SYDNEY: Australia's A$21.7bil of income tax cuts announced in Tuesday's budget will spur economic growth without stoking inflation or prompting the central bank to raise interest rates, executives and economists said.
The cuts were on top of last year's A$14.7bil of income tax relief, Treasurer Peter Costello said when releasing his 10th budget in Canberra.
Economic growth is forecast to accelerate to 3% in the fiscal year starting July 1 from 2% this year, the slowest pace since emerging from recession 14 years ago.
Lower taxes may fuel consumer spending, which accounts for more than 60% of Australia's economy, the fifth largest in the Asia-Pacific region. The reductions will be paid for by welfare cuts and surging tax revenue from record company profits. The biggest winners from the tax cuts will be high-income earners.
“It's not enough to alarm the Reserve Bank,'' said Brian Redican, senior economist with Macquarie Bank Ltd here. “The tax cuts are heavily skewed to high-income earners. It will be a boost to economic growth.''
Redican view was backed by central bank board member Hugh Morgan, who said the tax cuts did not go far enough.
“It's still uncompetitive on an international scene,'' Morgan, who is also chairman of the Business Council of Australia. “It's a start, but it's not satisfactory.''
The lowest tax rate will be cut to 15% from 17%. High-income earners will get the most relief, with the threshold for the top 47% tax rate being increased in two stages to A$125,000 by July 1, 2006, from A$70,000 now.
Retail stocks gained on anticipation that consumer spending will rise as taxes are cut. Said Gerry Harvey, the 65-year-old chairman and founder of Harvey Norman, Australia's biggest retailer of electrical appliances and furniture: “All retailers will be on the champagne.'' – Bloomberg