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Call for 25pc flat tax rate to help households

Lex Hall  |  30 Oct 2018Text size  Decrease  Increase  |  
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A flat tax rate of 25 per cent would prop up Australia’s household consumption in the face of significant challenges including more out-of-cycle rate rises, according to Morningstar’s head of equity research Peter Warnes. 

Speaking at the Morningstar Individual Investor Conference in Sydney on Thursday, Warnes predicted more out-of-cycle rate rises, saying the the RBA’s record low interest rate of 1.5 per cent left it little room to move.

Instead, the royal commission into banking and finance had acted as a surrogate curb on lenders.

“Out-of-cycle interest rate rises are going to come,” Warnes said. “The Hayne royal commission and all that type of stuff is basically doing what the Reserve Bank can't do.

Peter Warnes

Warnes says further out-of-cycle rate rises rank among rising challenges for households

“The Reserve Bank knows full well that because these guys [banks] are in trouble, it can't move at all unless it wants to bring on a recession," he said.

In a lively and thought-provoking presentation, Warnes also said Australia should avoid Donald Trump’s move to provide tax relief for businesses and instead look at lowering the personal income tax rate.

Warnes said Australia’s headline inflation rate of 2 per cent was misleading as it failed to properly account for increases in household expenses, such as childcare.

Instead, Warnes proposed a flat tax rate of 25 per cent for individuals on $300,000 or less.

“Inflation is 2 per cent - that's the official number,” Warnes said. “But hands up those people who think their household expenses are going up by 2 per cent per annum.”

“I would cut taxes by 25 per cent across the board. Under $300,000, 25 per cent tax rate.”

Warnes noted that consumption was consistent, but that it was being funded by savings and a boost to immigration levels.

“Consumption is holding up quite well, don't get me wrong, because we've got another million people in the past five years or what have you. So total demand is still rising.

“But the consumption has been funded by savings. The piggy bank ain't rattling anymore, because there's nothing in it. So where do you go to from here?”

RBA data showing falls in credit growth was another cause for concern, according to Warnes. In the year to August, credit growth has fallen year-on-year by 40 or 50 basis points. Housing credit growth year-on-year is down 17 per cent, and business credit is down 12 per cent.

“These are big, big numbers,” Warnes told the conference. “And I suspect when the RBA refreshes those for the end of September year-on-year, they'll continue to show a fall of that magnitude. I don't know how you arrest that.”

Warnes also called for an end to what he sees as a culture of “welfare entitlement” although he hinted this was unlikely to occur, given the increasing likelihood of Labor taking office in next year’s election.

 

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Lex Hall is a Morningstar content editor, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is content editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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