Australia | May 26 2006
By Chris Shaw (Tokyo)
For most Australians the most important element of the Federal Budget earlier this month was the fact income taxes have been cut, which gives the average consumer more money to spend and so had economists wondering whether the stimulus would prove too much and so force interest rates higher.
No is the answer according to economist Joseph Capurso of the Commonwealth Bank, who while agreeing with the view the stimulus of lower tax would see spending increase, doesn’t believe it will increase by enough to force the hand of the Reserve Bank into a further tightening of monetary policy at its next meeting.
He estimates the boost to consumption from lower taxes and assuming all else was unchanged is likely to be in the order of $10 billion, but at the same time he points out other things will change as a result of the tax cuts. The flow on impact of higher spending will be higher prices, which in turn eventually leads to higher interest rates.
As interest rates increase the level of investment made by companies in new equipment and machinery and individuals in housing will decrease, so offsetting some of the gains from higher consumption.
Additionally, as interest rates move higher the currency is likely to strengthen, which would reduce exports and increase imports, so Capurso sees the overall impact of the tax cuts as being much lower than would be implied by the tax cuts themselves. On his forecasts, the boost to GDP should be about 0.4% or $4 billion.
Any boost to the economy is unlikely to be shared equally across all industries though, Capurso noting some sectors will receive a disproportionately large or small stimulus depending on their position in the overall economy.
Winners should come from those exposed to the retail, consumer and telecommunications sectors of the economy, while healthcare, banking, utilities and those with an import component to their operations should also receive a boost. Likely losers are the manufacturing and export industries such as mining and agriculture, while he expects there will be little impact on the industrials and consumer staples sectors.