Reserve Bank of Australia Governor Philip Lowe yesterday in Sydney. Picture: Hollie Adams
Weak wage growth and fast-growing taxes have led to Australia's biggest decline in living standards in more than 30 years, with the cost of living exceeding 2.9 percent of household income in the past three years.
As the economy emerged from the global financial crisis, after-tax income for average households had not increased since the end of 2010.
An analysis of living standards by the Centre for Social Research and methods at the Australian National University shows that the decline in living standards over the past three years has been greater than the last decline in living standards in 1991-92. "the income recession was much better than the one we had at the time of the job recession," said lead researcher Ben Phillips.
But the weakness in after-tax income highlights the fragility of consumer spending, which Reserve Bank President Philip Lowe described yesterday as the biggest domestic economic risk.
A booklet on Labour's economic views released over the weekend claimed that the standard of living under Rudd and Gillard's administration had improved considerably, to 7.5%, compared with 2.5% for the Union. The Labour document, however, uses a measure of "net national disposable income", which includes changes in profits and export and import prices. It reflects the income of the economy as a whole, not the household.
Mr Phillips's estimates are based on household income, including wages, benefits and investment income. Taking into account the effects of taxes and interest payments, as well as population growth and rising costs, his estimates show that living standards peaked in 2011. There has been no improvement in the next four years, but income growth has lagged behind the rise in the cost of living since the end of 2015.
Household income has risen 8.5% over the past three years, thanks to job growth and population growth. Gross wage revenues rose 10.6%, while business income for contract workers and self-employed workers rose 9.4%. Investment income was repressed, rising just 5.9%. Job growth means fewer people depend on welfare.
The biggest blow to household income comes from personal income tax. Personal income tax rose 20 percent over the period to a total of nearly A $10 billion to A $57.4 billion, as "higher tax bands" pushed more people's personal income to higher tax bands. Higher taxes mean a mere 7.1% increase in total disposable income over the past three years.
A 5 percent increase in the population contributed to most of the increase, while a 5.1 percent increase in the cost of living reduced the real income of average-income households from three years ago.
Families will be helped by individual income tax cuts, Dr Lowe said yesterday. The tax cuts announced so far will boost household income growth this year and later next year. This is a positive development, "he said."
He also said he expects wage increases to increase over the next two years and that wages have improved slightly over the past year.
The Reserve Bank expects wage growth to rise to about 2.5 percent by 2021, while the Treasury expects it to reach 3.5 percent.