Thursday, April 25, 2024

Aussie households feel post-covid funk

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Key market for NZ primary producers buckling under ‘tax creep’.
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New Zealand farmers are not alone in facing the challenge of striving for value while mitigating their environmental footprint. Senior reporter Richard Rennie is in Australia to find out how our neighbours are approaching the issues of gene technology, carbon farming and sustainability.

Insidious tax creep has been putting the brakes on Australian household wealth for the past two years, and has started to have a greater effect than the rapid rise in interest rates.

Westpac Australia’s chief economist Dr Luci Ellis painted a mixed picture of how New Zealand’s largest trading partner is managing post covid, sharing some of the issues familiar to many New Zealanders. 

Australia’s household wealth matters to NZ for more than just its envy factor. The US$1.7 trillion ($2.7 trillion) economy accounts for about $8 billion worth of exports, much of them from the primary sector – making it NZ’s second most valued market after China.

Typically, tax creep has people paying more tax not because of a shift in tax rates but due to rising nominal incomes being captured in a higher bracket, despite real incomes remaining static or falling.

“There has been a real squeeze upon the Australian households, not only from inflation, but also bracket creep. As a share of household income, this is now at its highest ever level. 

“What a lot of people do not realise is the tax drag is sucking out more purchasing power than higher interest rates now.

“So, policy matters, but it is not just about monetary policy.”

She said covid’s marks still linger in the economy, with effects not only on inflation, but also population growth, which slumped, only to surge significantly when borders fully reopened last year to Chinese students, in particular. Rents have soared.

In covid’s wake has come a more restricted fiscal policy after covid expansiveness, and a rash of interest rate rises.

After seeing unemployment rise to 7.5% over covid, it dropped to 3.5% within a year – something Ellis said she would never have believed back then – and now sits at about 4%.

“It is expected to drift up to 4.5%, but that is still lower than in the previous 20 years.”

Meantime the economy is experiencing its highest level of labour force participation in history. This is partly attributed to demographics, with an ageing population that would have been expected to be stepping out of work, actually continuing to be engaged.

“This has been a surprise to all economists who expected us to have a shrinking labour market due to people retiring.”

She described Australia as having a “pretty soggy” economy for the second half of 2023. 

Expectations are that any cuts to Australia’s interest rates are unlikely to kick off until September.

Australia’s total mineral exports account for almost two-thirds of all export revenue, and prices of commodities such iron ore matter to the economy’s direction.

With ore prices sliding off their historic high of AU$120 a tonne, the ease back to AU$110 a tonne still sits significantly above budgeting average of AU$60 a tonne.

“The corporate tax implications of that are massive, and an important element in our terms of trade, and plays a huge part in supporting our national bottom line,” she said. 

Coal and gas make up the big three resource export components.

With the export of such bulk commodities comes the impact of bulk shipping costs, soaring in recent months as a result of the Red Sea disruptions.

“But they still remain below where they got to over 2021.”

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