Australian households are now paying nearly twice as much in income taxes compared to just a decade ago, a trend paralleled by a dramatic increase in mortgage interest payments. This financial upheaval, highlighted by macroeconomist Warren Hogan, is reshaping the economic realities for families across Australia.
Hogan, who specialises in property and financial market analysis, has brought to light some concerning statistics. Income taxes paid by Australian households have skyrocketed from $65.1 billion in the third quarter of 2021 to an astonishing $90.9 billion in the same period of 2023. This surge of $25.8 billion is in stark contrast to the $43.9 billion recorded just ten years earlier. Alongside this, there has been a significant rise in mortgage interest payments, from $11.2 billion in 2021’s third quarter to $29.7 billion in 2023 – an increase of $18.5 billion, almost doubling the $14.7 billion reported in the third quarter of 2013.
This financial strain is set against a backdrop of modest economic growth. The Australian economy is still expanding, albeit at a modest rate of 0.2%, with an annual growth rate holding steady at 2.1%. However, there is an undercurrent of concern as Hogan hints at potential further weakness in domestic demand. His analysis suggests that for the economy to maintain its delicate balance, this ‘soft landing’ needs to persist well into 2024. He notes that real unit labour costs are just below 4%, and a cyclical bounce in productivity is becoming apparent. However, this does not imply a shift in the Reserve Bank of Australia’s (RBA) tightening bias.
Shane Oliver, AMP’s Head of Investment Strategy and Chief Economist, shares a similar view. He points out that increased tax payments are significantly reducing household income. Despite more people being employed, wage growth is inadvertently pushing individuals into higher tax brackets that were not originally meant for them. This phenomenon, known as bracket creep, effectively acts as an unnoticed increase in taxes.
Justin Fabo, known for his keen macroeconomic insights, observes that while net interest payments have risen, they only return to 2019 levels as a share of income, acknowledging distributional issues in this assessment.
The broader economic context is characterised by a slowdown in household spending. High inflation, a surge in mortgage repayments, and the increased income tax burden have significantly impacted consumer behaviour. The Australian economy’s growth was a mere 0.2% in the September quarter, although annual growth maintained at 2.1%, buoyed by revised results for the latter half of 2022.
However, when considering the nation’s population surge, which typically bolsters economic growth, output per person has declined since March. Economic activity per person plummeted by 0.5% in the three months leading up to September, following a 0.1% fall in the June quarter.
Treasurer Jim Chalmers acknowledges the softening of household consumption but remains optimistic, highlighting the progress being made even as the economy slows in expected ways. He attributes the current challenges to higher interest rates and international uncertainty.
The September quarter’s economic performance fell short of expectations, with government spending and capital investment emerging as the primary drivers of GDP growth. Katherine Keenan, head of National Accounts at the Australian Bureau of Statistics, notes that household spending was essentially stagnant during this period.
In the run-up to the festive season, the household saving ratio plummeted to 1.1%, the lowest since 2007, marking eight consecutive quarters of decline. Keenan attributes this fall partly to the removal of the Low and Middle Income Tax Offset in the 2022-23 financial year, which resulted in many households facing higher income tax bills.
With increasing interest rates adding to household borrowing costs and inflation rebounding to 5.6% in the September quarter, the proportion of income diverted to savings has been adversely affected. Additionally, GDP per hours worked, a key measure of labour productivity, fell 2.1% in the year to September, albeit less than the 3.6% decline recorded in the 2022-23 financial year.
These developments paint a challenging picture for Australian households, who are grappling with rising financial pressures amid a complex economic environment. The combination of higher taxes, increased borrowing costs, and persistent inflation is reshaping the financial realities for many, with potential implications for the broader economy as we move into 2024.
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