’ the tax cut benefits to spend at end-of-year sales – the Black Friday, Cyber week and Boxing day events in particular.
The latest update from the Consumer Panel, incorporating data for the December quarter, firmly debunks this theory with households again opting to save rather than spend most of the income boost from Stage 3 tax cuts. After a significant squeeze on household incomes over the past few years, not even the allure of a festive season and aggressive discounts could persuade consumers to part ways with their hard-earned dollars.
The average nominal spend per person did increase in the December quarter in seasonally adjusted terms, rising 0.8% over the quarter. This was softer than the 1.8% increase in spending per person in the September quarter and below the average quarterly change over the two years preceding the tax cuts.
Most importantly, the increase in spending in both the September and December quarters is modest in the context of the significant income boost from the Stage 3 tax cuts. Using the average of 10 different model specifications we estimate that the marginal propensity to consume (MPC) from the tax cuts over the September and December quarters was 0.25 – that is spending 25% of the income boost and saving the remaining 75%. In dollar terms, households have received an average cumulative tax benefit of roughly $830, of which $205 has been spent and the remaining $625 has been saved.
This estimate is corroborated by other dimensions of the Consumer Panel, which again revealed large inflows into savings and offset accounts and sizeable contributions to mortgage repayments in the December quarter.
Many forecasters, likely including the Federal Treasury and the RBA, would have reasonably assumed an MPC in the vicinity of 0.5 for a fiscal stimulus such as the Stage 3 tax cuts. Our own assumption was for an MPC of around 0.4. Clearly, these are well above what has been observed so far in the Consumer Panel. In fact, the average spend per person over the second half of 2024 was around $215 lower than under a scenario where households spent 50% of the tax cuts. That’s a significant difference when scaled to a population of around 12.4 million taxpayers. In total, nominal spending would have been $2.7bn higher over the second half of 2024 under a 0.5 MPC scenario.
Implications
The low passthrough of Stage 3 tax cuts to spending should have a bearing on the near-term decision-making of the RBA and more broadly to the outlook for consumption and growth.
Relatively modest growth in consumption in the September quarter National Accounts (stalling flat in real terms) soothed some of the RBA’s concerns that tax cuts could trigger a consumer splurge that would add significantly to demand and potentially delay the return to the inflation target. However, the minutes from the December policy meeting suggest that these concerns were not completely allayed.
In particular, the minutes to the December RBA Board meeting show members were unsure whether the solid spending signal from card transaction data through October and November “reflected a persistent pick-up or temporary pre-Christmas spending activity”. The Westpac Consumer Panel and our Westpac Card Tracker both suggest it was the latter. That should in turn bolster the RBA’s confidence that disinflation progress is continuing and is sustainable. On its own , this would support an earlier rather than later rate cut from the RBA. However, whether that eventuates clearly depends heavily on forthcoming inflation updates and how the RBA assesses recent labour market data.
In terms of the outlook, the Consumer Panel suggests some significant downside risks to consumption. The consensus view among economists, which we broadly share, is for consumption growth to recover modestly through 2025 as the pressures on income – from high inflation, a rising tax take and elevated interest rates – gradually subside. These pressures have already started to ease, with the Stage 3 tax cuts a significant contributor to this process, the impact on household incomes roughly equivalent to three interest rate cuts. With the tax cut pass-through to consumption very muted, we may see a similar behaviour as incomes more generally start to improve, especially in response to an eventual easing in interest rates.
The aftermath of the large shock to incomes in 2022 and 2023 could be longer lasting. After going backwards over the last few years, households are using the current rebound in income to rebuild their finances. The risk is that they continue to do this until real income levels are back around pre-shock levels. Our current forecasts do not see this happening until 2026. Hence, to the extent that this behaviour continues, there is a risk of prolonged period of stagnant consumption growth as consumers put most of their marginal income gains towards saving rather than spending.
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