Independent economist Chris Richardson said the end of the offset would be felt through the economy and by households already facing financial pressures due to high inflation and the RBA’s aggressive tightening of monetary policy.
“We’re talking a substantial amount of money. It’s the equivalent of two interest rate rises,” he said.
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“On top of higher interest rates and inflation,it’s really going to affect households. Retailers are also going to feel this,for sure.
“The Reserve Bank has done a lot of work by lifting interest rates but don’t under-estimate what the government is doing by doing nothing,” Richardson said.
The structure of the offset means there is a substantial change in take-home pay for people earning about $126,000. A person earning $125,999 will suffer a $420 drop in their after-tax pay while someone earning $1 more will have no change.
The end of the offset will help the government bring down the budget deficit and total public debt by increasing overall income tax collections. Tax refunds,worth an estimated $41.8 billion this financial year,are expected to fall to $36 billion in 2023-24. Total personal income tax is expected to climb to a record $304.1 billion next financial year from $280.1 billion.
Treasurer Jim Chalmers says the May budget will contain cost of living relief in some form.Credit:Alex Ellinghausen
EY Australia chief economist Cherelle Murphy said the offset was not an inconsequential amount of money to be pumped into the economy.
She said the offset was twice the amount Australians spent every month on eating out across the nation’s cafes and restaurants.
“It’s going to make it that much harder for people to deal with the increase in interest rates that we’ve had. It’s like super-charging the impact of those rate rises,” she said.
The reduction in after-tax income for more than 10 million Australians will be particularly hard on people who have a mortgage.
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The increase in official interest rates has lifted the repayments on a $600,000 mortgage by almost $1200 over the past year. Research released on Thursday by the Reserve Bank shows low-income earners were at particular risk of spending more than they earn by the end of 2023.
RBA governor Philip Lowe this week admitted some households were already under financial pressure.
“The higher interest rates are biting. We know that. The cost-of-living pressures are biting as well. Many people are finding their real incomes going backwards and that’s affecting their spending,” he said.
While the May 9 budget will not contain an extended low- and middle-income tax offset,Chalmers has made clear it will provide cost-of-living relief in some form.
“Cost-of-living relief is the priority and we need to provide that where we can in the most responsible and affordable way consistent with the budget constraints that we’ve got as well,” he said last week.
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