Economics
Economic indicators and report cards
Economic indicators describe an economy travelling reasonably well, but which needs more attention to tax reform and housing.
In comparison with other “developed” countries, Australia stands out as an economic success. In comparison with our economic performance over the last fifty years, however, we seem to have come to a standstill. This choice of perspectives allows for differing partisan commentary, without much enlightenment on structural issues that don’t show up in regular economic statistics.
National accounts – modest growth
In December the ABS published the National accounts for the September quarter with some reasonably promising figures on public and private investment. Over the year GDP rose 2.1 percent, GDP per capita rose by 0.4 percent, and productivity as measured by GDP per hour worked rose by 0.8 percent. That’s all unexciting but it’s in the right direction.
In order to get a first-order indicator of material living standards, I have combined national accounts data with CPI data and population estimates to look at Australians’ real disposable income over the last 45 years, shown below.
It shows the high growth in incomes from the late nineties – the dividends from the Hawke-Keating structural reforms, and income from the minerals boom that lasted until the global financial crisis of 2008. This is followed by a period of no growth, interrupted by the stimulatory response to the Covid-19 pandemic. Since then there has been a heap of partisan misinformation based on chosen data points, but the reality seems to be that there is some modest growth now that we are clear of the statistical artefacts of the pandemic response.
As for the claim that we are suffering a “cost of living crisis” we are a little ahead of where we were before the pandemic when there wasn’t a “cost of living crisis”.
This isn’t to say some people aren’t doing it tough. House price inflation has locked young people out of housing, those who became heavily indebted when interest rates were too low (the Reserve Bank’s real policy misjudgement) are still struggling, and the tax system is resulting in terrible intergenerational inequities. These are serious problems in equity, but they are manifestations of a problem in income distribution, rather than a general “cost of living crisis”.
Mid-year economic and fiscal outlook – mostly boring if we overlook $300 billion in rorts and concessions
The Mid-Year Economic and Fiscal Outlook, a routine document that updates budget estimates and economic forecasts, had few surprises. There were a few tweaks to economic forecasts: inflation next year will be a little higher than originally forecast (2.75 percent, up from 2.50 percent), and real wage growth will be lower (0.49 percent rather than 0.43 percent). Gross and net debt (mainly debt accumulated during the Covid stimulus) will be a little lower. Net debt by 2028-29 is forecast to be $755 billion, which is high by Australian historical standards but is still low in comparison with other “developed” countries.
Unsurprisingly the Treasurer’s statement on MYEFO was upbeat: it’s “the most responsible mid‑year update on record”. Stephen Bartos and John Hawkins of the University of Canberra have a Conversation contribution that takes some of the gloss off the Treasurer’s statement: The budget update shows a slight improvement in the federal deficit, but it’s mostly due to good luck.
Writing in the Saturday Paper – The fight Chalmers has to have – Richard Denniss of the Australia Institute is critical of the government’s narrow fiscal focus and the media’s obsession with tiny variations in estimates. “Our 40-year preoccupation with the size of the deficit has made us blind to the scale of the opportunities we face” he writes. The government should be looking at ways to raise more revenue – for example from the privileged gas industry – and should bring our public services up to the standard one should expect in a prosperous country.
The other document, published by Treasury at the same time, is the Tax Expenditures and Insights Statement.
This year the Commonwealth collects around $690 billion in tax, supplemented with another $60 billion in non-taxation revenue, and will spend about $790 billion.
If there were no tax concessions – concessions for superannuation contributions, tax deductions for charitable donations, GST exemption for education, and about 50 other breaks – the Commonwealth would be collecting another $290 billion a year. These breaks are listed in the Tax expenditure and Insights Statement.
Treasury is not suggesting that all these exemptions, described as tax expenditures, are not justified. Indeed some of their classifications appear to be arbitrary: for example while businesses claim deductions for expenses in earning corporate income, employee work-related expenses are called tax expenditures, and franking credits are called tax expenditures rather than rebates of company tax doubly paid.
The biggest group of tax expenditures, costing $58 million this year, relate to superannuation. Capital gains tax concessions cost another $22 billion. That’s real money.
For some of these tax expenditures Treasury publishes a distributional analysis where data is available – typically by age, income decile and gender for individual benefits. For those it has chosen to analyse the benefits seem to flow disproportionately to people with high incomes, and some, particularly those relating to concessions on superannuation earnings and the Medicare Levy Surcharge, involve a significant transfer from young and working-age working people to well-off retirees.
Which one has the case for subsidising tax breaks for the rich?
