Why we’re watching out for tax and cash rate cuts

The growth outlook for Australia in 2020 is subdued at best, meaning a number of stimulus measures – such as tax and cash rate cuts – could be on the cards in the next few months.

We expect GDP growth in Australia this year to be at around the two per cent mark, which is tracking lower than the average of about two and half to three per cent. There are a number of factors which contribute to this outlook.

The devastating bushfires, which have largely struck NSW and Victoria on the east coast, are likely to detract about 0.4 percentage points from growth across the December and the March quarter. This will be followed by a rebuilding and reconstruction effort more towards the middle of the year, which will be felt by local economies in particular.

There are broader knock-on impacts to consider from the bushfires also, including a hit to retail sales and the tourism industry. For example, preliminary estimates from Tourism Australia indicate international bookings to Australia fell between 20 and 30 per cent in the first two weeks of the year¹.

It’s important to note there are factors outside of the bushfires which are contributing to this growth outlook, and they were known to us throughout 2019. For example, we have low wages growth, and business investment growth isn’t particularly strong. The mining sector is also coming back as a share of the economy, but non-mining growth remains relatively soft.

Factors like these put pressure on policy makers to provide support and stimulus to the economy. As noted last year, we expect the RBA will cut the cash rate in February to 0.5 per cent, followed by another cut in March, ending the quarter on 0.25 per cent. We don’t expect the cash rate to fall further than that, as it’s unlikely to have the desired impact on the economy if the banks don’t pass the cuts onto consumers, which history indicates they wouldn’t do.

Beyond cash rate movements, the RBA may also embark on a quantitative easing program or asset purchasing throughout 2020.

These moves from the RBA can only do so much to stimulate credit demand and spending in the economy, which puts pressure on the government to provide stimulus. For households, tax cuts are one of the most effective forms of stimulus. Although the government’s mid-year economic outlook (in December 2019) didn’t indicate tax cuts were on the cards, this could come through in the Federal Budget, which is likely to be handed down by May.

At this stage, the federal government appears to be more open to providing a smaller Budget surplus, in order to provide further relief to the bushfire-impacted parts of Australia. A surplus is important to Australia’s triple A credit rating, so this is something to keep an eye on. Windfall from commodity prices would be supportive of a surplus, which for the time being, is a wait and see situation.

¹ https://www.abc.net.au/news/2020-01-19/federal-government-announces-bushfire-recovery-tourism-package/11880114