Just Get Over It: The cost of living in Australia

September 23, 2011

Progressive Economics

by Tim Soutphommasane

Executive Summary

This paper investigates the cost of living in Australia, an issue that has dominated recent political debate. It evaluates whether cost of living complaints are justified in light of economic reality and household consumption patterns. It considers how governments should respond to cost of living issues.

While much public discourse suggests there is a generalised cost of living crisis, the reality is less alarming. Inflation figures indicate only a modest increase in the cost of living, even when adjusted to include mortgage interest and consumer credit charges. While the cost of some essential items have experienced price rises that exceed the CPI, with particularly negative effects on those on fixed and low incomes, these must be considered in light of the full economic context. Wage growth, low unemployment and higher household savings levels all indicate a disproportionate level of concern about the rising cost of living. Australian households are, on average, better off now than they ever have been.

A more complete picture would recognise that household residential and consumption patterns can significantly influence the cost of living. A significant gap exists with respect to the representation of cost of living issues in the media. There is an overwhelming focus on what government can do to alleviate living pressures on households, with very little on whether households themselves are contributing to their financial pressures. Yet subjective cost of living pressures are associated with rising expectations about a decent standard of living in Australia. Australians have enjoyed increasing prosperity: our new houses are the biggest in the world and our expenditure on household goods, particularly electrical goods, has grown dramatically. As we acquire more and live more comfortable lifestyles, however, it follows that the cost of living will grow as well. Uninterrupted economic prosperity may, somewhat counter-intuitively, be heightening people’s exposure to even modest increases in cost of living.

There is a genuine expectation that the state should guarantee a comfortable standard of living. It has now become an iron law in our politics that politicians must pledge to ease the pain of households doing it tough – and not merely those on lower incomes. This paper argues that in a market economy there is only a limited sense in which a state can control cost of living pressures specifically. Rather, the role of the state in providing social assistance is better defined by a principle of need. The state should ensure the conditions for a fair and civilised society: equal opportunity, public goods, and assistance in time of hardship. But it should not succumb to the political temptations of middle-class welfare. This paper proposes a medium term policy agenda aimed at encouraging individuals to adopt more sustainable consumption and lifestyle patterns.