The cost-of-living obsession

What’s the problem – cost of living or generational inequality?

From the media one can believe that everyone in Australia is burdened by the cost of living. We are supposed to believe there is a “crisis”. But the impression we get from observing everyday life is quite different: people are on waiting lists to buy luxury cars, high-price restaurants find they cannot get enough staff to cater for booming demand, and tradespeople are fully committed doing expensive house renovations.

In fact many Australians are doing very well. As Mike Seccombe notes in his Saturday Paper contribution –   Why the cost of living is still too high – some Australians are living large. “Wealthier and older Australians – who are to an ever-increasing extent one and the same – continue to spend up big on all manner of non-essential things.”

Younger Australians, however, aren’t living large.

Monash University’s 2022 Australian Youth Barometer, a survey of the living conditions of Australians aged 18 to 24, tells a story of insecurity, financial stress and struggle. Some readers, reflecting on their student days, may believe that these are the normal problems of youth, but the barometer reveals worrying signs in the present cohort of young people. More than half of them believe that they will be financially worse off than their parents. For most of them their student experience is one of juggling study with long hours of poorly-paid work, with little opportunity for face-to-face interaction with teachers, and a steady accumulation of education debt. Only half of those surveyed believe that their education prepares them for the future, an unsurprising finding when the student experience is so impoverished. That’s the life of students. When they graduate they find only precarious and poorly-paid work is on offer.

This is one aspect of wide and growing generational inequality in Australia. Crispin Hull points his finger at the baby boomers, those born in the years after the Pacific War:

… they have cajoled and electorally frightened governments into polices that benefit them – from free university; cheap land; and subsidised mortgages in the 1970s; to superannuation concessions in the 1990s; investment concessions thereafter; and all the while generous senior’s cards giving car rego, utilities and rates concessions to the well-heeled.

A similar analysis, focusing on superannuation concessions, is given by independent economist Chris Richardson. Superannuation was a grand idea in its inception, but as a result of a raft of tax concessions in both the accumulation phase and in the retirement phase, of most benefit to the well-off, it has driven a large intergenerational divide in wealth and income.

Hull, like other commentators, notes that the Reserve Bank is exacerbating the divide. Interest rate rises hardly affect the older and well-off, who carry no substantial debt, and thanks to superannuation and savings accumulated during the pandemic, are untouched by higher interest rates.

This is confirmed in the Essential poll of 14 November which finds that about half (49 percent) of Australians report a personal negative impact of interest rates. Notably that rises to 54 percent of people aged 35 to 54, while older Australians are relatively unaffected – in fact 13 percent of those over 54 report that interest rises have had a positive impact on their lives.

It is also notable that the proportion reporting a negative impact from interest rates has not moved since February, which suggests that rising interest rates go on affecting the same group of people, rather than expanding their impact. Monetary policy is concentrating, rather than spreading its burden.

Those holding a mortgage, around a third of households, are most clearly affected by rising interest rates, but while some can ride out the difficulty, those with the lowest income have the greatest trouble coping. The ABC’s Story Lab team has a revealing infographic – Australia’s housing divide masks real interest rates pain – showing that the impact is most severe on those with lower incomes. Mortgagors in the lowest quintile of household disposable income are spending more than 60 percent of that income on housing costs.[1]

There is a similar but more complex story relating to rental costs. The recently-published Rental Affordability Index shows that the proportion of renters experiencing financial stress has been fairly steady for at least the last ten years. The problem is bad, particularly (but not only) in big cities. It isn’t getting any worse and for some, including pensioners, the burden has been easing over the last year: a shift from “severely unaffordable” to “unaffordable” is an improvement. But the figures on which the index is based, and which appear in the CPI, relate mainly to ongoing rentals. Those seeking to rent as they enter the workforce, relocate, or are evicted from their rentals, are experiencing severe stress.

The problem is that it’s becoming harder for people to make a transition from renting to owning. Those who own their home outright, or whose mortgage has been whittled down over years, are largely untouched by the Reserve Bank’s decisions, and they happen to be older Australians. Also the inequity in housing costs is becoming a class divide as a significant proportion of young people can draw on the bank of mum and dad to get started in the property market.

