Living standards have stagnated since the Coalition was elected to government, but in the Budget it is now forecasting an improved performance. How likely is this?
Living standards can be expected to figure prominently in the forthcoming election. Certainly, all the signs are that Labor is seeking to make living standards a key issue, and public opinion polls suggest that it may be the number one issue.
Recent trends in living standards
The Morrison Government’s own budget figures showed real wages (earnings after inflation) in the current financial year (2021-22), falling by 1.5 percent: equivalent to about $25 a week for the typical male worker. Furthermore, the fall in real wages was even worse in the previous year – as much as 2 per cent. While prior to the Covid pandemic, under the Coalition real wages stagnated, with an average annual rate of increase of only 0.5 per cent between 2013 and 2019.
It is therefore not surprising that the widespread claims that living standards are under pressure focus almost exclusively on what has happened to real wages. However, real wages are an incomplete measure of living standards. A broader measure of living standards – real household disposable income per capita– shows living standards have improved substantially by 6½ per cent in total over the last couple of years between the end of 2019 and the end of 2021.
This improvement in living standards despite the fall in real wages is mainly because of a massive increase in social assistance and strong increases in employment.
After years of stagnation and cutbacks in government social assistance, during the pandemic social assistance to households increased by as much as 15.3 per cent in 2019-20 and another 11.9 per cent in 2020-21.
In addition, employment has increased over the last two years: by as much as 6.5 per cent between June 2020 and June 2021, and an estimated increase of another 2¾ per cent between June 2021 and June 2022. Naturally, this rapid increase in employment has also boosted household incomes.
Thus, notwithstanding the fall in real wages over the last two years, the increases in social assistance and employment have ensured that overall real household disposable incomes did not fall, and actually increased quite fast. Nevertheless, for the many households that depend almost entirely on their wage incomes and are not working extra hours, they would be struggling to maintain their living standards
Furthermore, even in those household whose incomes and living standards have been quite buoyant for the last couple of years, they too will still be asking what is the outlook for the future?
Future living standards
In the Budget future employment growth is forecast to return to a much more modest rate of increase of 1½ per cent, consistent with past experience. While the social assistance from the Government was always intended to be temporary, and the most important form of assistance – JobKeeper – was terminated some time ago.
Nevertheless, in its latest Budget the Morrison Government felt compelled to again address the pressures on the cost of living with another temporary package, consisting principally of:
- An increase in the low and middle income tax offset of $420 for the 2021-22 income year, so that taxpayers with a taxable income between $48,001 and $90,000 will receive a tax rebate of $1500 after mid-2022.
- A one-off $250 cost of living payment for eligible Australian pensioners, welfare recipients, veterans and concession card holders.
- Halving petrol and diesel excise and excise equivalent customs duty for 6 months.
These measures seem to have been politically driven and their cost effectiveness is very debatable. In any event they are deliberately temporary and will not assist households to maintain their living standards over the longer term.
The overall outcome is that according to the Budget forecasts on average there will be almost no increase in real household disposable incomes in the next financial year (2022-23), followed by a return to a slow rate of growth thereafter.
Risks to future living standards: wage growth
But even that forecast may well prove to be optimistic. The Government is relying principally upon wage growth picking up in response to the very low rate of unemployment forecast to fall to 3¾ per cent by the September quarter this year and remain there. The extent to which that pick-up in wage growth will happen is, however, highly debatable for two reasons.
First, the model used by the authorities assumes that all the wage stagnation over almost a decade is cyclical and that wages growth will return to past rates of more than 3 per cent when unemployment falls to around 4 per cent – where it now is.
However, the authorities track record of forecasting wage growth has been very poor over the last decade, almost always significantly over-estimating it. As they themselves acknowledge, they cannot be sure how far unemployment needs to fall to meet their target for wage growth until they get there. Consequently, they have not been planning to tighten policies much before wage growth picks up.
In contrast, I and others have argued that low wage growth is not just cyclical and that there are other structural causes as well that are changing the relation between wages and unemployment and also between wages and price inflation (see my article in Pearls & Irritations, February 8, 2022). Unless these structural causes are addressed, as Labor is proposing, I think it is likely that wage growth will continue to stagnate and consequently so will living standards.
Second, the Budget forecast of wages growth of 3¼ per cent over each of the next two years depends upon a ridiculously high forecast rate of productivity growth of 2 per cent next year and 1 per cent the year after. This compares with a substantial fall in productivity in the current year (2021-22) and stagnant productivity growth averaging only an annual rate of increase of 0.85 per cent over the six years of Coalition government prior to the Covid pandemic.
Nevertheless, over the next ten years labour productivity is assumed in the Budget to converge to the average growth rate in labour productivity over the 30 years to 2018-19 of 1.5 per cent per annum. No reason is, however, provided to support this assumption.
In fact, the rate of productivity growth has fallen in many other countries as well as Australia and this is most likely because the rate of technological progress has declined. In the absence of policy changes, there is no reason to suppose that productivity growth will recover to anything like the extent assumed in the Budget.
In sum, Australia has done well in protecting the living standards of many people through the pandemic. However, the picture varies among different households. Those who are solely dependent on their wage incomes and whose hours of work are unchanged have typically fared less well.
Living standards were stagnating before the onset of the Covid pandemic, and this stagnation is likely to return in the absence of a shift in policies to encourage faster technological progress and the take-up of new innovations, and to assist workers to adapt successfully to these new innovations.
In addition, another major challenge is the deterioration in housing affordability for both new owners and renters. This is of such significance for some households future living standards that it warrants further discussion in a separate article to be posted tomorrow.