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AAP
AAP
Politics
Poppy Johnston

Tax cuts to help households 'catch up' to rate rises

Many tax cut recipients are expected to spend the money on essentials like groceries. (Lukas Coch/AAP PHOTOS)

Australian taxpayers are set to see more dollars appearing in their bank accounts each pay cycle as long-awaited tax cuts kick in.

The saving depends on tax brackets but federal government analysis shows the average full-time worker earning around $98,220 will be getting a cut of $2134 a year, or $41 a week.

Yet with higher mortgage repayments, rents and other living expenses, shoppers polled by AAP said any extra money would be going towards essentials, like groceries.

Some had other ideas, such as using it to support family overseas, while others were not aware the tax cuts were coming into effect from Monday at all.

People using ATM
The average full-time worker will receive a tax cut of $41 per week. (Joel Carrett/AAP PHOTOS)

Compare the Market economic director David Koch said some people might be thinking they were about to get a lump sum but it would instead be coming in "dribs and drabs" in each pay cycle.

He suspected many would not notice the extra cash, especially if another interest rate hike were to eventuate - something that has surfaced as a possibility following hotter-than-expected monthly inflation data.

While most economists are still expecting no further increases to the cash rate, if rates rise by another 25 basis points in August, a borrower with a $750,000 loan would need to stump up an extra $123 a month.

Mr Koch said for many households, there wouldn't be much leftover from their tax saving after taking out that $123 a month.

Even with the cash rate holding steady, the tax cuts will do little to ease existing pressures on borrowers.

Based on Compare the Market's calculations, someone with a $700,000 home loan was having to find an extra $18,000 a year compared to before rates started going up.

"For a lot of people, (the tax cuts are) just going to help them either catch back up, or cope with an August interest rate increase," Mr Koch said.

The cuts were first legislated under the former coalition government but reworked by Labor earlier this year in a controversial broken promise.

Under the changes, low and middle-income workers ended up with a larger share while higher-income folk ended up with less.

The rejig sparked speculation the cuts would be more inflationary than the previous iteration as those on lower incomes were more likely to spend the money rather than save it.

But because the total envelope stays the same from a revenue perspective, the rework did not sound alarm bells for the Reserve Bank of Australia.

In another promising sign for the inflation fight, most Australians have already indicated they plan to pay down debt or save any extra money rather than spend it.

A National Australia Bank survey from May found a third of Australians planned to stash any extra money away when the cuts started flowing through.

Treasurer Jim Chalmers
The tax cuts were designed to bring prices down, not worsen inflation, Treasurer Jim Chalmers said. (Dean Lewins/AAP PHOTOS)

Treasurer Jim Chalmers said the tax cuts and other cost-of-living measures, such as energy bill rebates, were carefully designed so as not to fuel inflation.

"These are designed to put downward pressure, not upward pressure, on prices," he told reporters on Friday.

To get the most out of the upcoming tax cuts, Mr Koch recommended first paying down any expensive debt, like credit cards.

From there, he suggested setting up an automatic payment the size of their monthly cut to go directly into home loan offset accounts "so it doesn't disappear into the ether".

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