Lower living standards and high inflation: it's what Australians unwittingly voted for

For about a decade, Australia has been governed at both federal and state levels by a succession of either "moderate" Coalition governments or more left-leaning Labor administrations. Both brands of politicians have taken "Nervous Nellie" positions on climate change and Covid. Both (especially Labor) have been woke, and both liked to spend. The difference between the two has largely been a matter of degree.

The only conservative government in recent years was the Abbott government. Abbott and (then Treasurer) Hockey attempted budget repair in the 2014 Budget. They then gave up following defeats in the Senate and internal divisions, that saw the "moderates" eventually prevail. The now Dutton-led federal Opposition is starting to present a more conservative face again.

All this has contributed to the current economic situation, which is characterised by falling real wages, an increase in inflation, large scale immigration, and a big jump in the interest rate burden on borrowers.

The real value of wages declined the most (4.5 per cent) in calendar 2022, the biggest deterioration on record according to the ABC. The rate of decline in living standards has lessened over 2023 but wage increases still lag the CPI. Despite rhetoric by Labor administrations supporting higher wages, and wage increases granted to certain interest groups (e.g. child-care workers), it seems clear that falling real wages will continue for some further time.

The actual decline in living standards for most people has been even greater than suggested by the real wage statistics.

This is firstly because interest rates, and repayments as a percentage of borrowers' disposable income have been soaring.

Secondly, (despite so-called "tax cuts") tax scales have not been adequately adjusted for inflation so that workers are retaining less of their gross incomes. This is particularly the case with the highest bracket of personal income, which is taxed from $180,001. Our top tax rate (very high by international standards) now applies at less than double average male earnings, a threshold that has remained unchanged since (would you believe it?) 2008-9! The CPI has increased by over 40 per cent over this time, and, with the Medicare levy included, our top tax rate (currently 47 per cent and not set to change) provides little incentive for work effort.

Bracket creep has been even worse at state government level. The States/Territories have been raking in huge tax revenues from buoyant property markets by failing to adequately adjust stamp duty thresholds for inflation, and by applying "super" rates for high value properties. Purchasing just an average Sydney house now attracts stamp duty of about $46,000, and houses over $3,194,000 attract stamp duty of 7 per cent at the margin.

NSW stamp duty thresholds are a joke, and the situation is little better in other jurisdictions. The actual thresholds are $14,000, $ 32000, $85,000, $319,000, $1,064,000, and $3,194,000. The lower thresholds bear no resemblance to the prices now actually paid for property and reflect decades of government profiteering by omission. While there are now concessions for first home buyers, there is little for others. There is now some indexation of thresholds, but this has come about too late at threshold levels that are already much too high.

In Australia the main group unaffected by recent falls in living standards are those on welfare, whose benefits are fully indexed to inflation. Real increases were also granted to many welfare recipients in the 2023 Budget. Another group largely unaffected are retired public servants (like myself) on generous defined-benefit pensions, that are both fully-indexed to inflation, and benefitting from tax concessions available for superannuation income.

High inflation and declining living standards are not confined to Australia. Of late, comparable economies like New Zealand, the US and the UK have reported similar issues. All these economies benefited from strong government stimulus during the early stages of the pandemic, but this came at the cost of subsequent overheating. The IMF said, for example, that "New Zealand is in the midst of a necessary, policy-induced slowdown following the strong post-pandemic recovery", and that "New Zealand is likely to continue slowing in the near term as monetary tightening takes hold".

The root cause of initial economic over-heating followed by policies to curb demand has been attitudes of the public, reflected in the governments they elected. This is most clearly evident in respect of two big issues.