XSBI: Are interest rate or income tax cuts benefiting small businesses yet?

Cuts to official interest rates and income taxes have begun in some countries, with some hoping the changes would help boost consumer spending. Unfortunately, this doesn’t seem to be the case yet for small businesses, according to the latest Xero Small Business Insights (XSBI) data. 

What cuts have happened?

Central banks have been busy in the past few months, switching their focus from raising interest rates in an attempt to fight inflation, to cutting interest rates to boost growth. The Australian and New Zealand governments also introduced income tax cuts. Here’s how it’s played out over the last few months:

• June: The Bank of Canada kicked things off with interest rate cuts
• 1 July: Australian income tax cuts started
• 31 July: New Zealand income tax cuts started
• August: The Reserve Bank of New Zealand and the Bank of England started cutting their interest rates
• September: The US Federal Reserve started to cut its main interest rate

Notably, the Reserve Bank of Australia is yet to start cutting interest rates as it remains concerned about inflation. 

How has this impacted small business (so far)?

At this stage, there are no clear signs of an uptick in spending in response to either income tax or interest rate cuts. The latest XSBI data (and small business confidence surveys) show that consumers are yet to spend any extra in small businesses. In fact, in Canada, New Zealand and the US, small business sales are lower than they were in the same month a year ago. In Australia and the UK, sales are higher than they were last year, but only just.

Xero small business customers are experiencing this on the ground too. Renae Kund is the Managing Director at Cape York Motorcycles in Cairns, Queensland, Australia. She says a boost from Australian income tax cuts was short-lived: “While the initial tax cuts did result in a brief surge of interest and inquiries, we’ve noticed that this momentum did not sustain itself. Our customers, although appreciative of the additional disposable income, seem to be approaching their spending with caution. The economic uncertainty continues to influence their spending habits, leading to a more conservative approach overall.”

To navigate this uncertainty, fluctuating consumer confidence and other challenges, Cape York Motorcycles decided to take a multifaceted approach through:

• Optimising tour packages
• Partnering with other small businesses
• Increased marketing efforts to reach wider audiences
• Enhanced customer engagement through social media
• Offering informative and useful information for riders

“Recently, we’ve invested in technology to streamline our booking process and improve customer service. This includes an upgraded website with user-friendly booking features and automated communication tools to keep customers informed and engaged,” adds Renae. “Despite the current challenges, we remain optimistic about the future. The demand for our unique and adventurous travel experiences is resilient, and we believe that with the right strategies, we can navigate through the uncertainties.”

Why are benefits not yet flowing?

While it’s frustrating there hasn’t yet been a sales boost, it’s important to recognise that consumers don’t yet seem confident enough to start spending more in small businesses. This highlights that the effects of interest rate and income tax cuts on consumer spending can take time. Other economic factors, like unemployment and the structure of financial systems, can also impact how long an upturn in consumer spending takes. 

For example, the Bank of Canada has cut its interest rate multiple times in recent months, but the unemployment rate in Canada is higher than other countries. This might encourage people to hang on to any extra cash rather than spend it. Similarly, mortgages in the US tend to have longer fixed terms than in New Zealand. This might mean that, despite a cut to the Federal Funds rate, repayments in the US are no lower for many people who have a home loan.

When will the benefits start to appear?

With so many factors at play, it’s unclear when benefits will start to appear for small businesses. There’s speculation that central banks will continue to cut interest rates in the coming months, which may spur a lift in economic activity. As we head into the traditionally busy end-of-year holiday season, many small businesses will be hoping to see things improve.

Renae thinks that consumers are looking for more certainty in the economic outlook: “For a more pronounced and sustained improvement in business turnover, a combination of factors will likely need to come into play. Continued economic stability, further interest rate cuts, and increased consumer confidence are crucial.”

What can small business owners and their advisors do right now?

It’s unfortunate that many small businesses are yet to benefit from these policy changes, but there are steps they can take to get prepared for when customers return. In addition to the steps outlined by Cape York Motorcycles above, small businesses can also try the following:

Boost productivity: It’s always a great time to think about productivity boosting changes in your business. Earlier this year, Xero put together this handy guide, Increasing productivity in small businesses, to help small business owners and their advisers think about how to lift productivity.   

Get paid faster: You can also make sure that you are being paid on time for the sales that you are making. XSBI data shows that, on average, small businesses are paid at least a working week late which can have a big impact on cash flow management.

Check out Xero Small Business Insights to see how your country is doing, read analysis from Xero’s economist, and even download and explore all the data yourself.