As many of us settle back into our work roles after the festive season, it’s worth considering the economic outlook for 2024 and what the year holds for Australian households.
As many of us settle back into our work roles after the festive season, it’s worth considering the economic outlook for 2024 and what the year holds for Australian households.
Housing supply, alleviating cost-of-living pressures and supporting real wage increases through productivity growth will be massive priorities for the Albanese government in the coming year.
The Mid-Year Economic and Fiscal Outlook (MYEFO) nudged Australia’s economic growth forecast for 2023-24 up a quarter of a percentage point to 1.75 per cent compared to last year’s budget.
Overall, my sense is that Australians’ tolerance of the cost-of-living crunch is wearing thin.
Retail spending remains subdued, not least because of the ongoing uncertainties regarding living costs and the fact that more households are dipping into their savings to make ends meet.
Price inflation will remain elevated over the first part of 2024, mainly due to rents, housing costs, and fuel and energy price increases without any significant matching growth in real wages.
Weekly grocery price inflation has been slowing, but this comes on the back of some hefty price hikes, and there is little support among commentators for prices to return to the 2 to 3 per cent RBA target band at any time during 2024.
One of the enduring challenges facing households is the cumulative effects of price inflation on household financial wellbeing.
Even if prices and wages converge to the 2-3 per cent target band, the cost-of-living problem won’t have been eliminated.
Without any compensating (and persistent) growth in real household incomes over the long term, or prices shifting downwards, the price hikes we’ve experienced over the past two years will just have been baked into household expenses.
What’s unusual with the current situation is that the taxes paid by households have risen to a record high: 16.3 per cent of gross income.
Much of the growth in personal tax receipts has been driven by bracket creep from personal tax thresholds that aren’t indexed to prices.
This means people are pushed into higher tax brackets with rising nominal wages, even if those wages aren’t keeping pace with inflation.
These data will have hardened the government’s resolve to press ahead with stage three tax cuts from July 2024, when the 32.5 per cent and 37 per cent rates will be merged into a single 30 per cent rate for incomes between $45,000 and $200,000.
This will put money back into the hands of consumers, but disproportionately for higher earners.
A worker earning $100,000 will be $3,040 (3 per cent) better off in July 2024 compared to before the Personal Income Tax Plan commenced, but someone on $200,000 will be $11,640 (5.8 per cent) better off, with $9,075 attributable to stage three alone.
This will elevate pressure on the Albanese government to relieve lower income earners.
The pressure will be all the greater because of the distributional inequity of stage three, and because the recent MYEFO shows that the budget has massively improved as a result of higher tax revenues.
And a further temporary extension of the LMITO isn’t the answer.
The stage three tax cuts are ongoing, which means the excess benefit to higher income earners will continue to grow over time unless other more permanent structural tax reforms are introduced to level the playing field for households across all income levels.
- Professor Alan Duncan is director of the Bankwest Curtin Economics Centre
