KEY POINTS:
Households hoping for financial relief when tax cuts arrive in October may be disappointed - experts say the rising cost of living means many people will still be worse off than they were a year earlier.
The first phase of the Government's tax cuts arrive on October 1 and will be worth about $2.1 billion to wage earners over a full year. However BNZ chief economist Tony Alexander said people were already paying about $2.5 billion extra a year for food and petrol, and there was no reason to expect prices to fall.
There is no doubt people will have more in their take-home pay from October. However, the tax cuts will arrive at the end of a year in which economists expect inflation to have risen up to 2 percentage points more than wages, and for many, they will not be enough to offset the difference.
Westpac economist chief economist Brendan O'Donovan said by the end of September the average family would be spending $57 more a week to get the same goods and services they purchased in September 2007.
The 5.9 per cent increase in the cost of living, which takes into account interest rates and the rate of inflation, is unlikely to be matched by wages, which Mr O'Donovan expects to rise $37, or 3.8 per cent, over the same period.
Those hoping to break even with the help of tax cuts may also be disappointed. Tax cuts arriving on October 1 will deliver between $12 and $28 a week to wage earners. However, only those earning $70,000 or more will gain enough to fill the $20 a week gap expected between the previous year's rise in living costs, and the rise in wages.
The picture is worst for those on low incomes. Council of Trade Unions economist Peter Conway said the cost of living was going up faster than average for working people on modest incomes because the largest price increases were for basic items. Items such as petrol, dairy foods and school fees were rising, while luxury items like domestic air travel, stereos and phone equipment were falling in price.
Mr Conway said some households would be much better off in October, particularly some working families. From October 1, a family might receive a 5 per cent pay increase, equal to about $20-$30 a week, a tax cut of $15 and a Working for Families top-up payment of $10, leaving them about $50 a week better off. Mr Alexander said there was no doubt real earnings were going backwards as wages failed to keep up with the rising cost of living.
He said how much a household was affected by rising costs depended on their circumstances.
"Older, retired people who aren't bussing kids around and don't have such high food bills will not be left as badly off by the [food and fuel price] shocks as younger families who've got kids to take to school and a couple of hungry teenagers."
Economists spoken to by the Herald predicted annual inflation would peak at between 5 and 5.5 per cent at the end of September, while wage growth over the same period was expected to be between 3.4 and 4.4 per cent.
Tax cuts for all workers will rise to between $21 and $55 a week in 2011 if Labour leads the government.
IT ALL ADDS UP
Average weekly household spending
For the year ended September 2007: $966
Expected cost by September 2008: $1023
FOOD
For the year ended September 2007: $158
Expected cost by September 2008: $169
UTILITIES
(including rent, home ownership costs, water and electricity)
For the year ended September 2007: $228
Expected cost by September 2008: $238
PETROL
For the year ended September 2007: $39
Expected cost by September 2008: $54
CLOTHING AND FOOTWEAR
For the year ended September 2007: $33
Expected cost by September 2008: $32
Source: Westpac economists
