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.

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