My Blog

Author: Greg Jericho

  • The Reserve Bank needs to watch that it doesn’t push the economy off a cliff

    But as Labour Market and Fiscal Policy Director, Greg Jericho, notes in his Guardian Australia column, the latest monthly inflation figures out yesterday suggest that maybe the peak could be lower than anticipated.

    While the monthly figures can be a little erratic, they do closely align with the quarterly “official” CPI figures and in October the ABS estimates that annual inflation growth fell from 7.3% to 6.9%. Better still this makes 4 months in a row where inflation has remained around 7%, rather than increasing quickly as it has since the middle of last year.

    Combined with the latest Retail Trade figures released this week which showed the dollar amount spent in the shops fell in October, and the volume of spending falling even faster, there are solid signs that the interest rate rises are having an impact.

    This means the Reserve Bank needs to be very cautious as much of the impact of the rate rises from September October and November has yet to flow through into the data. And because the rates of existing mortgages take longer to rise than do rates for new home loans this also means that even were the RBA to halt rate rises, for most mortgage holders rates will still be about to rise over the next few months.

    The IMF, OECD, Treasury and the RBA itself all forecast a sharp slowing of Australia’s economy next year and into 2024. The rationale has been that this is the cost of needing to reduce inflation, but the central bank needs to be very careful that it does not commit overkill. With the economy and consumer spending already slowing, and inflation showing some good signs that growth is no longer increasing at a rapid rate, the RBA should strongly consider not increasing the rate next week in its final board meeting of the year.

    The post The Reserve Bank needs to watch that it doesn’t push the economy off a cliff appeared first on The Australia Institute's Centre for Future Work.

  • Rough times ahead for Australia’s economy as oil, gas and coal companies celebrate

    As Labour market and Fiscal Policy Director, Greg Jericho, notes in in his Guardian Australia column, the OECD predicts in both 2023 and 2024 Australia’s economy will grow by less than 2%. In the past such weak growth has been associated with recessions. And while a recession is not predicted, unlike for the UK and Germany, the OECD also notes the risks that lie ahead.

    One major problem is that most nations around the world are lifting interest rates to attempt to slow their economies and thus reduce inflation. The OECD notes however that when nations act in concert the impact of higher interest rates on slowing the economy is greater, while the impact on slowing inflation is weaker.

    Given Australia has a higher proportion of mortgage holders with variable rates this increases the risk that higher interest rates will slow our economy more than in other nations, and still have less impact on inflation.

    But one sector of the economy are rejoicing at the current conditions that are causing the rising inflation – energy companies.

    The OECD notes that the share of GDP being spent on energy by OECD nations is higher now than it was during the OPEC crisis in 1974 and 1980. The evidence again is clear that a windfall profits tax should be levied on coal, oil and gas companies who a reaping massive profits while the cost of living rises sharply for households.

    The post Rough times ahead for Australia’s economy as oil, gas and coal companies celebrate appeared first on The Australia Institute's Centre for Future Work.

  • Wages growth improves but real wages fall at a record rate

    This growth is very welcome. It highlights that far from wages driving inflation, wage growth is only now beginning to grow at a pace that would be expected given the low level of unemployment. But as Labour Market and Fiscal Policy Director, Greg Jericho notes in his Guardian Australia column, while the level of wage growth we are seeing remains well below what would have been expected in the past with a 3.5% unemployment rate.

    The strong growth came mostly from the private sector through a combination of new financial year individual contracts and the 5.2% minimum wage increase.

    But even this is not enough to prevent real wages from falling for the 9th straight quarter. For more than 2 years now prices have been rising faster the wages. It has seen real wages fall back to 2011 levels after a 4.6% fall since September 2020.

    The figures show that greater bargaining power is required for workers as they continue to lose out. The fastest wage growth for a decade should not see the biggest fall in real wages on record.

    We know that greater enterprise bargaining producers better wages growth. That business groups are so against the provision in the Fair Work Amendment Bill demonstrates how worried they are about the ability of workers to have increased ability to bargain.

    Profits have been growing faster than inflation, but wages are not.

    The latest wage growth figures are pleasing to see, but they also demonstrate the challenges ahead, and just how greatly workers’ living standards have been hit by price rises that they did nothing to cause.

    The post Wages growth improves but real wages fall at a record rate appeared first on The Australia Institute's Centre for Future Work.

