The Reserve Bank's biggest worry at the moment is that households will cut back further on their spending in response to slow income growth and falling house prices.

Key points: Over the past year, personal taxes increased at twice the rate that household incomes did

Over the past year, personal taxes increased at twice the rate that household incomes did Households are now paying the highest percentage of their income in taxes since the early 2000s

Households are now paying the highest percentage of their income in taxes since the early 2000s RBA assistant governor Luci Ellis says this may be weighing on consumer spending growth

Given that consumer spending makes up something like 60 per cent of Australia's economic activity, any downturn in this sector is likely to lead to a slowdown in the broader economy.

This has already happened over the past two quarters, where GDP data from the Australian Bureau of Statistics revealed a dramatic drop-off in economic growth, with activity per person actually falling over the past two quarters in a 'per capita recession'.

However, the bank's assistant governor (economic), Luci Ellis, has downplayed the role of falling home prices in the decisions of households to close their wallets, pointing to stagnating disposable incomes instead.

The RBA says falling disposable income growth is leading to slower consumer spending growth. ( Supplied: ABS/RBA )

In a speech to the property and building industry this morning, Dr Ellis revealed that the RBA's research shows falling home prices mainly affect car sales (because people do not want to take out a big car loan against the falling value of their home) and households goods like furniture and electricals, because most people buy these when they move and fewer people are moving home when property values are falling.

Dr Ellis also downplayed the weak wages growth that has affected Australia since the mining construction boom ended shortly after the global financial crisis, saying there were signs that wages growth was starting to pick up on lower unemployment and underemployment rates.

Rising taxes have cut disposable income growth

Instead, Dr Ellis has pointed the finger at a range of essential costs deducted from households' incomes, which have reduced the disposable income they have available to spend, as a key factor in their decisions to shut their wallets.

"Income payable — the things deducted from gross income to calculate disposable income — increased by nearly 6 per cent in 2018," Dr Ellis said.

"This was significantly faster than growth in gross household income."

Rising unavoidable costs, like taxes, have been the biggest recent drag on household disposable incomes. ( Supplied: ABS/RBA )

Chief among these costs is personal taxation, which Dr Ellis said has grown at an historically fast pace.

"A useful rule of thumb is that, in the absence of adjustments to tax brackets to allow for bracket creep, for every 1 percentage point of growth in household income, taxes paid by households will on average increase by about 1.4 percentage points," she observed.

"In the past year, taxes paid by households increased by around 8 per cent, more than double the rate of growth in gross household income of 3.5 per cent.

"So the ratio is more like a bit over two-to-one at the moment, rather than 1.4 to one. That is at the high end of the range this ratio reaches."

This is not just a one-off over the past year, Dr Ellis added.

"What is noteworthy is that for all of the past six years, growth in tax paid has exceeded income growth by an above-average margin, at a time when income growth itself has been slow."

The share of income going to taxes is at its highest point since the early 2000s. ( Supplied: ABS/RBA )

Translated into plain English, the average person's tax bill has been growing at a much faster rate than their income has over the past half decade.

In an environment where pay increases have already been small, the Federal Government has taken a larger share than usual of those incremental wage increases.

That analysis offers both major political parties a compelling economic argument to justify income tax cuts in their pre-election budget and budget reply next week.

Reasons why personal taxes have risen

Dr Ellis said there were a few factors that explained why the tax share had increased even though income tax rates had not.

"Interest rates on investment property loans are now higher than for owner-occupiers, but overall the interest rate structure on mortgages is lower than it was a few years ago," she noted.

"So landlords will have lower tax deductions for interest payments on loans on investment properties.

"At the same time, the significant run-up in housing prices in some cities over the past decade will have increased the capital gains tax liability paid by investors selling a property."

Dr Ellis said the taxman had also been more diligent in capturing revenue from individuals.

"The Tax Office reports that its efforts to raise compliance around work-related deductions have boosted revenue noticeably," she said.

"The next wave of this effort, focused on deductions related to rental properties, could result in further boosts to revenue."

Some of these factors are temporary, but the effect of bracket creep in increasing the tax take per dollar earned is not.