Australian households have suffered the largest fall in living standards of any advanced economy over the past year as high inflation, a rapid increase in mortgage repayments and rising income taxes ravage household budgets.
Inflation-adjusted disposable incomes have hit their lowest level since June 2019 after falling for seven consecutive quarters, newly released data from the OECD show. The data are also adjusted for population growth.
The figures underscore the political challenge facing the Albanese government, as polling consistently shows the rapid rise in the cost of living has become the single most important issue for voters.
In the 12 months to June, Australian household incomes slumped 5.1 per cent, the sharpest fall recorded across the OECD, according to analysis by The Australian Financial Review.
The outcome was in contrast to the OECD as a whole, where living standards increased 2.6 per cent as countries including the United States, the United Kingdom and France recorded real income gains.
The decline means Australian real household incomes are now just 18 per cent higher than in 2007, compared with 22 per cent across the OECD as a whole.
While headline inflation in Australia is lower than the OECD average, nominal wages are also growing at a much slower pace than many other advanced economies, including the UK, Canada, the Euro Area and the US.
Jarden chief economist Carlos Cacho said the OECD data showed Australian households were victim to a perfect storm of factors that led to materially worse outcomes than other countries – surging population growth, persistently high inflation and a household sector dominated by variable rate borrowers.
“The pass-through of interest rate hikes to households is faster and stronger for Australia than many peers,” Mr Cacho said.
“Norway and Sweden are the next two countries with the weakest real disposable income growth who are also seeing a material drag from interest payments.”
The share of outstanding mortgages with variable rates is higher in Australia than in any other advanced economy except for Norway, according to Reserve Bank research.
With the cash rate at 4.35 per cent, a household with a $500,000 loan is paying $1210 a month more on its mortgage than it was in May 2022, representing a 59 per cent increase, according to RateCity.
Disposable incomes surged at the onset of the pandemic as the Morrison government unleashed $429 billion in fiscal stimulus, which experts have since found dramatically overcompensated households for the losses experienced due to COVID-19.
Excessive stimulus meant the Australian household sector accumulated a far larger savings buffer than the average advanced economy, according to economists at the US Federal Reserve. While those savings have supported households over the past year, the researchers found the buffer was almost depleted.
Income tax and population surge
Mr Cacho said bracket creep was also a factor behind the rapid decline in living standards.
Australia is among the cohort of 21 OECD countries that do not index their tax brackets for inflation. Seventeen OECD countries automatically adjust their brackets to compensate for higher prices.
Because tax brackets are not indexed to inflation, increases in nominal wages lead to increases in average taxes, since a greater proportion of a worker’s pay is pushed into the highest bracket applicable to them. Economists call this bracket creep.
As a result, a near-record 16.2 per cent of household incomes was lost to income tax in the three months to June, according to the national accounts.
Deloitte Access Economics lead partner Pradeep Philip said the decline in real incomes highlighted the importance of fundamentally overhauling Australia’s tax system.
“The overreliance of taxation on individuals is something that has to shift dramatically,” Dr Philip said.
“The key thing is to shift the mix away from direct personal income tax to other sources.”
Dr Philip said Australia’s 2.2 per cent population growth rate explained about one-third of the decline in per capita incomes.
“The problem is not population growth per se, because there are a lot of benefits from population growth, and Australia has unambiguously been a winner from population growth,” he said.
“The solution is actually to grow the economy to accommodate that high population growth, because then we create a virtuous cycle.
“We want people coming in because there are skill shortages. We need reforms that lift the supply side and growth capacity of the economy.”
Source : Financial Review
