The private sector is on strike.

Households are not spending and businesses are not investing.

It's a secondary boycott where the Australian economy is being hamstrung by a protest about wages, job security and just about anything in-between.

"Bloody ingrates," various mandarins within the walls of Treasury and the Reserve Bank are probably muttering.

Their frustration is almost palpable.

Australian businesses and home-owners have just had their borrowing costs slashed with three interest rate cuts.

Taxpayers — almost 9 million of them — had $25 billion shovelled back at them through refunds, according to Treasurer Josh Frydenberg, while jobs are still being created at a healthy clip, growing at 2 per cent, almost double the rate of most developed economies.

That's seen a 7 per cent drop in taxes paid over the quarter — almost entirely due to the Low and Middle Income Tax Offset — while interest payments have fallen by 2.5 per cent.

Coupled with reasonably solid income growth of 0.7 per cent (as measured by the National Accounts' average cost per employee, not the weaker Wage Price Index) it delivered a healthy 2.5 per cent lift in household disposable income.

And where did it go? The ultimate insult — it was basically lent to the scandal-prone banks, deposited at almost a zero interest rate and sold back to borrowers at a still healthy margin.

Put another way, savings grew by $6 billion, roughly around the value of the tax cuts announced in the May Budget.

Savings up, spending down

Those bemoaning a lack of parsimony out in the mortgage belt, would no doubt be chuffed by the resulting surge in the household savings rate.

Not so Treasury and the RBA. Domestic demand accounts for more than 60 per cent of the economy.

If households and the private sector are on strike, the economy is in no position to cross the picket line.

"Because of the sharp increase in the saving rate, none of the aggregate tax savings showed up in new consumer spending," Jim Stanford, director of the Australia Institute's Centre for Future Work, said.

"The propensity of Australians to consume from their pre-tax income actually declined in the quarter. In other words, the effect of the tax cut had zero measurable impact on aggregate consumer spending."

Treasurer Josh Frydenberg is putting a more positive spin on it, arguing as long as the money is out there that is what matters.

"The Government's goal has always been to be that to put more money in the pockets of the Australian people and it is their choice as to whether they spend or save it," Mr Frydenberg said.

Treasurer Josh Frydenberg says it is not up to government to tell taxpayers what to do with their refunds. ( AAP: Stefan Postles )

Wage growth, not tax cuts

Others are not so sure.

"The makeup of Australian GDP growth is concerning," AMP chief economist Shane Oliver said. "Private spending — i.e. consumer spending, dwelling investment and business investment — is falling and acting as a drag on the economy."

Private demand growth fell for the second consecutive quarter and is now stumbling along at its "weakest pace since the GFC" — a phrase that is a disturbing coda to many key data points in the economy at the moment.

"Consumer spending is likely to remain constrained while wages growth is soft at just over 2 per cent, household debt is high and the unemployment rate is trending higher," Dr Oliver said.

"RBA rate cuts will help consumer spending at the margin and higher home prices are also positive for the 'wealth effect' but stronger wages growth would be more desirable."

The Centre for Future Work's Jim Stanford agrees.

"Tax cuts have an insignificant effect on disposable incomes, compared to the benefits of restoring normal wage growth," Dr Stanford said.

"In just one year, a restoration of normal wage growth would boost incomes by $12 billion — three times the value of the tax cuts.

"Compounded over just 3 years, normal wage increases would lift incomes by a cumulative total of $75 billion, and consumer spending by $50 billion."

The Australia Institute's Centre for Future Work, Jim Stanford, argues wage growth not tax cuts will stimulate the economy. ( Supplied: Australia Institute )

Fear factor

But it's a chicken and egg argument, to a degree.

Getting wages growth back near average requires the unemployment rate to fall (back down to 4.5 per cent or below, according to the RBA).

Cutting borrowing costs hasn't worked, neither has the RBA promising to keep interest rates at historic lows, nor imploring business to advantage of this extraordinary moment in history — borrowing costs at 5,000-year lows.

Why are households and businesses not listening? In short, it's a lack of confidence in the future — the fear of blowing up perfectly good money in the bank, or under the mattress.

"It is clear that any boost to disposable income in the quarter from the rebate and lower mortgage payments was saved, effectively paying down debt faster if done so in an offset account rather than spent," RBC strategist Robert Thompson noted.

"There could also be an element of precautionary saving against a softening labour market outlook, and hence we're not yet convinced on the RBA/Federal Government narrative that balance sheet repair will ultimately feed through to higher consumption."

While household consumption edged up just 0.1 per cent, that was entirely due to paying for life's essentials.

Food (+0.3 per cent), rent and dwelling services (+0.6 per cent), health (+0.9 per cent) and education (+0.3 per cent) all accounted for greater spending.

Discretionary, or the fun bit of, spending fell by 0.3 per cent.

"At a moment of economic weakness, when both business and consumer attitudes are shifting negatively, there is an enormous risk that pessimistic expectations can become self-fulfilling," Dr Stanford said.

"If consumers and businesses respond to uncertainty by reducing their own expenditures, and socking away money for a feared downturn, they can hasten the arrival of the downturn that they fear."

Dr Stanford argues the federal government, rather perversely, has actually encouraged this counter-productive reaction, with both the size of its tax cut, and its design.

"By arranging the tax reduction in the form of a one-time end-of-year offset, the Government has actually encouraged consumers to set it aside," he said.

"There is no sign at all of an acceleration of spending after the federal election, nor after the tax cuts were passed and the offsets began to be paid out.

"In that context, a one-time package of tax offsets is truly a needle in a haystack.

"Strengthening wages, to underpin a genuine and sustainable increase in consumer spending, requires urgent measures to address the wages crisis — not token tax cuts."

Delicately balanced

Looking into the entrails of third quarter GDP data is ominous, according to AMP's Shane Oliver.

"With consumer spending still struggling to lift noticeably, falling residential construction, moderate business investment growth, the private sector side of the economy will likely remain weak," Dr Oliver noted.

"The soft global environment may also infiltrate further into Australia's external sector. RBA interest rate cuts will provide some assistance to consumers, but stronger wages growth would be better in boosting consumer demand."

The economy is delicately balanced. On one side there's government spending and the exporters pushing things up, on the other side of the fulcrum the dead weight of domestic demand is driving things down.

Short-term business investment plans have been dialled down. Residential construction is still falling and consumer confidence frail.

The gentle turning point the RBA wistfully talks about either seems a fair way off, or in the wrong direction — then again the Australian economy could be motoring towards a dead end with little room to manoeuvre.

The Federal Government is committed to returning the budget to surplus, a task made more difficult by a slowing economy and falling tax take, so a spending splurge is unlikely. The RBA's cuts have yet to gain any traction, maybe a couple more may do the trick.

But until households and businesses end their spending strike, the Australian economy is not going anywhere fast.