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Australians could get their second tax cut in two years as the economy teeters

Jack Derwin
  • A second set of tax cuts could be implemented as soon as next year, as the Australian economy looks worse for wear.
  • On the same day that the jobs market suffered its worst fall in three years, Treasurer Frydenberg indicated he was considering tax changes.
  • While unconfirmed, economists have been encouraging him to bring forward the 2022 cuts to get Australians spending.

The government doesn't want your damn tax dollars.

Okay, it does – please keep paying your taxes, people – but Treasurer Josh Frydenberg indicated on Thursday that he would consider bringing forward the next set of tax cuts.

"We're always looking for opportunities to reduce taxes," he told Sky News when the topic was broached.

It's a major sign that he and his government may be open-minded enough to consider bringing forward the next set of tax cuts currently destined for 2022 to this year.

The first cut put up to $1080 back in taxpayers' pockets at tax time this year. The second set aimed would see the $120,000 income bracket be hit with a 32.5% tax instead of incomes above $90,000. It would in practice give taxpayers in that bracket up to $1,350 extra in their return.

While the ever-optimistic Frydenberg maintained the June cuts made "an impact" on the economy, they appear to have not done so in a meaningful way. A glance at the Commonwealth Bank's September quarterly figures showed that the expectation Australians would spend half was incorrect. Instead, CBA customers clearly either saved the cut – deposits rose 10.4% – or used it to pay down debt, as demonstrated by lower arrears figures. While both clever moves by households, neither provides stimulus to an Australian economy that desperately needs it.

Yesterday's data shows a whopping 19,000 jobs were wiped from the country in the month of October – the single largest fall in three years. 10,000 of those came from New South Wales, one of two states that have long-propped up the national labour market.

READ MORE: Cracks are emerging in the Australian jobs market, which just had its biggest fall in three years

It's a major concern, not least because it followed wage data that showed that healthcare and social service workers are the only ones in the country getting decent pay rises.

Both jobs and wages are intertwined and serious concerns of the Reserve Bank of Australia (RBA), which has cut the official interest rate three times to get things moving. While a delay is expected before the full impact of those starts to show up, they have so far failed to move the dial.

It's what leads Frydenberg to be considering bringing forward tax cuts now. While the first lot failed to do a whole lot, economists are more optimistic about the second lot.

"Fiscal stimulus, by way of tax cuts to meaningfully lift household disposable income, is the solution," Morningstar head of equities research Peter Warnes wrote in a note issued to Business Insider Australia "Despite below trend wages growth, bracket creep is alive and well."

Westpac chief economist Bill Evans meanwhile recommends bringing a partial cut forward.

"Rather than implement the second stage of tax cuts at once, the government could phase in the income tax threshold changes over two years," he wrote in a note. "So, the point at which households move from the 19 per cent tax rate to 32.5 per cent could lift from $37,000 to $41,000 in the first year and then $45,000 in the following year. Similarly, the move from the 32.5 per cent tax rate to 37 per cent could occur at $105,000 in the first year and then $120,000 a year later,"

These, Evans argues, would be palatable to the government because they wouldn't compromise its undying need for a budget surplus, with the added bonus of being more effective.

"The tax cuts in the second phase are likely to have a more direct effect on household spending since they will show in households’ weekly after-tax income," Evans said.

Ball's in your court, Treasurer.

READ MORE: Speculation is rife Australia is about to start printing money, as RBA governor Philip Lowe prepares to speak on quantitative easing