On the ABC’s The Money you can hear four researchers reveal how parental help is rising in influence (it takes many forms). Presenters on the program cite evidence that those who have been well-helped by their parents, having bypassed the discipline of saving to get into housing, are likely to become over-committed in housing debt. On the half-hour program you can hear the word inheritocracy for the first time. The presence of such a pool of well-supported people in the market inflates housing prices for all.

The message from the researchers is partly about the immediate problem of housing affordability, but is mainly about the way Australia is moving towards a class-divided society, that division being around inherited wealth, particularly property wealth.

Re-thinking – it’s a distributional problem

Rather than a general cost-of-living crisis, Australia is subject to an established but growing division in economic opportunities, much of which has to do with housing. If housing were affordable for all, many of these problems would be significantly alleviated. (There would still be the problem of wage inequity.)

Writing on the ABC website Gareth Hutchens reminds us that we have drifted a long way from the 1944 idea that “a dwelling of good standard and equipment is not only the need but the right of every citizen”: If housing was considered a human right, would it fix our housing crisis?

Gas pump
Stop complaining – you’d be paying $200 in Norway

But the story that everyone is suffering under the burden of a cost-of-living crisis is easily spread. Even the well-off can feel it when they discover that macadamia nuts and Hill of Grace shiraz have risen in price. Some items achieve a salience in people’s minds. Many people are particularly conscious of the price of a litre of gasoline, while forgetting that the price of cars, the main component of motoring costs, has tumbled in recent years. And some people confuse utility bills with prices: they react to a high electricity bill for the winter quarter, while being quite ignorant of the price of a kWh of electricity.

The partisan media promotes the cost-of-living story because it supports the idea that the Albanese government has made a mess of the economy: while the prime minister was travelling to the US, China and the Pacific the government was supposedly doing nothing about the economy. Some journalists have a strange idea about how public administration works!

We don’t have a general cost-of-living problem. Rather we have a deep-seated problem in the way the benefits of economic activity are distributed. It’s a problem of economic structure, generated since 1996, when the Howard government, and subsequent governments, mainly Coalition, gave up on structural reform and were profligate with the returns from a commodity boom.

Towards a solution

There is no easy fix. William Bowe, drawing on Newspoll figures, reports on public preferences for bringing down the cost of living for those most severely affected. These are:

These are all short term, and apart from cutting government spending, they would all result in an increase in money supply, probably prompting another Pavlovian response by the Reserve Bank. As for cutting spending, a favourite of the Coalition, few respondents ever offer suggestions about what spending they would cut. Our public finances are already weak: any cut in government-provided services such as health or education is likely to result in higher personal outlays for the same services, and cuts in capital spending simply push the problem down the line: we already have an emaciated public sector and over-stressed infrastructure.

But there are short-term solutions on offer, and they involve increasing taxes, particularly on those with means, with part of the proceeds directed to measures that would give relief to those most in need. In this context there is plenty of scope to tax well-off “self-funded” retirees, and to re-shape the Stage 3 tax changes to give relief for low-income earners, while collecting more from the well off.

A re-design of those cuts could make them fiscally positive and economically progressive. Peter Martin, drawing on modelling by Matt Grudnoff and Greg Jericho, demonstrates how the cuts could be shaped so as to make every taxpayer earning up to $132 000 substantially better off than they would be under the model presently proposed, while still giving some tax breaks to everyone, and costing the government $70 billion less: We could make most Australians richer and still save billions – it’s not too late to fix the Stage 3 tax cuts in The Conversation.

Enduring and long-term cost-of-living relief requires substantial economic change, however, rather than a reliance on shuffling taxes and spending. As Chris Richardson urges, governments at all levels must work to increase the supply of housing. A renewed push on competition policy could unstick prices in industries as diverse as supermarkets, airlines and pharmacies. There are policies that can speed up our capacity to use our renewable energy resources to our benefit, and other policies that can promote productivity improvement and innovation throughout the economy.

1. These include mortgage payments, and also inescapable fees such as rates. ↩