Jim Chalmers warned real wages won't grow by enough to offset the forecast rise in annual inflation to 7.75 per cent by the end of this year.
"Australia is outperforming much of the world, but that doesn't make it any easier to pay bills at home," Dr Chalmers told parliament in an economic statement.
"More Australians are in jobs than ever before and that's a very welcome outcome.
"But fewer Australians are feeling confident about the choppy waters that our economy is in.
"They see the impact high inflation is having on their living standards, in an environment where workers aren't getting wage rises sufficient to match those price rises."
The pain of interest rates will also continue as the central bank wields its monetary policy stick to beat inflation back down to its preferred two to three per cent target band.
"Every extra dollar Australians have to find to service the mortgage is a dollar that can't help meet the high costs of other essentials," Dr Chalmers said on Thursday.
But he also said this once-in-a-generation challenge also presents a once-in-a-generation opportunity.
"(It offers) the opportunity to build a better future," Dr Chalmers said, where the link between hard work and decent wages is restored and Australia makes more goods of its own.
"We have it within us to stare down these threats, steer our way through this difficult period, and seize the opportunities of this new age."
Treasury has now downgraded its key economic forecasts for inflation and growth.
Inflation is expected to spike at 7.75 per cent by the end of the year, leapfrogging earlier forecasts by a significant margin.
It is then forecast to fall to 5.5 per cent by mid-2023, 3.5 per cent by the end of 2023, and 2.75 per cent by mid-2024.
"In the meantime, higher interest rates, combined with the global slowdown ... will impact on Australia's economic growth," Dr Chalmers said.
"A key part of this weaker growth outlook is due to weaker consumption."
Economic growth forecasts for 2021/22, 2022/23 and 2023/24 have been pared back by half a percentage point, culminating in a low of two per cent in the next financial year.
Based on these forecasts, real wages are expected to start growing again in 2023/24.
While Dr Chalmers' statement did not focus on budget forecasts - he is saving that for his budget on October 25 - he did indicate hard decisions are coming.
"The budget we inherited is bursting with waste and rorts, booby-trapped by expiring measures, and burdened by long-term demographic challenges that come with critical and necessary spending," he said.
Dr Chalmers said Labor had inherited a "trillion-dollar handicap" in government debt, and the pressures on the budget were striking.
"The debt burden left to us - the highest level as a share of the economy since the aftermath of the Second World War, with deficits stretching beyond the decade - is growing heavier because of the impact of higher interest rates on repayments," he said.
Interest payments on government debt will outstrip spending on the NDIS, aged care and hospital funding.
"For these reasons, our government must make the hard decisions necessary for responsible budget repair," Dr Chalmers said.
Shadow treasurer Angus Taylor said his counterpart had no plan to help Australians with rising living costs.
Business groups said Dr Chalmers' update was sobering and stark, coming ahead of the budget.
"More than ever, we cannot allow fiscal, monetary and wages policy to work against each other as we navigate what are clearly challenging times," Australian Industry Group CEO Innes Willox said.
Economists agreed the forecast revisions weren't surprising, given the global economic headwinds hitting Australia.
8°C