  • Gas companies are profiting off of human misery – we need a windfall profits tax

    But none of these profits have come from either management decisions or productive investments. The price rise has not come from any economic improvements. No, they have come only from an illegal invasion that is causing great human misery.

    Labour market and fiscal policy director Greg Jericho notes research suggests that the gas sector has accrued around $26bn in profits due to price rises affected by the Russian invasion. He argues that all of these profits should be garnered in taxation – a view that echoes that of former Treasurer Secretary Ken Henry.

    This revenue would be enough to cover the cost of rewiring the nation and greatly assist the tradition to renewables.

    But the problem of revenue are much deeper than the need for a windfall profits tax.

    Jericho’s analysis of industry data reveals that the industry pays much less company tax relative to production than it did in the past.

    Had the industry paid the same level of company tax relative to revenue that is had in the decade prior to the opening of the Gladstone port, in 2019-20 alone, an extra $9.1bn in tax revenue would have been raised.

    Oil and gas are Australia’s resources. Not only are their emissions causing climate change but the profits are largely headed overseas, and more than in the past not flowing through into taxation.

    As Australians demand better and wider government services, and the costs of dealing with climate change grow ever higher, we need to ensure the fossil fuel companies pay their rightful share.

    The post Gas companies are profiting off of human misery – we need a windfall profits tax appeared first on The Australia Institute's Centre for Future Work.

  • With household incomes set to fall, we need to think about what matters in the economy

    As Labor Market and Fiscal Policy Director Greg Jericho notes in his Guardian Australia column the Reserve Bank in last week’s Statement on Monetary Policy, has forecast GDP growth to slow to levels normally associated with recessions – even if the RBA is not actually forecasting a recession.

    However, in one area the RBA is not hedging at all – that of real household disposable income. This measure, which essentially examines the living standards of the average household, is forecast to decline at a pace as bad as any experienced in the past 60 years.

    While a fall in household incomes was always expected given the abnormal level of stimulus that occurred during the pandemic, the fall is predicted to be much greater than just going back to where we were. The Reserve Bank predict incomes will fall well below the pre-pandemic trend level.

    That such a drastic fall has received little coverage highlights that the orthodox commentary and debate around the economy largely focuses on aspects that minimise workers and households in place of corporations and the “broader” economy of GDP.

    The cost of taming inflation is too often discussed in terms of whether it will send the economy into a recession, without examining if that measure misses the real-life experience of most people.

    If the RBA forecast comes true, inflation will have been brought back to the RBA target, GDP will have kept growing, but household living standards will have plunged.

    The post With household incomes set to fall, we need to think about what matters in the economy appeared first on The Australia Institute's Centre for Future Work.

  • Would further interest rate rises do more harm than good?

    Over the past year, the main driver of inflation has been house prices accounting for a quarter of the 7.3% rise in the CPI. And yet we know that house price growth is now either slowing dramatically or even falling in some areas. The RBA has also noted that commodity prices are falling and supply-side issues are being dealt with and that these aspects, which are not influenced by interest rates, will reduce inflation next year.

    At the same time, the Reserve Bank continues to sound warnings of a wage-price spiral despite any evidence of such a thing occurring. Indeed the latest CPI figures show that overwhelmingly inflation is driven by the price rises of goods rather than services. This is important because service prices and wages are strongly linked.

    More rate rises will certainly continue to reduce demand in the economy as the cost of servicing a mortgage rises. But to what end? The main factors driving inflation are easing, wages have not risen above 3% yet, let alone to a rate anywhere near inflation.

    Even if wages were to rise in line with the historical link with service prices, in September they would have risen 3.5% – a level very much consistent with inflation growth of between 2% and 3%. And yet we know that wages are unlikely to rise that fast. The most recent estimates have it closer to 2.8%.

    The great risk now is that further rate rises will only hurt the economy for little gain and see wages growth stunted before they even get to a level that would see real wages rising.

    The post Would further interest rate rises do more harm than good? appeared first on The Australia Institute's Centre for Future Work.

  • Inflation is soaring and real wages are plummeting

    The biggest concerns about the figures are that inflation is rising fastest for items that are non-discretionary, which means people are unable to avoid paying them – things like food, energy bills, transport costs, and health costs. As Labour market and fiscal policy Director, Greg Jericho, notes in his Guardian Australia column low-middle income earners have to spend a greater share of their income on these items than the average, which means they are hurt hardest.

