Cost of Living pressures? Get real!

There’s a perception that Australians are suffering under the weight of cost of living pressures and that these pressures will only get worse when the carbon tax starts and when some other unspecified issues unfold.

Fortunately, this scare-mongering is not supported by the facts.

This is not to deny some people feel they are doing it tough – they may well be. But in general, if that is the case, it is most likely due to the burden of excessive consumption, rather than the cost of living.

Think of the following facts:

• For EVERY year in the last decade, average weekly earnings have risen at a faster pace than the CPI. Every year for 10 years by a cumulative 30%! Purchasing power has in other words increased by 30%.

• For seven out of the last nine years, there have been massive income tax cuts. Compared with 2002, someone earning $50,000 a year is now paying $1,300 less income tax; someone on $100,000 is paying $2,600 less income tax. Nice.

• In the last 10 years, the age pension has increased by nearly 75% - nearly double the rate of inflation. This is great news for the 2.1 million age pensioners.

Some people “doing it tough” no doubt are experiencing financial pressure. Personal financial pressure is a most unwelcome position for anyone to be in. But I might hazard a guess that for many in such a position, they may well have borrowed too much for a too big a house, they may well consider discretionary items as essential (wrongly of course) and it might simply be that attitudes and behaviour towards consumption may be the problem. After all, strong real wages growth and substantial tax cuts for the best part of decade should ease any financial pressures for a given level of consumption.

While this generalization is a broad one, it remains the case that Australians are among the highest income people in the world. Australian incomes in purchasing power parity terms are well above those in the UK, Canada, Germany, France, Japan, Korea, Sweden, Belguim and New Zealand and we are about to overtake the US. In fact the US is the only country at the moment with a population of greater than 20 million people that has a higher per capita GDP (PPP basis) than Australia.

But for some reason, many Australians feel they are doing it tough.

I can point to many people in the so-called rich world doing it tough.

People in California, by way of a tiny example, who bought a house 4 years ago for, say, $1,000,000 with a $700,000 mortgage might have cause for complaint. Based on the house price data, the house is now worth about $600,000. Unemployment has doubled in the last few years, there have been no income tax cuts and no real wages growth. It’s similar across a lot of the US, Ireland, Spain, the UK and other recessed countries. Falling house prices, falling real wages, sharply higher unemployment and higher taxes are the indicators of cost of living pressures. Australia has little or none of that.