Surging taxes driving slump in Australian living standards, warns economist
Australia needs to explore policies such as major tax reform, investment incentives and deregulation to help boost productivity and improve living standards, AMP chief economist Shane Oliver has said.
AMP chief economist Shane Oliver has warned that Australia is experiencing a deterioration in living standards which is illustrated through a range of indicators.
Oliver noted that real household disposable income per capita, which shows the value of incomes per person after allowing for tax, mortgage debt payments and inflation, is experiencing a slump.
"Since its high point in 2021, it has fallen around 10 per cent. Of course, [this is] exaggerated because it comes off the back of a surge through the pandemic due to payments like Job Keeper but even allowing for that, real disposable income per person has been stagnant for a decade," he said.
"The problem is also evident in falling per capita consumer spending which is down 2.8 per cent from its 2022 high. It’s also evident in the per capita recession with per person GDP down 2.1 per cent from its 2022 high."
Oliver said the poor performance in real household disposable income reflects a combination of factors.
"First, wages growth has generally been weaker in Australia, such that wages have not kept up with inflation," he said.
Since the end of 2020 average consumer prices are up 18.7 per cent, but average wages have only gone up 12.9 per cent.
"This means real wages have fallen 4.8 per cent. Recently real wages have started to rise but it hasn’t made up for the gap," Oliver said.
The rise in mortgage interest payments in Australia reflecting the high preponderance of variable rates and Australia's relatively high household debt-to-income ratio, has also contributed to the decline.
Bracket creep has also driven income tax payments to a record high as a share of income, further reducing disposable income.
"Tax and interest payments are taking up an extra 5 per cent of income compared to 3 years ago."
The slump in productivity has also driven the decline in real incomes, Oliver added.
"While productivity growth was strong in the 1990s and into the 2000s it slowed from the mid-2000s and has stalled since 2016. Our productivity growth has dropped to the low end of OECD countries."
The absence of any major reforms since GST, a slowdown in business investment and market concentration have led to a slump in productivity growth.
One of the key ways that productivity could be boosted is through tax reform, Oliver said, adding that Australia needs tax reform to rebalance from direct tax to a broader GST while compensating for those adversely affected.
Nuisance taxes like stamp duty should also be removed to incentivise work effect and investment and to better allocate resources.
"Australia should also deregulate product and labour markets to remove red tape and boost labour market flexibility," he said.
More incentives to boost investment and adopt new technology were also needed, Oliver said, and the government must also match population growth to the ability to supply new homes and make it easier for people to live away from congested cities.
"While Australian governments appear to be keen to do reforms that boost the size and power of government, support for the hard-nosed supply side reforms needed is low."
"[However], living standards malaise may start to drive support for more serious reform."
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