The central battleground issue for this upcoming federal election will be the Australian economy and more specifically cost of living. Since its election in May 2022, the Albanese government has been confronted with a slowing economy and stubbornly high inflation. While inflation is coming down, prices for goods and services are generally not. Businesses have now baked into their price structures the inflation rises of years past, meaning that we, the consumer, now get much less for the $100 we spend than we did a few years earlier.
The central battleground issue for this upcoming federal election will be the Australian economy and more specifically cost of living. Since its election in May 2022, the Albanese government has been confronted with a slowing economy and stubbornly high inflation. While inflation is coming down, prices for goods and services are generally not. Businesses have now baked into their price structures the inflation rises of years past, meaning that we, the consumer, now get much less for the $100 we spend than we did a few years earlier.
To add to the Government’s current economic woes is weak GDP growth, the worst Australia has experienced – outside the pandemic – since the 1990s. Though the economy is not in recession, it is worth acknowledging that Australia’s GDP growth per capita has been going backwards.
Controlling inflation remains a priority and should be because inflation acts as a tax on goods and services, much like GST, and like GST it is regressive, impacting those with the least income most. So, it is right and proper for there to be a concerted effort to address inflation in our economy but with some care so as to not trigger a recession and an explosion in the number of people without work.
Taming the inflation dragon will lead to people losing their jobs and in some cases their homes. Unfortunately, this is the way we have structured our economic system, and it seems few have the desire to change it.
In a recent address to the Anika Foundation Fundraising Lunch, RBA Governor, Michele Bullock said ‘we know that if high inflation becomes entrenched in the expectations of firms and households it would be more difficult and costly to reduce.’ Some economists have criticized the RBA’s monetary policy strategy, suggesting that it was too late in lifting interest rates and too slow in reducing them, the result of which is increased financial pain for Australian people and businesses.
The latest data from the Australian Bureau of Statistics (ABS) offers insights into where households are feeling cost-of-living pressures most. Inflation in discretionary item spending, things like take away meals, alcohol and holidays has fallen and is within the RBA’s 2-3 per cent target range. However, inflation for non-discretionary goods and services, that is things that we buy to meet our basic needs (food, shelter, healthcare), maintain current living arrangements (car maintenance, school fees), or legal obligations (compulsory insurance, stamp duty) remains high.
'There is a growing body of evidence linking concentrated market power to rising income inequality, low productivity growth and high prices and markups. Treasury has itself found evidence to suggest that the lack of competition in Australia’s economy is contributing to a slowdown in productivity.'
The June 2024 ABS inflation data showed that the costs of health, transport, education and insurance/financial services were up between 4.6 to 6.4 per cent. Rental prices rose by around 7.3 per cent and electricity prices increased by 6 per cent, but without the Government’s rebates the increase would have been more than double. It must be remembered that inflation has a compounding impact on prices, so the latest increases, though more modest, continue to add financial stress to Australian household budgets.
For the majority of the past two decades wages growth has either equalled or exceeded CPI. Post pandemic however three out of the four years has seen inflation outstrip wages growth. The largest differential occurred in 2022 where annual inflation was in excess of 6 per cent, while wages growth came in at less than half that rate at a little over 2.5 per cent.
The electorate is rightly feeling grumpy. Whatever wage increases and tax cuts they have received has been swallowed up by the increased cost of housing both rents and mortgages and the basics of living. Worse still many Australian households are being forced to draw on their savings to survive. It is one thing to use savings to increase your standard of living, it is another when you dip into those savings just to make ends meet.
The Government is not blind to the difficulties facing Australians today. Changes to childcare, the cost of prescription medicines; the electricity rebate as well as the rejigging of the stage three tax cuts were positive measures undertaken by the Albanese government to help with cost-of-living pressures. While many argue that more needs to be done, the reality is that the leadership within our political and economic systems are not willing to do more than tinker at the margins.
The pursuit of political power and profit is a handbrake on the types of reforms which would better protect the vulnerable and enhance the economic, social and environmental prosperity of our nation.
Inflation is a natural part of our market economy. However, in Australia today we have an over reliance on the RBA to control it and for its part the RBA has only one tool in its kit bag, interest rate movements. This over reliance on monetary policy does two things; it allows governments to duck their responsibilities to make politically difficult decisions in addressing the economy and second it simply provides more power and profit to Australia’s banking sector.
The purpose of lifting interest rates is to cool down economic demand and in turn drive down inflation. What if instead of making interest rate movements the first and primary mechanism to control inflation the Government lifted, temporarily, the compulsory superannuation guarantee rate as a first response to growing inflation concerns. The RBA could then intervene with interest rate movements if demand was not sufficiently curbed by the measure. The lift in the superannuation contribution would remove demand from the economy just like interest rate rises but the money is preserved in the hands of the individual rather than on the balance sheets of the banks.
A second measure is to attack price gouging, through improving market competition in Australia. Price gouging or profiteering does exist, despite what many economists would have you believe. The number one reason for the dramatic increase in inflation post the pandemic was said to be the disruption to global supply chains. Those supply chains are now back online. And more critically prices for energy production – coal, natural gas and oil are all down, but we have seen little relief in the cost of energy for consumers.
While the price for labour in Australia has risen, it has not spiralled. Yet despite the supply chain issue pretty much dealt with and input costs for energy production dropping, prices for goods and services have held firm. And why? – because there is no incentive for businesses to hand back any of the margins they have baked into their prices because in the sectors that matter to everyday Australians competition policy has failed us.
Research by Professors Flavio Menezes and John Quiggin have shown that where there is excessive market power – or a lack of competition – that firms with that market power amplify inflationary shock. Further, Menezes and Quiggin note that there is a growing body of evidence linking concentrated market power to rising income inequality, low productivity growth and high prices and markups. Treasury has itself found evidence to suggest that the lack of competition in Australia’s economy is contributing to a slowdown in productivity.
But when it is all said and done, the only way to tackle the limitations of our economic system which has delivered us these cost-of-living issues is political will. If our political system is truly committed to addressing these and other social and economic issues including poverty and inequality, housing affordability and productivity then we need more bipartisanship between the parties, which focus on what is best for our society rather than what might be best to win office.
If Australia’s politicians truly hold the interests of Australians at their heart, they will find a way to deliver better bipartisan policy solutions to the problems we face, even if those solutions cause discomfort to those with power, money and influence.
Joe Zabar is the Chair of Mercy Works Ltd and a Visiting Fellow with the Tax and Transfer Policy Institute, ANU