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The extremely high cost of living is currently the biggest problem for Australians, and on that topic the latest budget delivered some bad news.
As revealed in the budget, wages will be slightly higher than expected, but inflation will be much higher than first thought. Inflation hit nearly 8% in his last three months of the year and is expected to take him more than a year to bounce back. Wages will not grow faster than prices from 2024 to 2025, as the following graph shows.
This puts Australians further behind. Paypackets are on the rise, but we’re making fewer purchases in stores than we used to. It’s terrible math. Things are even worse for those who do not use their wages to buy their daily bread. If there are savings, they can recede even faster than wages. If the price rises 6% this year and the bank account he is paying 2% interest, there is a 4% gap. This means that his purchasing power has dropped 4% this year alone.
The math can be even worse if you have your retirement pension invested in stocks. If the value of the portfolio falls 10% this year and the purchasing power of that value falls 6%, the purchasing power of the supermarket will fall 16%. Better hope these dividends are good (in fact, some stocks pay higher dividends than inflation).
One way to see how this plays out is to look at the budget’s consumer spending projections.
Household consumption is shown to increase by 1.25% from 2023 to 2024, down from 6.5% in the current financial year. This is below population growth (1.4% projected for 2023-24) and means spending per capita is declining. This is what drives economic growth.
Wasn’t the budget just to keep the cost of living down?
What was the cost of living promised by the treasurer? Well, as he said, they are indeed “responsible and targeted”. However, in most households the difference is small. Some points worth making:
- Child support payments are increasing. The government will put his $1.35 billion into next fiscal year to lower childcare costs. The subsidy cap he has increased from 85% to 90%. More than 1 million families use child care, which can save you a lot of money, over $20 a week. But for her 90% of households in Australia (shared houses, singles, young couples, families with older children, pensioners), it doesn’t move the needle.
- The government will reduce the out-of-pocket cost of treatment under the Pharmaceutical Benefits Plan by $12.50 from $42.50 to $30. A few people could benefit a lot (although the most ill are saved by another policy, the safety net). For most people it would be trivial.
- Paid parental leave available. The government is extending paid parental leave. That’s good policy. But it’s not clear why they put this in the cost of living section of their budget. I guess I should have added something to this section.
- Government plan to build 1 million homes. That he will start in 2024. A house doesn’t appear overnight like a fungus after a rain. let’s see.
- There are also tax breaks for electric vehicles under $80,000. They no longer attract a 5% import duty.
Chancellor Chalmers said the change was “responsible, not reckless, and will make life easier for Australians without fueling inflation”.
What is the most important price? Rents are trending upward. The budget says:
“Rental costs are expected to rise significantly over the next two years as the rental market remains tight amid a growing population growth momentum and limited housing inventory. Rents have risen sharply over the past year, rising 10% by September 2022. As new rentals are signed and existing contracts are renegotiated, the overall Rental costs are expected to rise.”
But the budget offers little beyond this observation. Rent increases are great news if you’re a landlord who can get new tenants.Your income is up.But if you’re a tenant? Wow.
exception to the rule
The only exception to the inflation rule in Australia is established housing. Existing housing is not included in the CPI. That omission pushes the CPI down when house prices are rising and supports the index when house prices are falling.
So one item that will make your money even more these days is buying a house.
This savings is most effective when paying in cash. If you’re in debt, expect a significant increase in your mortgage payments compared to 2021.
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