Middle Australia is earning less than before the pandemic

Middle class Australian families are working harder than ever but earning less than they were before the pandemic, as soaring interest rates, rents and cost of living lower real incomes.

Australian households are working harder than ever but earning less than before the pandemic, as soaring inflation and interest rates have squashed real incomes . Picture: Monique Harmer

Middle Australia is working harder than ever but earning less than they were before the pandemic, as soaring interest rates, rents and cost-of-living expenses lower real incomes.

A rate cut later this year, easing inflationary pressures and tax relief via the stage three tax cuts will result in a rise in households’ real disposable incomes through 2024 – the first such rise in three years, according to exclusive modelling by the ANU.

But that will still leave middle-income earners with lower living standards than before the Covid-19 health crisis, the legacy of a once-in-a-generation inflationary outbreak, and a similarly aggressive response by the Reserve Bank.

The analysis from the ANU’s Centre for Social Research and Methods breaks households into five groups, or quintiles, ranging from average earnings after tax of $35,000 in the lowest segment as at the end of 2023, to $104,400 in the middle of the distribution, to an average of $245,100 in the highest segment.

It shows the largest fall in living standards has been felt by the third (middle) and fourth (upper middle) household segments – families that typically have an after-tax income of between $100,000 and $150,000.

Reflecting in particular the rapid rise in mortgage costs, average annual after-tax household incomes in the centre of the earnings distribution have dropped from $105,200 in 2019, to $103,500 at the end of 2023 – a drop of $1700.

As Anthony Albanese this week talked up the prospect of further cost-of-living support in the May budget, the modelling estimated the average income among upper-middle households at the end of 2023 was $1520, or 2.5 per cent, lower than pre-pandemic, at just shy of $140,000.

Real earnings are stagnating, and even falling, despite more Australians than ever being in jobs and an unemployment rate more than one percentage point lower than in 2019.

As Middle Australia struggles, the ANU analysis shows the bottom 40 per cent of households by income – those typically earning between $35,100 and $70,000 – are better off now than pre-pandemic, as well as the highest earning households, where the average disposable income was an estimated $238,700 at the end of last year.

ANU associate professor Ben Phillips said this somewhat counterintuitive result was thanks to policy changes that boosted welfare payments, alongside indexation of payment rates to inflation, which had run ahead of broader wages growth.

Mr Phillips, who conducted the modelling, said that as a result income inequality had not increased through the pandemic.

The country’s Gini coefficient of income distribution – a widely used statistical gauge of income inequality – had dropped very slightly from 0.343 in 2019, to 0.341 in 2023, he said, representing a slight reduction in inequality.

The introduction of the stage three tax cuts from the middle of this year – the benefits of which will mostly flow through to higher-­income earners – will raise the level of income inequality slightly, shifting the Gini coefficient up marginally to 0.346 and still in line with pre-Covid levels.

An assumed rate cut in the second half of this year and a fall in the rate of inflation from 5.4 per cent to closer to 3 per cent by December will ease pressure on families, and the ANU analysis estimates a lift in real household earnings across all income ranges after two years of falls for all but the poorest families.

Australian households in 2024 will enjoy a real pay rise of $1646, bringing the average across all incomes ranges to $113,750 and 1 per cent higher than in 2019, the modelling shows.

But, once again, Middle Australia will still lag behind. Households in the centre of the income distribution will be earning $864 less a year than five years earlier at an estimated $104,365 in real terms, a fall of 0.8 per cent. The most notable improvement will be among the top 40 per cent of households by income, who will stand to enjoy the lion’s share of the gains from the final stage of the former ­Coalition government’s three-stage tax reforms – the first two of which largely benefited lower to middle income earners.

And the second-highest quintile of earners will still be earning $1520 a year less by the end of 2024 than in 2019, the analysis shows.

KPMG chief economist Brendan Rynne said the end of rapidly rising prices would be a welcome relief, but would leave a legacy of higher costs that would continue to drag on household budgets.

“Our standard of living has taken a blow and it will take a while to recover,” Dr Rynne said. “We won’t have the undue pressure like at the moment, but we are at a step down (in terms of living standards) relative to history.”

Despite falling real incomes and contracting per-capita GDP, the economy has proved surprisingly resilient through 2023, buoyed by a record migration intake.

Dr Rynne said pessimistic forecasts for the past year had been ultimately proved wrong.

“What I think lots of economists didn’t get right, me included, was the accumulated savings acted as a much, much stronger buffer to the economy than what any of us really thought would be the case,” he said.