AFFLUENZA EPIDEMIC

If you were one of hundreds of thousands of Australians who have "liked" the Liberal Party's facebook page or are on its direct email list, you may have seen a message from Liberal Party federal director Brian Loughnane this week.

If you were one of hundreds of thousands of Australians who have "liked" the Liberal Party's facebook page or are on its direct email list, you may have seen a message from Liberal Party federal director Brian Loughnane this week.

"Have you noticed how prices have skyrocketed?" the man who runs Tony Abbott's campaign for election asks in the email. "Thanks to Kevin Rudd and Labor, everything from electricity, gas, education and medical services has gone up significantly. And Labor and the Greens have made things far worse when they introduced the carbon tax."

Enter your estimate of your bills into the facebook app dubbed the "Cost of Labor Calculator" and you will be in for a shock. When this reporter did so, it was only to discovered the "yearly cost of living increase" had gone up by some 31 per cent under Labor.

In an election campaign in which exaggeration, fear-mongering and outright lies from both Labor and the Coalition have become the depressing norm, the calculator is one of the most egregious examples of misrepresentation.

It cherry picks only the items that have gone up - utilities, rent, education and medical expenses - and, worse still, gives you the price rise over 5½ years and suggests it is an annual increase.

"It's like taking Don Bradman's 10 worst scores, finding the average and then saying it represents his career's work," says Ben Phillips, principal research fellow at the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra.

In truth, the cost of living has risen by just over 2 per cent a year over the period of the Rudd and Gillard governments.

Indeed, under Gillard's administration, even with the dreaded carbon tax, the increase in prices has been only 1.6 per cent a year, according to NATSEM, the lowest of any government in the past 25 years.

More importantly, NATSEM's analysis shows disposable incomes have risen even faster than the cost of living. It means that, since 2008, incomes have risen by 15 per cent, leaving the average household $5324 a year better off even after the cost of living increases.

Since John Howard took power in 1996, the standard of living - disposable income minus cost of living increases - has increased by 2.6 per cent per annum on average for 17 years. According to NATSEM's Phillips, that equates to a gain in real household income of $14,286, or $275 a week.

It's an impressive outcome - and one might have thought it was cause for celebration. Yet throughout that time we have been telling politicians, through the focus groups, polling and market research that so closely guides policymaking and campaign strategies these days, that cost of living pressure ranks front and centre of our concerns.

"Whenever we sit down with consumers, they always complain about the cost of living. It doesn't necessarily have to be a big jump in prices to start the moaning," says Rebecca Huntley, executive director of Ipsos Australia, a market research firm.

A source in the Coalition campaign confirms the trend, saying "quantitative and qualitative research shows cost of living is even more prominent than it was five years ago" when voters outline their concerns.

Why the disconnect between reality and sentiment when it comes to cost of living? Simply put, we remember nasties like price shocks and we don't notice much when prices are flat, moderately increasing or even declining.

That psychological quirk is even more pronounced when price increases come in the form of quarterly and annual bills such as electricity, gas and insurances as has been the case in recent years, and when the declines or stagnant prices are in everyday items such as food and clothing.

And, as we grow wealthier, behavioural economists have discovered that people's expectations and aspirations quickly change to match their rising incomes. They spend more but they don't necessarily feel happier, and consequently feel that cost-of-living pressures are still acute.

It's been dubbed the curse of "affluenza" by critics of consumerism and the "hedonic treadmill" by psychologists and behavioural economists. However, rather than disabusing us of our false notions, politicians have been reflecting them straight back and exploiting them.

For the opposition, of course, it's hardly surprising they would do so. Repealing the carbon tax has highlighted a broken promise by Julia Gillard but also provided a powerful way to home in on perennial, if misplaced, cost-of-living gripes by voters.

But the potency of cost-of-living concerns is such that even incumbent governments with what, prima facie, would be a good story to tell, can be reluctant to enter the cost-of-living debate.

Economist and adviser to former prime minister Julia Gillard, Stephen Koukoulas, recalls being howled down when he "suggested a number of times at strategy meetings that there was a great story to tell about low cost-of-living increases and rising incomes". "I was a lone voice . . . they said you can't go down that track. The kickback was that you didn't want to feel out of touch. If you're a politician, it's more important to show voters you feel their pain, not tell them the truth."

