Westpac says Aussies are saving 84 per cent of Stage 3 tax cut boost

Australians have banked about $6.4bn in extra disposable income since July’s Stage 3 tax cuts, new data from Westpac shows, and the vast majority of the boost is being funnelled into savings.

Westpac estimates consumers have spent about 16 per cent of the cash injection and saved the remaining 84 per cent in the three months from July to the end of September.

The average cumulative benefit from the Stage 3 over the three months reached $604 per person, the bank said, increasing to about $1800 for individuals in the top tax bracket.

Despite the injection, the bank recorded a subdued 1.5 per cent lift in spending over the quarter.

“It equates to an average increase in spending of around $138 per person on a seasonally adjusted basis,” Westpac economist Jameson Coombs said.

“This is much less than the average cumulative tax benefit from Stage 3 of $604.

“Additionally, this does not account for the fact that nominal spending has been increasing steadily over 2024.

“We account for this underlying trend and compare spending activity to a calculated aggregate benchmark level to estimate the marginal propensity to consume the Stage 3 tax cuts.

“Our estimate comes out at about 0.16.

“That is, households are spending around 16 per cent of the boost to their income and ‘saving’ the other 84 per cent as higher deposits and offset balances.”

The bank said even with more conservative assumptions, the spending and saving proportion comes in at 28 per cent and 72 per cent, respectively.

Westpac said the money was going into savings and offset accounts and mortgage balances.

“The September quarter also saw the largest average decline in mortgage balances in two years, suggesting higher additional principal repayments,” Mr Coombs said.

“The upshot is that households are using the improvement in disposable income to rebuild their flow of savings and pay down mortgage debt rather than materially increasing their spending, as least for now.”

Westpac’s data is the first major report into how consumers are behaving post Stage 3.

The tilt to paying down debt rather than spending will likely please the Reserve Bank of Australia, the bank argued, which is sensitive to inflationary pressures from consumption.

The Board has been alert to the upside risks to consumption from Stage 3 tax cuts and the implications a material lift in consumption would have for returning inflation to the target band,” Mr Coombs said.

“The panel vindicates our earlier view that the upside inflation risks from consumption remain muted.

“However, there are also implications for the growth outlook.

“If households are more reluctant to spend the improvement in their disposable income from tax cuts, this could have broader consequences for medium term consumption activity.

“In particular, the anticipated recovery in household spending once the RBA declares victory on inflation and monetary policy settings return to a more neutral stance may also be less pronounced.”

Australia’s inflation rate came in at 2.7 per cent for August and the RBA’s cash rate is pegged at 4.35 per cent.

Westpac’s data is drawn from 1 million de-identified customers.