Australia’s drop in living standards has prompted calls to revamp the tax system. 

Newly released OECD data reveals that inflation-adjusted disposable incomes have hit their lowest point since June 2019, with a 5.1 per cent decline in Australian household incomes over the past year—the sharpest fall recorded across the OECD.

This decline poses a significant political challenge for the Albanese government, as the cost of living emerges as the top concern for voters, according to polling data. 

The Opposition has recently seized on the issue during Senate question time, accusing the government of overseeing falling living standards.

Treasurer Chalmers has acknowledged the impact of higher interest rates and inflation on Australians. 

He says the government's $23 billion cost-of-living relief plan should help by alleviating pressure on households and addressing inflation concerns. 

Without this plan, the Australian Bureau of Statistics (ABS) estimates inflation would be half a percentage point higher.

The decline in real incomes stands in contrast to the OECD as a whole, where living standards increased by 2.6 per cent over the same period. The United States, for example, recorded a 3.5 per cent increase in disposable incomes.

The excess fiscal stimulus deployed by the Morrison government at the start of the COVID-19 pandemic has contributed to a depletion of the savings buffer accumulated by Australian households. 

Economists warn that this, combined with factors like surging population growth, persistently high inflation, and a household sector dominated by variable rate borrowers, has created a perfect storm negatively impacting Australia's households.

“Bracket creep” is a significant factor, with Australia among the 21 OECD countries not indexing tax brackets for inflation. This leads to increases in average taxes as nominal wages rise, contributing to a near-record 16.2 per cent of household incomes lost to income tax in the three months to June.

Some economists say Australia needs a fundamental overhaul of the tax system, suggesting a shift away from the over-reliance on personal income taxes.

While relief is expected with the implementation of stage three tax cuts on July 1, 2024, experts argue that more comprehensive changes are necessary. 

The E61 Institute recommends shifting the tax burden away from individuals to less sensitive areas like land or consumption.

Interest rate hikes are identified as another factor impacting household incomes, especially due to the dominance of variable-rate mortgages. 

Australia's 2.2 per cent population growth rate is also cited as contributing to the decline in per capita incomes, with experts calling for economic reforms to accommodate population growth and stimulate a virtuous cycle of growth.