Fancy another $13,000 a year in your pocket?

There is a lot of hysteria and outrage about cost of living pressures.  Electricity bills are rising by $400 a year.  The price of petrol is up 10 cents to $1.50 a litre, which means a tank will cost you $6.50 more.  The price of tobacco has also risen strongly which is "bad for struggling working families" especially with the average household spending more on tobacco than they do on electricity - not that you'd ever hear that reported.

Often forgotten in the discussion of cost of living are the falling prices for things like milk, clothes, shoes, household appliances, cars, TVs, computers and overseas holidays.

According to a Newspoll exit poll from the Queensland election, a staggering, unbelievable, 69% of people suggested cost of living pressures were an important factor swaying their vote.  I assume this means they voted for the LNP and not Labor!

This is extraordinary and shows how perceptions matter much more than reality.  And the Labor Party is as guilty as the Coalition in fuelling this mistruth with their oft repeated “families doing it tough” efforts to get on side with voters.

There are a couple of issues with this strategy – importantly, it is factually incorrect.  Second, it is tantamount to talking down the economy, adding to consumer disaffection and creating an impression that the Government is not delivering good outcomes to the people.  If the Government is telling me I am doing it tough, I must be - and it's their fault.

Let the Opposition talk down the economy, but for the Government to do it is one important reason for the current poll results.

So let’s look at some facts.

What is always forgotten or frankly ignored when looking in what is happening to the cost of living is the other side of household cash flows – wages.

In the 4 years through to the end of 2011, average earnings per worker rose $8,216 from $45,556 to $53,772 per annum.  This includes those working part-time.  For an average full-time worker, average earnings rose $12,029 over that 4 year period.

For the sake of discussion, I will use the overall average earnings figure – that is, an extra $8,216 over the last 4 years.  If we assume the tax take is at the marginal 30% rate (plus the 1.5% Medicare levy), it means an average worker takes home an extra $5,628 a year AFTER TAX than they were 4 years ago.

Now let’s work on the assumption that there are two workers on average incomes in a household – it could be one full-time and one-part-time – or just two average income earners; whatever.  This assumes average household income at the end of 2011 is around $107,544 per annum – a figure that is probably close to the mark if we use the less timely household income data which, by the way, also has a different coverage.

The important thing to note is that this household is taking home over $11,200 a year more – yes, in after tax dollars – than they were just 4 years ago. 

Let’s also work on an assumption that this average household has an average mortgage of $300,000.  At the end of 2007, there were paying 8.55% interest.  Now, they are paying an interest rate of around 7.4%.  This means an interest saving of $228 a month or $2,740 a year.

Let’s do some simple cash flow analysis.

The extra “available cash” of this average household has increased by around $13,000 a year.  This clearly is much more than is being eaten away from higher prices for electricity, tobacco or lamb. 

Just to cross check this – since the end of 2007, average earnings have risen by 18.0%:  the consumer price index, which of course includes all items that go up (like electricity) and down, has risen by 12.1%.  The purchasing power of someone on average wages has therefore risen by around 6%. 

So please no more crocodile tears.  Australian consumers are doing very well indeed.