Originally published in The Guardian on May 11, 2022

While it makes economic and political sense to suggest, as Anthony Albanese has, that the minimum wage, and indeed most wages, rise inline with the rate of inflation Scott Morrison has suggested such a move would be ‘reckless and dangerous’. What’s far more dangerous and reckless is letting real wages and consumer spending fall just as he is trying to wind back public spending in the economy, There are no easy choices facing Australian policy makers at the moment, but cutting the real wages of millions of Australians would have to be one of the worse ones.

Ironically, while high inflation is bad news for the budgets of ten million Australian households its good news for the bottom line of the Commonwealth Budget. While rapidly rising prices for groceries, coffee, petrol and building supplies mean tough choices are being made around Australia’s kitchen tables, those same price rises mean government revenue from the GST are set to surge.

Inflation is even better at boosting Commonwealth income tax revenues. Economists like to distinguish between what happens to your ‘nominal’ wages (which refer to the number of dollars that get deposited in your account each fortnight) and what happens to your ‘real’ wages (which refer to your spending power, or how much stuff you can actually buy with your nominal wages). If the prices of the things you normally buy all went up by 5 percent and your wages also went up by 5 percent then economists would say your ‘nominal’ wages had risen 5 percent but your real wage hadn’t changed at all.

But if your wages rose by 3 percent and the price of the things you buy went up by five percent then economists would say your ‘real wage’ has fallen even though there is more money getting deposited into your bank account. Unfortunately, that’s what is currently happening to millions of Australians – and right now the rate of inflation is going up at more than twice the rate of wage growth.

It gets worse. When the Australian Bureau of Statistics calculates the Consumer Price Index (CPI) they measure the monthly change in the price of goods ranging from baked beans to soap to petrol to new TVs. And while the CPI takes account of the fact that most people spend a lot more on petrol than they do on baked beans, they deliberately leave out a few things that aren’t considered to be ‘consumer goods’ – things like the price of buying a house (unless it’s a new build) and the interest paid on the mortgage. So, if you think that last month’s CPI figure meant that the ‘cost of living’ went up by 5.1 percent, keep in mind that figure didn’t even include the major expense of millions of people – putting a roof over your head.

And then there’s tax. I for one am all for collecting tax fairly and spending it on people based on the services we need rather than what seats a political party wants to win. Indeed, I’m so into taxes that I think Australia needs to collect more tax and spend more money lowering the cost of living by providing the kind of free health, education and childcare services that are so common in Europe. But even I, with my well-known enthusiasm for paying more tax, have major concerns about the fairness of what inflation is about to do to our tax system.

While it’s bad enough that real wages are falling for millions of Australians, and it’s even worse for those with mortgages than the official CPI data suggests, to add insult to multiple injuries, a lot of Australians are about to pay a higher average rate of tax this year even though their real incomes have fallen.

Australia has what’s called a ‘progressive income tax system’ where, as people’s (nominal) income rises, so too does their average tax rate. For example, while incomes below $18,200 per year are tax free, as wages rise above that level so too does the tax rate, starting at 19 cents in every dollar earned over the tax-free threshold and rising further still, in three steps, up to 45 cents in the dollar for income over $180,000 per year.

But while most Australians, and most countries around the world, SUPPORT a progressive income tax system, when there is a sudden burst of inflation most people will end up paying a higher tax rate – even though their real wages have fallen.

It all comes down to the distinction between nominal wages and real wages. Because the tax system has fixed income thresholds if someone earning $45,000 per year sees their cost of living grow by five per cent and their wages grow by five percent then you might think they’d be no worse off, but because incomes below $45,000 are taxed at 19 cents in the dollar and those above $45,000 are taxed at 30 cents, a five percent wage rise to cover a 5 percent increase in the cost of living would mean they would pay an extra $247 per year in tax. No wonder people are grumpy.

Despite being ‘over it’ we are not through the pandemic yet. Hundreds of people are still dying each week, the number of people on unemployment benefits is much higher now than it was in 2019, and while inflation will mean people will finally see some nominal wage growth, in real terms (that is, inflation adjusted terms) millions of Australians are already worse off than they were last year.

Just as the official definition of unemployment conceals the real lack of work in Australia, data on nominal wage growth and nominal GDP conceal what is really happening to people’s standard of living.

But while inflation eats into the real wages of most Australians, it simultaneously boosts GST and income tax revenues for the Government. It’s no accident that so many people don’t believe the story of prosperity that Scott Morrison is preaching. People with falling real incomes facing rising prices, rising interest rates and rising average tax rates have little to celebrate. No wonder the polls say there is a mood for change, and no wonder the share market is getting nervous.

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