The week that was & the week ahead

The week that was      

Income tax cuts! That’s going to be one of the issues in the next election campaign as the government looks to gain favour with a disgruntled electorate.

Who wants to pay less tax? We all do!

But the proposed income tax cuts raise a host of questions not least – can the government afford them when the budget is still in deficit? Will money be borrowed to fund them? Are there other policy priorities where the cash could be spent? Tax cuts would be a stimulus for the economy as the bulk of the rise in take home pay would no doubt be spent, but with the RBA forecasting a strong lift in GDP next year, would tax cuts be eaten up in a bring-forward of possible RBA interest rate hikes? We know the tax cuts in the 2004 to 2008 period were an important factor that saw the RBA lift official interest rates to 7.25 per cent.

The latest budget numbers show a return to surplus, but not until 2020-21, and even then, it’s pretty small. That surplus is based on some rosy economic projections, especially for wages. Promised tax cuts would make the task of returning to surplus on the present timeline a little harder.

Source: RBA

The week ahead

With the RBA and Treasury effectively betting the house on a pick up in business investment, the Private Capital Expenditure survey will be vital to see whether the tentative signs of a turn in investment in the non-mining sector has continued in the September quarter and more importantly, continued in the business investment expectations for the next year.

After sharp falls in the decade from 2005 to around 2015, when non-mining investment as a per cent of GDP fell to a record low, there has been a small, but welcome upturn. With consumer demand still weak, a pick up in overall economic growth is relying on business investment to pick up the slack. Certainly the NAB and illion business confidence and business expectations surveys are pointing to strength. The proof will be to see whether this optimism translates to actual fresh investment activity.

Source: RBA