Some of these breaks would fail even the most permissive pub tests. Almost all of the deductions for charitable donations go to people in the top income decile. Then there are deductions, costing $1.8 billion a year, for “managing tax affairs”, which are disproportionately claimed by the well-off. In none of the economic textbooks on my shelves can I find the public good argument for helping the rich avoid contributing to the common wealth. The concession that allows small businesses to pay a lower rate of company tax than large businesses, conjures images of young entrepreneurs working in garages on the next technological breakthrough, but in fact the lion’s share goes to the finance and insurance sector – probably to mortgage brokers and commission-based investment advisers who are part of the administrative overhead rather than the real economy.
The worst aspect of tax concessions is that between 2021 and 2024 they have grown by 33 percent. In real inflation-adjusted terms that’s about 10 percent a year. If any program involving cash outlays were expanding at that pace it would be subject to tough scrutiny, but tax expenditures go on rising with little attention.
This year ACOSS has done a short analysis of tax expenditures, focussing on superannuation and concessions for property speculators, but they should be subject to much more scrutiny.
IMF – we’re on track
“Slash spending and reform taxes” was the right-wing media’s headline interpretation of the IMF’s assessment of the Australian economy, released in late November.
In fact it was a generally positive assessment, tempered with comments on productivity and on housing affordability. It calls for “a comprehensive tax reform package”, which would include “an increase in indirect taxation, the reintroduction of a resource revenue tax, and removing income tax exemptions”. It calls for “more efficient” public spending. It’s not as upbeat as the Treasurer’s press statement on the report, but there is nothing to support a case for cutting spending.
Australia also gets a short mention in the IMF’s January 2026 World Economic Outlook Update, but only in the observation that Australia and Norway “are projected to see drawn-out persistence in above-target inflation”. In its table on expected GDP growth Australia stands out quite strongly in comparison with other “developed” countries.
OECD – productivity, housing and competition
The latest OECD Economic Survey of Australia, released on 21 January, includes a neat presentation of slides on the Australian economy. It includes recommendations for an effective carbon price, reduced emissions from the transport sector, and a shift from stamp duties to property taxes – reforms governments have been trying to ignore.
Its general assessment is captured in this extract from its summary:
The economy is normalising, but long-standing challenges of slow productivity growth, strained housing affordability and high carbon emissions should be addressed. Competition has waned across the economy over the past two decades, as business dynamism has declined and market concentration and profit margins have risen. With economic growth returning to potential and inflation expected to stabilise within the target range, fiscal policy should focus on steadily reducing the budget deficit while improving the efficiency of the tax system.
It includes a critical evaluation of competition in the Australian economy. The picture it paints is closer to that of a country with a comfortable business sector not too bothered with innovation or efficiency, rather than what one would expect in a dynamic market economy.
Employment – a strong labour market
The December Labour Force Survey shows an unexpected reduction in the unemployment rate (from 4.3 to 4.1 percent) and an even stronger reduction in the underemployment rate (from 6.2 percent to 5.7 percent). These were associated with a small rise in the participation rate.
Luci Ellis, former Assistant Governor of the Reserve Bank and now Westpac’s Chief Economist, gives her interpretation of these figures on Radio National’s Saturday Extra: Is another interest rate hike on the way?. She believes that the Reserve Bank may interpret these figures as indicators of an overheating economy (but that doesn’t mean it will inevitably raise interest rates). She is more relaxed about these strong figures.
CPI Inflation
The headline figure, both on the ABS website and in media reports, is about a 3.8 percent rise in the CPI over 2025. After not rising in October and November, the CPI rose by 1.0 percent in December, implying an annual rise of 13 percent if that were maintained.
Among the ABS’s 11 basic categories, the strongest monthly rise – 7.4 percent – was in “recreation and culture”. This would reflect some seasonal component, but even their seasonally-adjusted series are showing annual price rises of 3.3 percent over the last year and the last three months.
The trimmed mean figure, generally preferred by the Reserve Bank, was 3.3 percent over 2025.
Electricity prices rose by 21.5 percent over 2015, mainly because of withdrawal of various bill rebates. The pre-rebate price rise over 2025 was 4.6 percent, occurring once-off in July last year as new default market offer (DMO) prices were set.
There is a great deal of partisan misinformation about electricity prices. Because changes in subsidies generate odd results, like that 21.5 percent, we get a clearer picture of trends if we consider pre-subsidy prices.
The pre-subsidy retail price rose by 12 percent in July 2023 when the effect of higher fossil fuel prices was incorporated in the DMO, and fell a little over the following two years. The rise in 2025 was due to higher interest rates and higher costs incurred by “retailers”. In fact over the last 30 months the pre-subsidy price has risen by only 2.6 percent – equivalent to an annual rate of 1.0 percent, significantly lower than general inflation.
