Another five years of pain facing Australian households, expert predicts

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Another five years of pain facing Australian households, expert predicts


Australians face another five years of tough personal finances as the economy slows, one of the nation’s top economic forecasters has predicted, with warnings that tax cuts and falling interest rates will only provide muted relief to hard-pressed families.

As Treasurer Jim Chalmers warned inflation was likely to continue putting pressure on households, Deloitte Access Economics said the key financial challenge facing the country would soon shift to dealing with an economy it expects to suffer its slowest non-COVID growth period since the early 1990s.

Australian households face another tough five years, according to Deloitte Access Economics.Credit: Dion Georgopoulos

Data this week is expected to show inflation, which peaked at 7.8 per cent in late 2022, falling to around 4.3 per cent over the past 12 months. Many economists are now tipping inflation to drop further, paving the way for the Reserve Bank to cut official interest rates in the second half of this year.

While interest rates have been pushed up, economic growth has been relatively strong due in part to record levels of population growth. In per capita terms, however, economic growth has been negative for more than six months.

Deloitte is expecting economic growth to slow to 1.5 per cent this financial year, from 3.1 per cent in 2022-23, and then marginally increase to 1.6 per cent in 2024-25. Outside the pandemic, when the economy suffered a recession, it would be the lowest economic growth since the early 1990s.

Senior partner with Deloitte Access, Stephen Smith, said once inflation, population growth, tax and mortgage payments were taken into account, most Australians were feeling under increasing financial pressure.

He said households are facing an almost 9 per cent drop in real household disposable income per capita since it peaked early in the pandemic due to large government handouts and stagnant population growth, with the recovery from that fall to take until almost the end of this decade.

“Real household disposable income per capita is expected to remain below the trend seen between the 2008 financial crisis and the pandemic for at least the next five years,” he said.

“That means economic conditions will keep feeling pretty tough for a while yet.”

The Albanese government has cited the ongoing high cost of living as one of the reasons for its revamp of the stage 3 tax cuts that are due to start flowing from July 1.

Chalmers said this week’s quarterly and monthly measures of inflation, to be released by the Australian Bureau of Statistics on Wednesday, were likely to show a further easing in price pressures.

But he cautioned inflation was likely to remain a problem for some time.

“We have made welcome and encouraging progress in the fight against inflation, but it’s not mission accomplished,” he said.

“People are still under pressure. And that’s why we are delivering a bigger tax cut for more people without adding to these inflationary pressures in the economy.”

Some analysts have raised concerns the revamped tax cuts, which sharply reduce tax relief to people earning more than $200,000 while lifting it for people earning less than $147,000, could add to inflation. This is due to lower-income earners being more likely to spend their extra tax relief.

But the Commonwealth Bank’s head of Australian economics, Gareth Aird, said ultimately the amount of money involved in the tax cuts was not enough to change the economic outlook.

He said if all the extra tax relief to low- and middle-income earners was spent, it would boost overall consumption by $4 billion.

According to Aird, this was a rounding error in a $2.6 trillion economy.

“We do not wish to trivialise the tax cuts as they are significant in size. But the back-of-the-envelope calculation highlights why we do not think the government’s new tax plans warrant a change of economic forecasts,” he said.

“The tax cuts are only a partial offset to the massive lift in income tax paid as a share of household income over recent years.”

The tax cuts will dominate the political debate when the federal parliament resumes for the new year next week.

Independent MPs in the country’s richest seats say many of their constituents feel the Albanese government’s proposals are fairer, but warned more substantial reform must be on the agenda to resolve long-standing tax problems such as bracket creep.

Teals Kate Chaney and Monique Ryan said they would support Labor’s changes, while other MPs still considering the changes had heard a degree of positive feedback in their electorates.

Kooyong MP Ryan, who wanted changes to stage 3, said she would vote for the new package because it would give more relief to more Australians when they needed it.

“Most of my community believes the government should do much more to help us address the cost-of-living crisis,” she said.

But, she said, tinkering around the edges was not good for the country in the long term.

Chaney, the member for the WA seat of Curtin, will also support the redesigned package as an “acceptable compromise” while people struggle under cost-of-living pressures, but said tax brackets should be indexed to solve bracket creep.

“Even more importantly, I would like to see both major parties having a serious conversation about the reform we need in our tax system more broadly. We need to reduce our reliance on income tax and identify alternative sources of revenue,” she said.

Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.

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