The policy debate about the cost of living is among the most confused and confusing in recent memory. All sorts of measures to reduce the cost of living are proposed, then criticised as being potentially inflationary. The argument implies, absurdly, that reducing the cost of living will increase the cost of living.
The issue here is that the “cost of living” is an essentially meaningless concept, rather like the sound of one hand clapping. The problem isn’t the cost of buying goods, but whether our income is sufficient to pay for those goods. For most of us, that means the real (inflation-adjusted) value of our wages, after paying tax and (for homebuyers) mortgage interest.
In the famous Harvester decision of 1907, Justice Henry Bournes Higgins of the Arbitration Court determined that a family of five could live in “frugal comfort” on 42 shillings ($4.20) a week, less than the price of a cup of coffee today. On this basis, he set the basic wage at 42 shillings a week, or about nine cents an hour for the then-standard 48-hour working week.
Looking back over the past century or so, the cost of buying a basic bundle of necessities (and some modest luxuries) has risen almost continuously. But, fortunately, wages and other incomes have risen much faster. So while people complain about the cost of living today, few of us would want to go back to the frugal comfort of 1907.
Looking at more recent history, the consumer price index rose faster for much of the 1980s than it has done over the last few years. Inflation was a significant problem for macroeconomic management and financial markets. But the “cost of living” was not a big issue because wages were indexed under the Prices and Incomes Accord. Some small reductions in real wages were compensated for by the reintroduction of Medicare and improvements in superannuation.
The Accord, focused on real wages, produced a gradual decline in inflation rates, while maintaining standards of living. By contrast, the current discussion of policy in terms of the cost of living has produced incoherent policies and declining living standards.
The natural policy response to concerns about the cost of living is to seek reductions in prices that are politically sensitive (such as petrol, electricity and basic groceries) and to provide ad hoc relief to groups seen as “doing it tough”. This has included wage increased to offset inflation for particularly “deserving” groups (minimum wage earners and aged care workers), even as the real value of most wages remains far below pre-pandemic levels. Labor estimates the value of their 2022-23 cost-of-living relief package at $14.6bn.
In the neoliberal context, any benefits given to one group of wage earners or welfare beneficiaries must be offset by costs imposed on another. The ad hoc nature of policy responses to the perceived cost-of-living crisis reflects the incomplete and inadequate nature of this framing of the issue. But it is not the worst consequence.
The crucial problem with “cost of living” thinking is the implication that the problem will be resolved by reducing the inflation rate, ideally with a rapid return to the Reserve Bank target range of 2-3%. In this way of thinking, the worst thing that could happen is for wages to rise enough to offset past inflation. Such an adjustment, it is claimed, could set off an inflationary spiral.
A rapid reduction in inflation, achieved by holding real wages below their pre-pandemic level suits the institutional interest of the Reserve Bank, which are centred on its primary objective of price stability. But Australian workers would be better served by a gradual reduction in inflation, without real wage cuts, as was achieved in the 1980s under the Accord.
If the decline in real wages wasn’t bad enough, the Albanese government has made matters worse by eliminating the low and middle income earners tax offset (LMITO), introduced in 2018 by then treasurer Scott Morrison as part of a tax reform program designed to culminate in 2024-25 with stage three, massively skewed towards high-income earners.
LMITO was supposed to expire in 2020, but the Morrison government repeatedly shied away from raising taxes on middle-income earners at a time when real wages were failing.
Jim Chalmers and Anthony Albanese had no such qualms and scrapped LMITO from 2022-23 onwards. Over the government’s remaining term, the resulting increase in taxes will more than cancel out all the cost-of-living relief trumpeted in the last budget. Meanwhile, the stage-three tax cuts will ensure that high-income earners are returned to the lowest average tax rates in recent history, last seen under the Howard government’s final package of tax cuts.
In the end, the “cost of living” isn’t about the prices on grocery shelves, it’s about the distribution of income. In Australia, income has shifted from wages to profits and from low- and middle-income earners to those in the top 10% of the income scale and, even more, to the handful of “rich listers” whose growing wealth has outstripped that of ordinary Australians many times over.
John Quiggin is professor at the University of Queensland’s school of economics
