Key takeaways
Falling real wages and a surge in tax and interest payments have led to a slump in Australian living standards.
But a broader driver of the malaise in living standards has been a slump in productivity growth from over 2% pa in the 1990s to near zero since 2016.
Key policies to boost productivity growth could include: tax reform; a cap on public spending as a share of the economy, deregulation; greater incentives to invest; and competition reforms.
Are we still the "lucky country," or are we seeing a steady erosion of our living standards?
According to Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Investments, the answer might not be so clear-cut.
In a recent Oliver's Insight, he warns that "falling real wages and a surge in tax and interest payments have led to a slump in Australian living standards."
Source: AMP
While Australia’s economy has weathered many global challenges, it seems that prosperity isn’t being felt equally across households.
The erosion of living standards
Australia’s economy has long been praised for its resilience, but recent data highlights a worrying trend.
Despite a strong employment market and record-high commodity prices contributing to budget surpluses, household disposable income has taken a significant hit.
Source: AMP
This means that essential living costs such as rent, housing, utilities, and food are rising faster than incomes, creating a real strain for everyday Australians.
As Oliver points out, this has culminated in the steepest fall in real disposable income among OECD countries.
Source: AMP
This situation has been exacerbated by high inflation and rising interest rates, which, while necessary to control economic overheating, place additional burdens on households already struggling with the cost of living.
Why productivity matters
According to Oliver, central to this issue is Australia’s declining productivity growth.
Source: AMP
Historically, productivity grew at over 2% annually, but over the last two decades, it has slowed to less than 1% per annum.
Source: AMP
Why does this matter?
Productivity growth is the engine that drives wage increases and overall economic prosperity according to Oliver.
Without it, living standards stagnate or decline.
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Oliver stresses that lifting productivity is crucial, not only for boosting incomes but for ensuring the long-term sustainability of Australia’s economy.
He said:
“We cannot hope to lift living standards or maintain wage growth without addressing this critical issue.”
Source: AMP
Government spending: the double-edged sword
Australia’s record-high public spending, now at 28% of GDP, further complicates the picture.
Source: AMP
This is because the increased government expenditure has propped up demand in the economy, but this also hinders the Reserve Bank of Australia’s (RBA) ability to control inflation.
To counteract this, the RBA has kept interest rates high, which disproportionately affects households carrying debt, particularly mortgages.
As interest payments on debt grow, disposable income shrinks further.
This scenario creates a vicious cycle where higher interest rates, combined with stagnant wages, reduce household spending power which is another blow to living standards.
Immigration and its economic implications
Another key factor in the equation is Australia’s rapid population growth, largely driven by immigration.
While immigration boosts economic activity by increasing the size of the workforce, it also brings challenges, particularly in housing and infrastructure.
Oliver notes that "surging immigration is exacerbating Australia’s housing shortage," which in turn drives up property prices and rents, further stretching household budgets.
This dynamic creates short-term economic gains at the expense of long-term affordability for residents.
Addressing the challenges: what can be done?
According to Oliver, improving Australia’s living standards requires coordinated efforts across several key areas:
- Boosting productivity growth:
- Encouraging innovation and investment in technology can reignite productivity gains.
- Policies aimed at reducing red tape and increasing competition in key industries could also spur efficiency.
- Reforming public spending:
- Limiting government expenditure relative to GDP could reduce inflationary pressures.
- Spending should be directed towards productivity-enhancing projects such as infrastructure and education.
- Rethinking immigration policies:
- A balanced approach to immigration is needed to ensure population growth aligns with housing and infrastructure capacity.
- Investment in housing supply should match increases in demand driven by population growth.
- Simplifying the Tax System:
- A simpler, more efficient tax system could improve incentives for work and investment, which are key to economic growth.
- Encouraging workforce participation:
- Policies that support childcare and eldercare could help bring more people, particularly women, into the workforce.
- Incentives for older workers to remain in the workforce longer can also ease labour shortages.
However, achieving these goals will require significant political will.
With an election looming, bold policy reforms may be sidelined in favour of short-term political considerations.
But the longer these challenges are ignored, the harder it will be to reverse the decline in living standards.
Conclusion
Australia is at a critical juncture.
While the country has successfully navigated global economic storms in the past, the current challenges to living standards demand immediate attention.
By addressing productivity, rethinking public spending, and balancing immigration and infrastructure policies, Australia can secure a prosperous future for all its citizens.
