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What we’ve come to call the “cost-of-living crisis” has made this an unusually tough year for many people as they struggle to make ends meet. It’s likely to get worse rather than better next year. Which won’t help Anthony Albanese’s chances of being comfortably returned to government in early 2025.
Everyone hates rapidly rising prices and demands the government do something. But I’m not sure everyone understands the paradoxical nature of the usual ways central banks and governments go about fixing the problem. They make it worse to make it make better.
Illustration: Simon LetchCredit: Supplied
In a market economy, when our demand for goods and services exceeds the economy’s ability to supply them, businesses solve the problem by putting up their prices. The economic managers then seek to weaken our demand by squeezing households’ finances so that they can’t spend as much.
As our spending weakens, firms are less able to keep raising their prices without losing sales.
The main way the Reserve Bank puts the squeeze on household spending is by engineering a rise in mortgage interest payments, leaving people with less money to spend on everything else.
A shortage of rental housing has allowed landlords to make big rent increases. Employers have helped the squeeze by ensuring they raise wages by less than they’ve raised their prices. And Treasurer Jim Chalmers has helped by allowing bracket creep to take a bigger tax bite out of wage increases.
Much to discuss: Prime Minister Anthony Albanese and Treasurer Jim Chalmers.Credit: Alex Ellinghausen
All this is why so many people have been feeling the financial heat this year. But even if there are no more interest rate rises to come, the existing pressures are still working their way through the economy, with little sign of relief.
Consumer prices rose by 7.8 per cent over the year to last December, but the annual rate of increase slowed to 5.4 per cent in September. That’s still well above the Reserve’s target of 2 per cent to 3 per cent.
If the Reserve has accidentally hit the economy harder than intended, we could slip into recession next year, causing a big jump in the number of people out of a job, and thus hitting them much harder.
But with any luck, it won’t come to that. And the crazy-lazy way we define recession – a fall in real gross domestic product in two successive quarters – means that growth in the population may conceal the hip-pocket pain many people are feeling.
Consider the case of someone on the very modest wage of $45,000 a year in September 2021. If their wage rose in line with the wage price index, it would have risen by $3300 to $48,300 in September this year.
However, bracket creep, plus the discontinuation of the low and middle income tax offset, raised the average rate of income tax they pay from 9.8¢ in the dollar to 14.2¢. So their tax bill would have grown by $2460.
Now allow for the rise in consumer prices over the two years, and the purchasing power of their disposable income has fallen by about $5290, meaning their “real” disposable income is $4450 a year less than it used to be.
Can you imagine that person being terribly happy with the way their finances have fared under the Albanese government? My guess is, there’ll be growing disaffection with Labor as next year progresses.
If there’s a low-pain way to get inflation back under control, I’ve yet to hear about it.
To help him win last year’s federal election, Albanese made Labor a “small target” by promising very little change, including no change to the stage three income tax cuts, legislated long before the pandemic, to start in July next year.
His game plan had been to spend his first term being steady and sensible, keeping his promises and being an “economically responsible” government. This would get him re-elected with an increased majority and able to implement needed but controversial reforms.
But, through no great fault of his own, he’s had to grapple with the worst surge in the cost of living in decades. If there’s a low-pain way to get inflation back under control, I’ve yet to hear about it.
The trouble set in well before the change of government, and the Reserve Bank began its long series of interest rate rises during the election campaign.
My guess is that Albanese’s hopes of storming back to power at an election due by May 2025 are dashed. But it’s hard to see Peter Dutton winning the election unless he can win back the Liberal heartland seats that went to the teals, which seems doubtful.
So, it’s not hard to see Albanese losing seats and reduced to minority government, dependent on the support of the Greens and teals.
There is, however, one thing he could do to cheer up many voters: rejig the coming tax cuts so the lion’s share of the $25 billion they’ll cost the budget goes not to the high-income taxpayers who’ve had the least trouble coping with living costs, but to those on lower incomes who’ve the most.
Ross Gittins is the economics editor.
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