Struggling with rising prices? Time to remember why you hate economists

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I don’t know why the Voice to parliament referendum failed, but if one reason was that voters want the government to concentrate on Australia’s cost-of-living crisis instead, then I’ve got some bad news. Chances are that won’t happen, or if it does, it won’t work.

Politics abhors a vacuum, so it’s no surprise there are calls to “do something” about the cost of living in the wake of the referendum result. And I get that – given surging inflation, the disposable buying power of the average family has dropped back to where it was a decade ago.

Inflation is making the weekly shop more expensive. Credit: Nick Moir

In case you’re wondering, yes, that’s really bad. From the mid-1990s to the early 2010s, living standards in Australia grew at a pace that left most rich nations in our wake. But those days are gone, and the gains we did make over the past decade disappeared fast once inflation took big bites out of our pay packets. Prices have outpaced wages, and both interest payments and taxes have soared.

(For the nerds, our effective living standards peaked in late 2021, and they’ve fallen almost 10 per cent since then – a much bigger and faster drop than anything else in many decades, including during any recession.)

It doesn’t get much more kitchen table than that. It’s a key reason why we have a sullen electorate, and it’s why government backbenchers want it to “do something”. Those backbenchers just want to be loved. They see a government with bulging budget surpluses, and they wonder why some of that couldn’t help those who need it.

It’s time to remember why you hate economists: although the politics of “doing something” are good, the economics are bad. “Doing something” typically involves giving people money to help them handle the pain of cost pressures. Yet extra money going into an economy still struggling with an inflation problem hurts as much as it helps.

Why? Because if the government gives you money to help, you’ll spend it – that’s the whole point. That extra spending will make prices go up. And, worse still, prices could go up by enough to push the Reserve Bank into raising interest rates again. That means efforts to help fight a cost-of-living crisis can actually make it worse rather than better.

Don’t shoot me: I’m only the messenger. But that message really shouldn’t be a surprise. After all, if governments actually did have a magic wand that could make your living standards higher, they’d be waving it like mad – and they’d have been doing so for decades.

Even more of a challenge is the fact that Australia has less wriggle room on fighting inflation than most other countries. That’s because, at a time when other governments around the world are letting their extra efforts to help punters’ pockets gradually expire, here in Australia we already have $21 billion of “doing something” in the pipeline.

I’m talking about the famous stage three tax cuts. They’ve been much debated, but mostly badly. No, they’re not the spawn of Satan. Despite what you’ve heard, they don’t have much impact on the share of personal tax that’s being paid by the top end of town. Rather, the best argument against those tax cuts is simply that they’re too costly.

So any calls to “do something” can’t ignore the massive “something” that’s already occurring in the middle of 2024.

Could we do better than what’s already planned? Absolutely we could: the government could pay for extra cost of living assistance by cutting other spending or raising taxes. That way it could help people without risking inflation worsening and another interest rate hike.

It could, for example, boost rent assistance and the lowest welfare payments, and pay for that by trimming the stage three tax cuts. But that would mean taking money from swinging voters to give to rusted on voters: something the political hard heads would baulk at.

That says the right thing to do is also the politically difficult thing to do. So no, I don’t expect courageous decisions.

The next best outcome is for the government to choose to do nothing (or, more likely, to announce small things and pretend they’re big things). Because if the government does bow to the politics of the moment and gives the punters some extra money, that may actually make people worse off.

That’s a tough message for any government to hear when it would like to help. But I’m guessing what Treasury would be saying to it right now is: “Hold your nerve.”

Chris Richardson is an independent economist.

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