Cost of living pressures are building for Australian households

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  • Australia’s upcoming federal budget is likely to deliver income tax cuts to low and middle income earners.
  • Data out today from the ABS confirms cost of living pressures are increasing for all household types, regardless of their main source of income.
  • Australian wage data for the March quarter will be released on May 16.

Australian Treasurer Scott Morrison delivered a speech to the Australian Business Economists Forum in Sydney last week, outlining that tax cuts for low and middle income earners are likely in the upcoming Federal Budget on May 8.

Morrison argued that despite stronger economic conditions over the past year, many Australians are doing it tough, and yet to experience the benefits of a stronger economy.

“We will be delivering tax relief to put more money back in the pockets of middle to lower income Australians to deal with their own household and family budget pressures,” he said.

“This is why it is important that when we consider any plan for tax relief, middle to lower income families will come first as part of any broader plan.”

Helping to explain why the government is planning to offer relief for households at a time when the budget remains in deficit, other than the fact that we’re fast approaching the next federal election, is that cost of living pressures for all households — regardless of their main income source — are starting to increase.

Take the chart below as evidence.

From the Australian Bureau of Statistics (ABS), it’s Australia’s Selected Living Cost (LCI) Index, a measure of how much after tax incomes need to change to allow households to purchase the same quantity of consumer goods and services as they did on in the past.

Put simply, the LCI measures how much the household disposable income needs to increase to keep up with everyday living expenses.

This differentiates it from the consumer price index (CPI), which is designed to measure price movements in a select basket of goods and services commonly purchased by metropolitan households.

For clarity purposes, employee households have wages and salaries as their main source of income, while for self-funded retiree households it comes from superannuation or property income.

Age pensioner households receive most of their income from the age pension while other government transfer recipient households are those receiving a government pension other than the age pension.

In the year to March, the LCI grew by 2% or more for all household types aside from sell-funded retirees, faster than the 1.9% increase in CPI over the same period.

For employee households, the largest group in Australia, the LCI grew by 2% over the year, marginally below the 2.08% increase seen in Australia’s Wage Price Index (WPI) in the year to December last year.

Source: ABS

While we won’t know the March quarter WPI until later this month, it points to the likelihood that wage growth is only just keeping up with cost of living pressures. And for private-sector workers whose average hourly pay grew by 1.93% over the same period, it suggests wage growth didn’t keep up.

At a time when Australian household debt levels are at the highest level on record as a percentage of disposable income, and threatening to crimp household consumption, the largest part of the Australian economy, it underscores why the government is likely to deliver modest tax relief even with the budget still in deficit.

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