    The inflation figures also show that while house prices are still rising strongly, the rising interest rates are now starting to truly have an impact on rents. Rental prices across every capital city rose by more than 1% in the September quarter – the first time that has happened since 2007.

    But the real damage of inflation is seen in relation to wage growth. The Reserve Bank estimates that wages in the 12 months to September will have grown just 2.85%. This means people’s ability to buy things with their wages has fallen over 4% in the past year. This is a massive drop in real wages and unfortunately, it is expected to continue at least until the middle to end of next year.

    Right now real wages are back where they were 12 years ago. It is a damning indictment of the Industrial Relations system that has been designed to keep wages down. The Government today has introduced the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Bill 2022 which seeks to provide workers with greater power to bargain for better wages. Given the latest figures, it is clear how urgently the changes are needed.

    The post Inflation is soaring and real wages are plummeting appeared first on The Australia Institute's Centre for Future Work.

  • Families change but the same problems remain

    Labour market policy director, Greg Jericho, notes in his Guardian Australia column that over the past 40 years the make-up of families has shifted dramatically from ones with just one parent working to now more than 70% having both partners in employment.

    While this has mostly come from the great gains made by women since the 1970s that have seen changes to discrimination laws, child care and also societal norms to allow women to participate in paid work even once they have had children, it also highlights the rising cost of living pressures faced by most families.

    The times when a family on one income could be expected to buy a house are long gone. But the decade of weak wage growth and recent falls in real wages make living on one wage even more difficult.

    But the data reveals that men are still more likely to be the sole breadwinner and it confirms the labour force data that shows women remain much less likely than men to work full-time. This is a major reason why women in over 90% of occupations earn on average less than do men. It means that women remain at a heightened risk of income loss in the event of relationship breakdowns that can severely affect their standard of living, especially in retirement.

    The data also reveals that women remain very much the most likely parent in sole-parent families. Given the laws that now see such parents move from the parenting allowance to the lower-paying Jobseeker once their youngest child turns 8, this highlights the precarious nature over 800,000 women face as they attempt to survive as the sole parent.

    The post Families change but the same problems remain appeared first on The Australia Institute's Centre for Future Work.

  • With a global recession looming the cure of inflation looks to be worse than the disease

    As policy director, Greg Jericho, notes in his Guardian Australia column, the outlook is not much better for Australia. The IMF is now predicting that in 2023 and 2024 Australia’s GDP will grow less than 2%. Such meagre growth in the past has been consistent with periods of recession.

    The report should serve as a stark warning to central banks around the world that their efforts to limit inflation by sharply raising interest rates is becoming more and more likely to end with a recession and the resultant massive loss of jobs that will follow. Experience from the 1980s and 1990s where similar recessions followed extreme tightening of monetary policy suggests it can take a long time to reverse the damage.

    While the Reserve Bank is somewhat constrained because it needs to be mindful of the rate rises in the USA that weaken the value of the Australian dollar, the IMF report should cause them to weigh much more the costs of sharply slowing growth through interest rate rises.

    We know that current efforts to limit inflation growth are mostly involving workers taking a real wage hit. Having to endure rising unemployment and a recession after 2 years of already extreme falls in living standards would be disastrous, especially while profits continue to rise.

    The post With a global recession looming the cure of inflation looks to be worse than the disease appeared first on The Australia Institute's Centre for Future Work.

  • The UK shows how bad the Stage 3 tax cuts will be

    Fiscal Policy Director, Greg Jericho, notes in his Guardian Australia column that there are big lessons for Australia.

    The Stage 3 tax cuts are a case of terrible economics masquerading as a growth strategy. Trickledown economics does not work, never has, and this week we have discovered that even the markets agree.

    Rather than destroy your tax base, governments need to care about sustaining a broad revenue base that works to reduce inequality and fund services and investments that drives productivity and helps those who most need it.

    Trickledown economics has never worked and was always just fraudulent spin designed to hide its real aim of giving rich and powerful people tax cuts at the expense of others.

    This week has shown that no one even believes the lie anymore.

    The post The UK shows how bad the Stage 3 tax cuts will be appeared first on The Australia Institute's Centre for Future Work.