Westpac says carbon tax compensation could lift economy but retailers cautious

The carbon tax might not prove to be the financial disaster many individuals and companies fear, with Westpac tipping compensation for low-income earners and tax changes associated with carbon scheme could provide a fillip for spending next year.

Westpac says people earmarked for compensation, those on lower incomes, are more likely to spend the money than those on higher incomes.

The bank’s emissions and environment director Emma Herd says if that compensation – totaling $1.5 billion, or 0.5% of gross domestic product – is mostly spent, this would “provide a boost to consumer spending”.

Peter Strong, executive director of the Council of Small Business of Australia, says there are hopes the compensation and tripling of the tax-free threshold to $18,000 might have a similar effect to the stimulus package in the global financial crisis, albeit on a lower scale.

“The difference here is it won’t be a one-off payment. When you get a cheque, you think, where will I spend it? Whereas when it’s staggered, you’re less likely to notice it.”

“Yes, it’s money that wouldn’t be there otherwise, but it all depends on the cost of living and the cost of doing business.”

Russell Zimmerman, from the Australian Retailers Association, is cautious, expressing concern about the accuracy of Government modeling tipping a 0.7% increase in inflation, as well as the eventual increase in the cost of doing business.

“We are concerned that the money that people are going to receive for the carbon tax won’t cover costs such as electricity,” Zimmerman says.

“We’re already expecting that retailers will have to put prices up because their electricity and gas will go up. We’re not yet convinced that the Government’s modelling is correct.”

Zimmerman’s concern tap into an SME survey released by the accounting and financial services firm WHK, which found 83% don’t understand the move to price carbon emissions, although 73% believe that it will have a negative impact on their business.

Under the carbon tax to be introduced in July 2012, every taxpayer with income below $80,000 will receive a tax cut and households prices are tipped to lift by $9.90 a week, while average assistance will be $10.10 per week.

Two-thirds of households to be fully compensated, the Government says, and more than four million households to receive compensation higher than the expected average price increase. Nine out of 10 households will receive assistance through tax cuts, extra payments or both.

Under the scheme, carbon would be priced at $23 per tonne before an emission trading scheme is implemented in 2015. The Government will also also lift the tax-free threshold from $6,000 to $18,200.