In Australia the best term deposit rate I can find is 5.5%. This is a lot higher than you would be getting on US dollars (~0%) or the Euro (~2%) at the moment. With an inflation rate of 2.5% that looks like a real annual return of 3%, but a peculiarity in our income tax system means that tax is charged not just on the real 3% return as you might expect. Rather tax is charged on the full ‘nominal’ 5.5%.
As a result the real return I earn after tax is under 1.4%. If I were to jump up to the next income tax bracket I would be earning about 0.8%. In a year with inflation on the higher end of the Australian target, the real return would be roughly nothing. The interest I would earn on cash savings are a tiny fraction of the interest I would be charged on cash borrowings – about 15%.
The household saving rate in Australia has gone from 0% to 10% of national income since the 2008 financial crisis and a lot of those funds have gone into bank accounts. I can’t imagine the desire to earn interest has anything to do with it.
Tagged: economics, finance
