In the September quarter the economy struggled mightily. All that kept the economy afloat was government spending and population growth, while household living standards plummeted due to the removal of the low-middle income tax offset and rising interest rates.
Let’s ditch the rose-coloured glasses: the September quarter GDP numbers released yesterday by the Bureau of Statistics were not good. Australia’s economy grew by a mere 0.2% – essentially a rounding error away from going backwards. If we exclude population growth, then GDP fell by 0.5%. Outside the first few quarters during the pandemic, that is the fourth-worst quarterly per capita fall in 30 years:
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That now makes it three consecutive quarters of falling GDP on a per capita basis. The last time that happened was 40 years ago during the 1982-83 recession.
That is not good.
And it doesn’t get any better when you break down what drove what little growth there was.
In the September quarter the biggest contributor to economic growth was “change in inventories”. That’s the measure of businesses building up or running down stock.
In essence what happened is business did not sell as much stock as they anticipated and so their inventories increased. That is not a great thing, because next quarter we will likely see those inventories run down as businesses decide there is not much point buying more stock given households are not spending.
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The other big contributor was the government – both in spending and investment. Take away the government’s contribution and the economy shrank 0.2%.
Also not good.
Aside from the weakness of households and the general private sector, the economy also took a hit due to a decline in exports – notably coal and LNG.
The drop in exports has also led to a fall in profits (although non-mining profits increased) and also a fall in the unit cost of profits. Since the start of the pandemic, the cost of profits has been very much driving inflation, now as those costs begin to abate, not surprisingly so too is inflation:
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The real cost of labour rose, but we need to always note the context – mostly this is about recouping the losses of the past three years. Labour remains cheaper in real terms than it was before the pandemic:
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The real problem of the economy is households. We have stopped spending on non-essential items – those things that power economic growth because they require lots of workers.
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In the September quarter, overall household spending rose by the barest of margins – 0.03%. One reason it was essentially flat was due to government subsidies on energy and childcare, which reduced the amount households had to spend on those items.
Ideally that should have spurred spending on other items. But it didn’t.
Over the past year spending on discretionary items fell 0.8% in real terms. The other times in the past 35 years that households have bought fewer discretionary items than they did a year earlier? The 1990s recession, the GFC and the pandemic.
More than anything, falling discretionary spending shows that households and the economy are struggling.
Always remember that households account for just over half of our entire economy. So when our ability to spend goes backwards because our real disposable income falls, then you can be sure the overall economy will follow:
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Household living standards, measured by real household disposable income per capita, are now back where they were in 2014. All the pandemic stimulus has gone but the fall has continued:
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One of the biggest reasons for the decline in household living standards was the removal of the low-middle income tax offset (LMITO).
As I have been noting for a couple years now, the removal of the LMITO (which was a decision of the Morrison government, and agreed to by Labor in opposition) handed most workers a $1,500 tax increase in July this year.
And that tax rise drove down people’s living standards:
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The increase in compensation of employees of just 0.5% in real per capita terms was never going to be enough to counter the effect of the tax rise.
When Albanese and Chalmers agreed with the Morrison government’s cancellation of the LMITO, they did so thinking they would not be criticised for doing so because the policy was bipartisan. They were wrong – Peter Dutton criticised the government for implementing the policy, despite the fact it had been put in place by a LNP government. He even criticised the decision in his budget reply speech.
So much for bipartisanship cover.
They also made the call when interest rates were low and expected to stay low. They were wrong about that as well.
In the September quarter interest payments on dwelling loans rose 5% in real terms per person, and are now up 58% over the past year.
Just because a tax policy is bipartisan, does not mean it is a good economic decision, nor one that will result in a lack of criticism.
On looking at these figures, the government might do well to note the experience and effect of the LMITO as it thinks about implementing the stage-three tax cuts.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
