The scorchingly high cost of living is the biggest issue for Australians right now, and on that topic the latest Budget carried some bad news.
As revealed in the Budget, wages will be slightly higher than expected, but inflation will be much higher than first thought. Inflation will hit nearly 8% in the last three months of this year and is now expected to take well over a year to go back down. Not until 2024-25 will we see wages growing faster than prices, as the next chart shows.
That leaves Australians further behind. Your pay packet is rising, but it buys less at the shops than it did before. It is an awful calculus. Things are even grimmer for those who don’t use wages to buy their daily bread. If you have savings they are likely to be going backward even faster than wages. If prices are rising by 6% this year and your bank account is paying 2% interest you have a 4% gap. That’s a 4% fall in buying power this year alone.
If you have superannuation invested in stocks the calculation might be even worse. If your portfolio value is down 10% this year, and the buying power of its value is down 6%, your super’s buying power is down 16%. Better hope those dividends are good (indeed, some stocks are paying dividends greater than inflation.)
One way to see how this plays out is to look at the Budget’s forecast for consumer spending.
It shows household consumption will grow 1.25% in 2023-24, down from 6.5% this financial year. That is lower than population growth (forecast at 1.4% in 2023-24), meaning a collapse in spending per capita. This is dragging down economic growth.
Wasn’t the Budget Supposed to Ease the Cost of Living?
The cost of living measures the Treasurer promised? Well, they certainly are “responsible and targeted”, just like he said. For some people they will make a difference. But for most households the difference will be small. A few points worth making:
- Child care subsidies are increasing. The government is putting in $1.35 billion next financial year to make childcare cheaper. The top subsidy is rising from 85% to 90%. Over one million families use childcare and this could bring them decent savings—$20 a week or more. However for 90% of Australian households—share houses, people who live alone, young couples, families with older kids, pensioners—it doesn’t move the needle.
- The Government is dropping the co-payment for treatments under the pharmaceutical benefit scheme by $12.50, from $42.50 to $30. A small group of people may benefit a lot (although the very sickest are saved by another polic: the safety net). For most people it will be minor.
- Paid parental leave. The government is extending paid parental leave. That’s good policy. However it’s not clear why they placed this in the cost-of-living section of the Budget. It doesn’t reduce prices for anyone. I guess they needed things to add to this section.
- The Government’s plan to “build a million homes”. It starts in 2024. And houses don’t pop up overnight like fungi after rain. Let’s see.
- There’s a tax cut for electric cars that cost under $80,000, too. They no longer attract import duty of 5%.
The changes are “responsible, not reckless—to make life easier for Australians, without adding to inflation,” Treasurer Chalmers said.
As for the prices that matter most? Rents are heading upwards. The Budget says this:
“Rental costs are expected to pick up considerably in the next two years, as the rental market remains tight amid stronger population growth and limited housing stock. National advertised rents have risen sharply over the past year, by 10% to September 2022. As new rental agreements are made and existing contracts are renegotiated, overall rental costs as reflected in the CPI are expected to rise.”
The Budget offers little beyond this observation however. Rising rents are great news if you’re a landlord who can get a new tenant in. Your income is going up. But if you are a tenant? Yikes.
Exception to the Rule
The one exception to the rule of rising prices in Australia is established houses. Established houses are not in the CPI. That omission pins the CPI down when house prices are rising, and props the index up when house prices are falling.
So the one item where your money will go further these days is in buying a house. In Sydney, a house that would have cost you $1.1 million in 2021 will now go for about 10% less.
This saving may work out best if you’re paying cash. If you’re borrowing, expect a big increase in mortgage repayments compared to 2021. (Although also remember that inflation will make a big mortgage look small in the long run.)