Will this unexpectedly high CPI prompt the Reserve Bank to raise interest rates next week? Maybe, if they are simply guided by raw figures, but probably not if they think through what’s driving these figures. The concern of the RBA should be the risk of self-sustaining inflation, rather than one-off factors contributing to the rise in the CPI, such as food prices pushed up by hard seasons.
Even if there is evidence of excess demand inflation, there is scope for the government to dampen domestic demand through targeted fiscal measures in the budget. Bringing taxes on “self-funded” retirees in line with taxes on working Australians is a clear candidate for a socially just fiscal policy.
Capital gains tax – at last a carefully-considered proposal
Many reformers want the capital gains tax discount to be reduced. This would be bad public policy, worsening relative incentives for speculation over long-term investment. Researchers at e61make a strong case for restoration of the capital gains tax system that the Howard government destroyed in 1999.
One of the Hawke-Keating government’s most significant reforms was to introduce a capital gains tax system that achieved some degree of taxation neutrality between income from capital gains and income from other sources, such as wages and dividends.
When an investor realizes a capital gain, some of the price gain is usually a real increase in value, while some other part of the price gain is simply a reflection of inflation.
In 1999, in what may be the most economically destructive “reform” of the Howard government, the Hawke-Keating capital gains tax system was abolished, replaced by one which did away with indexation, and as a partial compensation applied tax to only 50 percent of the nominal capital gain. As a result the incentives for investors was tipped away from long-life patient enterprises (which would bear the costs of non-indexation) and towards generous returns from fast-turnover speculative assets, such as houses, and shares passing through highly-traded portfolios. (For those who want to compare the pre- and post-1999 systems, I have a 2009 paper prepared for Taxwatch.)
We still don’t know how such an economically irresponsible change came about. Some retired Treasury officials suggest it was because the Treasurer at the time had trouble understanding compounding. The more likely explanation is that it was recommended by John Ralph whose interests as a banker were to see a fast turnover of assets, providing commissions for the finance sector, all in the name of “financial dynamism”. Long-term patient investment may be good for the economy, but it isn’t very exciting for the BSDs in the finance sector.
It is understandable that many people, noting the contribution of capital gains tax breaks to housing inflation, are calling for an end to them.
The reformers’ usual call is for the discount to be reduced from its present 50 percent to perhaps 25 or 10 percent, without any mention of the distortionary effect of non-indexation. For example, Labor proposed a 25 percent discount in its failed 2016 election campaign.
The trouble is that the nearer we get to a zero discount, the closer we get to a tax system that taxes the nominal gain in an asset’s value, with no differentiation between inflation and real gain. This point is generally overlooked by those calling for reform.
But at last there is a more economically rigorous proposal on the table. In a submission to the Senate Select Committee on the Operation of the Capital Gains Tax Discount, Greg Kaplan, Matthew Maltman, and Matt Nolan of e61 have made a strong case for a return to the pre-1999 system.
They also go a little further, in calling for the income from capital gains to be spread out over more than one year: if an asset accumulates value over many years it makes little sense to count it all in one year on realization, almost inevitably pushing a taxpayer into a higher bracket for that year. The purist would suggest that capital gains be assessed yearly on an accrual basis, but the accounting costs in such a system would be prohibitively high. Spreading the income over a few years after realization would be a good second-best solution.
On oligarchs and the merely wealthy
Although widening wealth inequality is a much more serious problem than income inequality, we pay it too little attention. At its extreme it is manifest in the emergence of an oligarchy who systematically destroy democratic institutions.
Political arguments about inequality are usually about disparities in income, but the more enduring and self-replicating forms of inequality relate to wealth, as Thomas Piketty pointed out in his works.[1]
Wealth inequality creeps up on us because it takes time to develop. It can emerge from relatively small disparities in incomes, which divide societies into those who have the capacity to save and invest and those who strive to make it through from pay to pay. Over time, as investment returns enjoy compound growth, wealth accumulates among the former group. Inheritances, investor-friendly tax systems, and barriers to housing security reinforce the drivers of wealth inequality.
The chart below, compiled from ABS data on wealth and from the CPI, shows how real average household wealth has risen by 74 percent over the 20 years to 2024.
It is some time (2019-20) since the ABS has estimated how this wealth is distributed. The ABS definition includes owned houses (the main asset for most people), superannuation balances, bank deposits, shares, and the value of private businesses.
