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What we\u2019ve come to call the \u201ccost-of-living crisis\u201d has made this an unusually tough year for many people as they struggle to make ends meet. It\u2019s likely to get worse rather than better next year. Which won\u2019t help Anthony Albanese\u2019s chances of being comfortably returned to government in early 2025.<\/p>\n
Everyone hates rapidly rising prices and demands the government do something. But I\u2019m 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.<\/p>\n
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Illustration: Simon Letch<\/span>Credit: <\/span> Supplied<\/cite><\/p>\n In a market economy, when our demand for goods and services exceeds the economy\u2019s 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\u2019 finances so that they can\u2019t spend as much.<\/p>\n As our spending weakens, firms are less able to keep raising their prices without losing sales.<\/p>\n 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.<\/p>\n 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\u2019ve raised their prices. And Treasurer Jim Chalmers has helped by allowing bracket creep to take a bigger tax bite out of wage increases.<\/p>\n Much to discuss: Prime Minister Anthony Albanese and Treasurer Jim Chalmers.<\/span>Credit: <\/span>Alex Ellinghausen<\/cite><\/p>\n 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.<\/p>\n 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\u2019s still well above the Reserve\u2019s target of 2 per cent to 3 per cent.<\/p>\n 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.<\/p>\n But with any luck, it won\u2019t come to that. And the crazy-lazy way we define recession \u2013 a fall in real gross domestic product in two successive quarters \u2013 means that growth in the population may conceal the hip-pocket pain many people are feeling.<\/p>\n 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.<\/p>\n 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\u00a2 in the dollar to 14.2\u00a2. So their tax bill would have grown by $2460.<\/p>\n 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 \u201creal\u201d disposable income is $4450 a year less<\/em> than it used to be.<\/p>\n Can you imagine that person being terribly happy with the way their finances have fared under the Albanese government? My guess is, there\u2019ll be growing disaffection with Labor as next year progresses.<\/p>\n If there\u2019s a low-pain way to get inflation back under control, I\u2019ve yet to hear about it.<\/p>\n To help him win last year\u2019s federal election, Albanese made Labor a \u201csmall target\u201d 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.<\/p>\n His game plan had been to spend his first term being steady and sensible, keeping his promises and being an \u201ceconomically responsible\u201d government. This would get him re-elected with an increased majority and able to implement needed but controversial reforms.<\/p>\n But, through no great fault of his own, he\u2019s had to grapple with the worst surge in the cost of living in decades. If there\u2019s a low-pain way to get inflation back under control, I\u2019ve yet to hear about it.<\/p>\n 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.<\/p>\n My guess is that Albanese\u2019s hopes of storming back to power at an election due by May 2025 are dashed. But it\u2019s 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.<\/p>\n So, it\u2019s not hard to see Albanese losing seats and reduced to minority government, dependent on the support of the Greens and teals.<\/p>\n There is, however, one thing he could do to cheer up many voters: rejig the coming tax cuts so the lion\u2019s share of the $25 billion they\u2019ll cost the budget goes not to the high-income taxpayers who\u2019ve had the least trouble coping with living costs, but to those on lower incomes who\u2019ve the most.<\/p>\n<\/p>\n