It's this feedback loop based on the politics of empathy, often aided and abetted by the media, that has fed an entitlement mentality through much of the economic boom.

There has rarely been a more pressing time for straight talking from politicians but any hopes this election campaign might have produced some candour have quickly evaporated.

Australia faces a widely acknowledged challenge of a structural decline in government revenue and a permanent fall in the commodity prices that have underpinned economic growth in the first decade of the 21st century.

Then there is the growing cost to the budget bottom line from a slew of middle and upper-class entitlements at a time when the ageing population places increasing pressure on services and diminishes the relative size of the working-age population.

The campaign started off promisingly enough. Kevin Rudd vowed his central case for re-election would be a positive campaign based on a comprehensive economic plan to tackle the immense challenges of the end of the China-led mining boom.

"This election will be about who the Australian people trust to best lead them through the difficult new economic challenges which now lie ahead," he said at his first press conference after naming the election date.

But, within days, with public and internal polling showing his political fortunes were on the slide, Rudd reverted to a classic cost-of-living fear campaign.

Standing with a jar of Vegemite in a Melbourne schoolroom, he began scare mongering about the possibility of a rise in the goods and services tax under a Coalition government, seizing on the Coalition's planned review of the tax system, which would have included examining the GST.

The attack ads followed and, under pressure, Tony Abbott was forced to walk away from ever raising the GST while in power.

Any changes to the tax - which is now raising less revenue than hoped and leaving state governments (which receive the revenue from the GST) struggling to find the money to pay for hospitals and schools - would have been brought to the people to vote on before being implemented under the Coalition plan.

With the right compensation for low-income earners and as part of a comprehensive tax reform package, an increase in the GST and/or a widening of its base is widely seen as necessary to plug the chronic revenue shortfall faced by governments.

Perhaps, ironically, it could also assist in alleviating the cost of living pressure that is genuine - Australia's high house prices and soaring rental costs. The abolition of state taxes, such as stamp duty and developer levies that a bigger GST could replace, would spur residential building construction, addressing the undersupply of housing in Australia.

Along the way, a home building boom would also boost economic growth. In short, it would provide the kind of economic reform Australia needs.

Ipsos Australia's Rebecca Huntley, a former ALP member who resigned in disgust at branch stacking, says politicians' pandering to the false perceptions of cost of living is undermining the political discourse. "It underpins our political parties' inability to put forward serious long-term reforms or foster an honest debate about what governments can and can't do," she says. "There's a deadlock in the political discussion that's very hard to break and it's obfuscating the real view of the Australian economy. Australians are not being assisted at all by their politicians to rise out of the myopic view and focus on the bigger picture."

She says one of the curious features of our cost-of-living obsession is that those with rising incomes are equally, if not more, concerned about it. "People want to send all their kids to private schools, travel each year, own a big home, but they can find it hard to finance that lifestyle," she says. "There is a remarkably wide spectrum of people who say they are doing it tough."

These "aspirational" voters are seen as a key cohort of swinging voters. Attracting them - as well as addressing his lack of appeal to female voters - helps explain why Tony Abbott is so determined to introduce his $5.5 billion-a-year universal parental leave scheme, one of the most generous in the world.

Coupled with his objective to remove the means test on the health insurance rebate and expand access to the seniors card to more self-funded retirees, Abbott has introduced three new entitlements that will weigh heavily on the budget bottom line for many years at a time when it says there is a fiscal "emergency".

It also makes a mockery of shadow treasurer Joe Hockey's speech in London last year when he stated emphatically: "The age of entitlement is over. The entitlements bestowed on tens of millions of people by successive governments, fuelled by short-term electoral cycles and the politics of outbidding your opponents is, in essence, undermining our ability to ensure democracy, fair representation and economic sustainability for future generations."

It's a sentiment that Ross Garnaut, one of Australia's most eminent economists and an adviser to the Hawke government when it embarked on its watershed reforms to open up the Australian economy, would agree with.

He sees Australia facing a bleak economic outlook because of falling productivity and the easing of China's voracious appetite for our resources.

Australia's long period of prosperity has produced "a new political culture that elevates private over public interests and the immediate over the longer term", says Garnaut. "If we continue within the political culture . . . we will live in greater comfort for a short while. But sooner rather than later we will experience deep economic recession with high unemployment.

"We can expect bitter conflict within our society, and unhappiness about our institutions."

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