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Vivek Prabhu: Stage 3 tax changes could delay rate cuts

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The Albanese government’s Stage 3 tax cut changes are touted as cost-of-living relief. But they could delay the RBA’s hand on cutting rates, argues Perpetual’s VIVEK PRABHU


ANTHONY Albanese’s modification of the Stage 3 tax cuts will likely delay any Reserve Bank rate cut until late in 2024 as stimulus is redirected towards lower-income households more likely to spend the windfall, says Perpetual’s head of fixed income Vivek Prabhu.

The Prime Minister announced changes to the legislated Stage 3 tax cuts last month, reshaping the stimulus away from high income earners and triggering accusations that he broke an election promise.

The new package – forecast by Treasury to lift the total income tax take by $28 billion over 10 years – is “slightly more inflationary” in the near term than the previous package, says Prabhu.

“At the margin, the tweaked tax cuts are re-distributed from higher income households – with a higher propensity to save – to lower income households with a higher propensity to spend,” says Prabhu.

“All other things being equal, this may be slightly more inflationary as it stokes the demand side of the equation a little more than would otherwise have been the case.”

Prabhu says the implication of higher inflationary pressures could mean delays to start of a widely expected monetary policy easing from the RBA this year.

“At the end of the day, this is unlikely to materially change the near-term outlook for inflation and bond yields – though it may at the margin mean any potential rate cuts may take a little longer to come through.”

The new stage three package reduces the 19 per cent marginal tax rate to 16 per cent for people earning up to $45,000 and reinstates a 37 per cent tax rate for those earning between $135,000 and $190,000.

The net effect of the changes is to reduce the tax cut for someone earning $200,000 from $9075 to $4529, while lifting the tax cut for a person earning $100,000 from $1379 to $2179.

People earning $40,000, who were not due to get a tax cut in this round, will now pay $654 less tax.

Prime Minister is pitching the Stage 3 changes as cost-of-living relief for households doing it tough after an inflation spike sent prices sharply higher.

But any delay to rate cuts this year could undercut the effect of the tax reduction and leave households under pressure.

Despite being slightly stimulatory in the short term, the reintroduction of the 37 per cent rate will drive an additional $28 billion in tax revenue over the next 10 years as wage rises lift individuals past the $135,000 threshold.

“The stage three tax cuts were already legislated and largely factored in by the RBA and economists in terms of their stimulatory impact," says Prabhu.

"But the tweaks mean the distribution of the tax savings shifts even though the aggregate dollar value is largely unchanged.” 

 

About Perpetual’s Credit and Fixed Income team

Perpetual offers a range of cash, credit and fixed-income solutions and are specialists in investing in quality debt.

We take a highly active approach to buying and selling credit and fixed income securities and invest extensively across industries, maturities and the capital structure.

Find out more about Perpetual’s Credit and Fixed Income capabilities

Want to find out more? Contact a Perpetual account manager

Vivek%20Prabhu.jpg
Vivek Prabhu
Head of Fixed Income
BBus, FCA, Grad Dip App Fin & Inv, MBA, GAICD
Vivek Prabhu
Vivek%20Prabhu.jpg

Vivek Prabhu

Head of Fixed Income BBus, FCA, Grad Dip App Fin & Inv, MBA, GAICD
Bio

Years of experience: 30
Years at Perpetual: 18

Vivek is Head of Fixed Income and joined Perpetual in 2004. He has over 28 years of experience spanning accounting, finance, investments, governance and risk management. He has managed multi-billion dollar fixed income, credit and currency portfolios and his role involves credit analysis, trade execution and portfolio construction.

Previously, he spent nearly 8 years at Macquarie Bank in roles including Assistant Portfolio Manager (Credit, Global Fixed Interest and FX), Credit Analyst, Compliance Manager (Funds Management Group) and Operational Risk Analyst (Internal Audit). Prior to this, Vivek spent almost 4 years at Coopers & Lybrand (PwC) as an accountant / auditor.

He's aimed to give back to the communities, organisations and people with whom he's connected. Vivek joined the Board of The Deaf Society of NSW in 2011 and currently serves as Director and Treasurer. He joined Perpetual's Diversity Council in 2012, chaired by Perpetual's CEO. Since 2010, Vivek has regularly mentored university students, colleagues & finance industry professionals, leading the Fixed Income stream for Perpetual's Investment Analyst Program.

He was awarded the 2011 Financial Services Institute of Australasia (FINSIA) Hugh DT Williamson Performance Scholarship, an award recognising professional accomplishment, social responsibility and leadership. In 2011, he was also awarded a not for profit directors scholarship from the Australian Scholarship Foundation.

This article has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426, as the issuer of the Perpetual Diversified Income Fund ARSN 601 199 035 (Fund).

It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. It may contain information contributed by third parties. PIML does not warrant the accuracy or completeness of any information contributed by a third party.

Forward-looking statements and forecasts based on information available at the time of writing and may change without notice. No assurance is given that the forecast will prove to be accurate, as future events may impact actual results and these could differ materially from those anticipated. Any views expressed in this article are opinions of the author at the time of writing and do not constitute a recommendation to act.

The product disclosure statement (PDS) for the Perpetual Diversified Income Fund, issued by PIML, should be considered before deciding whether to acquire or hold units in the Fund. The PDS and Target Market Determination can be obtained by calling 1800 022 033 or visiting our website www.perpetual.com.au.

No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor's capital. No allowance has been made for taxation and returns may differ due to different tax treatments. Past performance is not indicative of future performance.