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$14,400 in cost-of-living relief in the Budget, but can anyone get it?

Treasurer Jim Chalmers and a Tesla electic vehicle, which will be cheaper after the Budget.
Jim Chalmers' Budget offered relief for those buying electric vehicles. (Source: AAP/Getty)

Here’s a quick Budget breakdown:

  • If you buy an electric car worth $79,000, you save $4,000 in import duty

  • If you have a flock of kids in child care and a high income, you could save as much as $10,000 a year

  • If you spend a lot of money on prescriptions, you could save as much as $500 a year

Somewhere out there is a high-income person with triplets aged 2, a plan to buy a Tesla Model 3 and a chronic issue that needs a lot of pills. This Budget is for them: it offers an estimated $14,500 in relief.

For the rest of us? I hope there is some comfort in knowing the Treasurer is aware of the problems.

“Further sharp rises in the cost of essentials, such as housing costs and energy, are expected to create pressures for families, particularly for those with lower incomes where these expenses make up a larger share of their budgets,” the Budget papers said.

“Rents are through the roof, and many families are struggling to keep up,” the Treasurer announced ruefully in his Budget speech on Tuesday.

More Budget news:

But there was not much in the way of concrete interventions that would help in the short run.

The reason Chalmers gave is that if the Government splashed cash around, it would drive inflation higher.

“When you're providing cost-of-living relief, you need to do it in a really targeted and responsible way, otherwise you risk making the inflation problem worse,” he said on Budget day.

https://au.yahoo.com/topics/federal-budget/
https://au.yahoo.com/topics/federal-budget/

How does this fight inflation?

Inflation is just a rise in prices, averaged across the whole economy.

It covers things from bread to bank account fees, football tickets to phone bills. Companies put up prices when customer demand exceeds their ability to supply their customers, or so the theory goes.

So, the way the Government is fighting inflation is by reducing demand. If you take money away from consumers, they stop trying to buy so much, companies stop putting up prices and, eventually, your inflation problem goes away.

One way in which inflation-fighting happens is raising mortgage rates – if borrowers have to give more money to the bank, they have less left over to spend on everything else.

Another tactic is raising taxes. The Government has lifted taxes on low- and middle-income earners by up to $1,500 by letting the low and middle income tax offset (LMITO) expire.

The LMITO used to reduce tax bills by $1,500 for anyone making $48,000 to $90,000 a year. Now, it is gone.

That’s going to hurt a lot of families. It isn’t the only kind of hurt either.

Electricity prices are expected to rise by 20 per cent this year and 30 per cent the year after.

I’d like to tell you that’s a rise of 50 per cent over 2 years, but thanks to the magic of compounding, it’s more – a rise of 56 per cent.

Domestic power and fuel spending already consumes $2,000 a year from household budgets (that’s 2015 data - the most recent) so, a 56 per cent increase could raise costs by more than $1,000 if people don’t reduce consumption.

“When it comes to electricity prices, I'm not going to pretend that we're not worried about these electricity price forecasts,” said the Treasurer, again offering empathy but not much in the way of help.

Gas is also going to rise, up 20 per cent this year and 20 per cent next year (total: +44 per cent).

Higher energy prices will not only hit families, they will hit businesses who will - if they can - pass prices on to consumers.

Higher energy prices are one reason inflation is now expected to last even longer than previously. It will now not be until 2024/25 that inflation is lower than wages and the buying power of your pay packet begins to expand again.

The Government expects consumption to grow by 1.25 per cent next year while the population grows by 1.4 per cent. In short, the cost of living is rising high enough that we can afford to buy less now than before.

The standard of living of Australians is actually falling.

We’re still saving

It is important to remember households are still saving. Incomes have been strong enough we haven’t needed to spend all of them.

That means there is some buffer: before we have to reduce how much stuff we buy, most households will reduce saving.

A graph showing Australia's household savings rates.
(Source: supplied)

The caveat to the above is to remember it is an average: households are saving, on average, but that doesn’t mean every household is saving.

Those who are will not have to reduce their consumption so much.

Those who are already living hand to mouth? They will feel real pain.

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