‘Forced to adopt half-decent policies’: Huge challenges for Aussie economy

As Aussies get ready to head to the polls, a leading economist warns these are the huge challenges that await whichever party wins the upcoming election.

Australia needs a productivity boost to increase living standards. Picture: NewsWire / John Appleyard

The Australian economy faces four major challenges that will have to be dealt with by whoever wins the upcoming federal election, a leading economist has warned.

AMP chief economist Shane Oliver said political parties were usually forced to adopt “at least half-sensible” policies to ensure rising living standards, with a broad consensus that these fundamentals included low inflation and mostly free markets.

Dr Oliver said the first thing the newly elected government would need to do was boost household living standards through increased productivity.

“Cost of living is voters’ key concern. It’s reflected in a 10 per cent fall in real household disposable income per person,” he said.

Australia needs a productivity boost to increase living standards. Picture: NewsWire / John Appleyard

An average 11 per cent boost to wages has not kept up with price increases, surges in tax and interest payments, and an overall slowdown in real income in the past decade.

“The key is to boost poor productivity, which is the main driver of decent real wage growth,” Dr Oliver said.

“This requires tax reform, deregulation, competition reform, and improving education.

“A good place to start would be to cap public spending as a share of GDP, as it’s been exploding and crowding out somewhat more productive private sector activity.”

In line with improving living standards, Dr Oliver said both sides of politics would need to deal with a lack of housing affordability.

Data released by PropTrack at the start of March showed national house prices were up 46.7 per cent since March 2020, with the national median at $794,000.

“This is voters’ number two concern. It’s been deteriorating for decades, impacting productivity equity,” Dr Oliver said.

Both sides of politics have promised to cap migration rates to help with housing.

The Albanese government is also planning to add 1.2 million new homes by 2029, although so far construction is behind this target.

Cost of living remains a key issue for voters: NewsWire Monique Harmer

The economist also warned budget spending is out of control, with both sides of politics needing to come up with a plan to repay the debt.

“Structural spending pressures around the NDIS, health, aged care, defence and public debt interest are now taking the budget back into deficit when public debt is already high,” Dr Oliver said.

“They need to be checked and/or offset by savings elsewhere.

“So tough decisions will be needed, as we can’t just keep relying on an ever-higher tax burden on Millennials and Gen Z to pay for things.”

The surge in cost comes despite the Labor government pocketing more than $200bn in revenue windfalls on the back of an unemployment rate of 4.1 per cent, high commodity prices, and bracket creep for tax payers.

This allowed the government to achieve back-to-back surpluses. It was the first time the budget was in the black in nearly two decades.

Regardless of who is in power, Dr Oliver warns they will need to survive the erratic policies of US President Donald Trump.

He said a US and global recession, direct tariffs on and reduced demand for Australian exports, increased geopolitical threats, and pressure to ramp up defence spending were among the concerns.

“This means making the economy as strong as it can be – so driving a bigger pie should be the key focus,” Dr Oliver said.

The warnings come as Australians gear up to head to the polls on May 3, with both Prime Minister Anthony Albanese and Opposition Leader Peter Dutton promising to help Aussies battling the cost-of-living crisis.

Australians have fallen behind in the last three years as wages did not keep up with rising costs. Picture: NewsWire/ David Crosling

Treasurer Jim Chalmers used Tuesday’s budget speech to talk up the strength of the Australian economy, which he remarked was likely to achieve the “soft landing” where inflation is back under control without major job losses.

“Our economy is turning the corner,” Mr Chalmers said.

“Inflation is down, incomes are rising, unemployment is low, interest rates are coming down, debt is down, and growth is picking up momentum.

“On all these fronts, our economy and our budget are in better shape than they were three years ago.”

Mr Albanese officially called the election on Friday morning, marking the beginning of the five-week campaign.

Originally published as ‘Forced to adopt half-decent policies’: Huge challenges for Aussie economy