That 2019-20 survey found that wealth was highly concentrated among those in the fourth quintile (21 percent) and top quintile (63 percent). leaving only 16 percent for the other 60 percent of households.
While the average wealth of all households was $1.0 million, households in the highest quintile had on average $3.3 million in wealth. At the very top were 110 000 households, 1.4 percent of the total, with more than $7.0 million in wealth. Because since then average wealth has risen by 44 percent in nominal terms, the average wealth of households in the fifth quintile would now be around $5 million, and around $10 million in the very top 1.4 percent of households. Some of those assets could be in housing, but if we assume a $2 million house for someone with $5 million in wealth there is still $3 million left over.
Saul Eslake has an informative slideshow on Australian wealth inequality which includes some international comparisons, confirming that wealth distribution has been becoming more inequitable than income distribution, and revealing the rapidly growing share of wealth in the hands of those in the 65+ age group.
Many people see these outcomes in wealth distribution as unfair, particularly when 40 to 60 percent of the population (those not in the top two quintiles) have no opportunity to accumulate significant amounts of wealth. Even conservative economists regard wide wealth inequality as costly, because it rewards idle investment and is associated with income immobility: those who are born into wealth have a much greater chance of realizing their capabilities than those who are born into indebted households.
The Australian government went to the last election promising to apply modest tax increases to superannuation balances above $3 million – a move criticized by the Grattan Institute researchers as being too mild. But the reaction to the government’s modest reforms, led by the Liberals’ Tim Wilson, was hysterical. Not that there are many people with $3 million in their superannuation, but there are enough people – “aspirationals” – who believe they can some day accumulate $5 million or $10 million. This led the government to water down its superannuation provisions – essentially indexing the $3 million threshold to inflation.
Those with $3 or $5 million in assets, particularly if most of those assets are reasonably liquid are certainly well-off. There should be enough to ensure a comfortable lifestyle – business class travel, but not enough for a Gulfstream private jet. Enough for a Mercedes but not a Lamborghini. Enough to donate a few thousand dollars to political parties and lobbies, but not enough to buy a politician. Not enough to qualify as an oligarch.
When a society allows an oligarchy to emerge, however, there are problems that go beyond the normal economic problems of resource distribution and allocation. In 1910 US Supreme Court Associate Justice Luis Brandeis prophetically warned “We can have a democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both”.
Brandeis’s message is repeated in a report prepared by Oxfam, in time for this year’s Davos Conference, Resisting the rules of the rich: protecting freedom from billionaire power. This report remarks on the extraordinary growth, worldwide, in the number of billionaires, now around 3000, and the way they exercise political power for their own benefit. Its authors ask how this has come about:
Why is it that policies that are so popular with the majority fall on deaf ears? When at least 80% of the world’s people want their government to take stronger action on climate change, why is the world so far off track on agreed climate goals? When the public overwhelmingly support a wealth tax on the super-rich, why does 80% of total tax revenue come from ordinary people while taxes on wealth account for just 4%? When the majority of people globally say the gap between the rich and the rest is a very big problem, why is the world on track to have five trillionaires within a decade while the number of people living in poverty has barely changed since 1990?
Their answer confirms Brandeis’s warning:
A large part of the answer lies in the influence the super-rich have over politicians. Billionaires have long used their vast wealth to “buy” politicians and political parties, subverting the power of the majority in favour of an unjust system of “one dollar, one vote”. The World Values Survey found that almost half of all people surveyed say that “the rich often buy elections” in their country. In the US, just 100 billionaire families poured a record-breaking US$2.6bn into federal elections in 2024. That is one in every six dollars spent by all candidates, parties and committees. The companies associated with the10 richest men in the world spent US$88m lobbying in the US in 2024; this is more than all trade unions combined (US$55m). Single large donors have an outsized effect on policy; for example, a study of US Congress elections found that when a top donor dies, legislators’ votes begin to realign with their party. Whilst the link between economic power and political power shows clear variation between countries, it is a serious issue in countries all over the world, at all income levels, and on all continents.
In a press release Oxfam Australia has added some local data to these worldwide figures, pointing out that since 2020 eight new Australian billionaires have been minted, taking our number up to 48. Oxfam calls for a wealth tax on the top 0.5 percent of households, which they estimate would raise $17 billion a year.
And for the alsorans – the well-off who don’t meet the oligarch threshold – Oxfam recommends reforms in capital gains tax and in negative gearing concessions. ( It’s not clear why they don’t include an inheritance tax in their suggestions).
1. For those who want to brush up on Piketty I have written a summary of his 1100-page 2020 work Capital and ideology. ↩