Australian Inflation Slows but Cost-of-Living Pressures Worsen Due to Tax Surge

Australian inflation is expected to hit its latest peak since the third COVID-19 wave, but cost-of-living pressures are worsening due to a surge in state and federal taxes. While inflation has more than halved from its peak in December 2022, it remains much higher than the Reserve Bank of Australia's (RBA) desired target range of 2%-3%. "The resilient labor market and concerns about persistent inflation mean the likelihood of a rate cut has been pushed to the tail end of 2024," according to economists.

Factors contributing to the inflationary pressures include upward pressure on tradable inflation, especially for fuel prices, and domestically driven inflation being pushed higher by a Federal Budget aimed at alleviating cost-of-living pressures. The RBA's strategy of not ruling anything in or out and providing no forward guidance is allowing the bank to carefully monitor incoming data and respond accordingly.

Commonwealth government revenue has reached a bittersweet trillion dollar milestone as government cashes in on your hard work, primarily driven by a steep rise in personal income tax receipts. This is partly due to high wage growth and strong employment, as well as the lack of indexation of tax brackets to inflation, which has pushed more income into higher tax brackets. The government's decision to not implement tax cuts has contributed to this burden on middle-income Australians.

The quarterly figures released by the Australian Bureau of Statistics show that inflation grew by 3.6% over the year to 31 March, largely due to a 5.9% rise in education costs. This will result in increases of more than $1,000 in June for millions of Australians with student loans, as the repayment of HECS/HELP loans is tied to indexation. The government is considering reforms to the HECS/HELP system, but the Greens argue that the proposed reforms do not go far enough and are pushing for the abolition of indexation and an increase in the minimum repayment threshold.

On June 1, all unpaid HECS-HELP debts will automatically increase when indexation is applied. Based on the latest Consumer Price Index (CPI) numbers, HECS-HELP debt is projected to increase by 4.7% this year, down from 7.1% last year but still significantly higher than 2021 when indexation was just 0.6%. The average student HECS debt in Australia is $26,494, and once the 4.7% indexation is applied, it will increase by $1,245.

Why this matters: The higher-than-expected inflation data complicates the Reserve Bank of Australia's efforts to bring inflation back to its target range and puts pressure on the government to provide cost-of-living relief in the upcoming federal budget. The surge in taxes and the lack of indexation of tax brackets to inflation are contributing to the worsening cost-of-living pressures faced by Australians.

Treasurer Jim Chalmers faces a "high-wire act" in balancing the need for cost-of-living relief and positioning the economy for growth. The government is aiming for a second budget surplus

Key Takeaways

• Australian inflation expected to peak, but cost-of-living pressures worsen due to rising taxes.
• RBA unlikely to cut rates until late 2024 due to resilient labor market and persistent inflation.
• Government revenue reaches $1 trillion, driven by high wages and lack of tax bracket indexation.
• HECS-HELP debt to increase by 4.7% in 2024, adding $1,245 to average student debt of $26,494.
• Treasurer faces challenge of providing cost-of-living relief while positioning economy for growth.