A report from the Westpac-DataX Consumer Panel has revealed a surprising trend among Australian households, with a substantial 75% of the income boost from the latest tax cuts being saved rather than spent.
This data comes from the initial response to the Stage 3 tax cuts, which started in the September quarter and continued through the December quarter.
Despite seasonal shopping periods like Black Friday and Boxing Day, the expected surge in consumer spending did not materialise. Instead, households remained cautious, largely preserving their financial boost.
“The average nominal spend per person did increase in the December quarter, rising 0.8% over the quarter, but this was still below expectations given the significant income boost,” said Jameson Coombs (pictured above), economist from Westpac.
The data suggested a marginal propensity to consume (MPC) of only 0.25, meaning only 25% of the extra income was spent.
This figure falls well below the more optimistic forecasts by financial institutions, which expected a higher pass-through of tax cuts to consumer spending.
This conservative spending behaviour could impact broader economic forecasts and monetary policy.
The low pass-through from tax cuts to actual spending is expected to influence the Reserve Bank’s (RBA) decisions, potentially supporting an earlier rate cut if this trend continues alongside incoming inflation data and labour market assessments.
Further insights from the Consumer Panel indicated that spending habits post-tax cuts are consistent across various demographics, including age, income levels, and mortgage status, although there are minor variations.
The overall trend shows that despite a substantial income increase from the tax cuts – estimated at $830 per person on average – most Australians are opting to bolster their savings.
The Westpac-DataX Consumer Panel’s findings underscore a significant caution among Australian households in their spending decisions, potentially indicating a longer-term trend of conservative financial management as incomes start to recover.
This behaviour may lead to subdued consumption growth, affecting the economic recovery timeline as households prioritise rebuilding their finances over increasing expenditures.
Access the Westpac insights here.
