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Category: Opinions

  • Wages are growing solidly but real wages continue to plummet

    The good news of the strongest wages growth since 2012, writes policy director Greg Jericho, in his Guardian Australia column, is tempered by the fact that real wages have fallen back to levels last seen in early 2009.

    The 3.7% growth in the wage price index demonstrates that workers are finally seeing some return for the tighter labour market in which unemployment is at around 50-year lows. It also reflects that public servants are also becoming free of the wage caps over the past decade that had purposefully kept wages down.

    In the March quarter for the first time in more than a decade, public-sector wages grew by 0.9%. Private-sector wages have also grown above 0.75% for 4 straight quarters – the first time since September 2012.

    But even with this very good wage growth, workers are seeing their living standards fall. In real terms, wages fell 3.1% in the past year and are now 5.4% below where they were before the pandemic. This destruction of purchasing power will take many years to recover. And it highlights that wages should rise faster than inflation and with workers being the ones who have suffered the most from inflation, they should not be expected to suffer once inflation is back within normal ranges.

    The post Wages are growing solidly but real wages continue to plummet appeared first on The Australia Institute's Centre for Future Work.

  • Don’t worry about a budget surplus, worry about a slowing economy

    The Budget announced this week by Treasurer Jim Chalmers revealed a projected surplus in 2022-23 before returning to a deficit in the future years. In response many commentators and economists have suggested that the budget is therefore expansionary and will fuel inflation. But as policy director, Greg Jericho notes in his Guardian Australia column given the projected slowing economy, if anything the budget should be more expansionary.

    Most of the claims around the budget fueling inflation are based on the movement of the budget from surplus in 2022-23 to deficit in 2023-24. And usually, this would suggest that the government is stimulating the economy. But when we look at the actual figures within the budget, the overwhelming reason for the shift from surplus is due to parameter changes relating to oil, gas, coal and iron ore prices. The spending measures the government is proposing are hardly expansionary at all. Their direct impact on total household income is minimal, and the largest spending is on reducing medical and energy bills rather than directly giving households more money.

    When we look at the forecasts for public demand growth we see a level of expansion that is more akin to an austere budget than one attempting to stimulate the economy.

    But when we also look at the forecasts for economic growth over the next two years we see an economy slowing quite abruptly in a world that is teetering on a global recession. In the past, such weak forecasts for household spending and GDP growth would have seen governments spending more and lifting economic growth.

    This budget appropriately deals with the concerns of inflation by directly lowering the costs of energy and medical bills – it demonstrates that governments do have a role to play in lowering inflation and that it need not be done purely by the traditional view that the government must slow the economy. The economy is already projected to slow, and by this time next year the calls will likely be less about why the budget is not in surplus and more about what is the government doing to simulate the economy

    The post Don’t worry about a budget surplus, worry about a slowing economy appeared first on The Australia Institute's Centre for Future Work.

  • Affordability of a Liveable Jobseeker Payment is a Non-Issue

    Commonwealth on Track for Diminutive Deficit or Surplus in 2022-2023

    In the lead-up to its 2023-24 budget, the Labor Government finds itself in an awkward position, accepting that the Jobseeker payment is “seriously inadequate” and an impediment to regaining work, yet professing that it lacks the financial capacity to afford a meaningful increase anytime soon.

    The Economic Inclusion Advisory Committee’s (EIAC) April 2023 Interim Report recommended raising Jobseeker from 70% of the Pension up to 90%. The current Jobseeker base rate for a single person with no children is $693.10 per fortnight. Lifting it up to 90% of the current Pension payment of $971.50 per fortnight would provide the unemployed with an extra $181.25 per fortnight (or $12.25 per day).

    Labor has baulked at the cost of the EIAC’s Jobseeker proposal. There is speculation that the upcoming budget will include a $50 per fortnight increase in the Jobseeker payment for those over 55 years of age. It is unclear if that increase will apply to everyone over 55 years of age, or just to the 55 to 59 year old cohort who are currently ineligible for the additional $52 per fortnight already available to those over 60 and who have been unemployed for longer than nine months.

    A $3.57 per day rise in the Jobseeker payment for those over 55 years of age (or between 55 and 59) seems rather stingy. One might expect that the plight of the unemployed—among the least well-off and most financially-constrained members of society—would be a high priority in the middle of a cost-of-living crisis.

    Before last year’s election, the Labor party abandoned a previous pledge to raise Jobseeker payments, on concerns about growing Commonwealth government debt. The EIAC then only came about as a concession to gain Senator David Pocock’s support for the Secure Jobs Better Pay Act 2022.

    Labor’s meme of “inheriting a trillion dollar debt that will take generations to pay off” has echoed the Coalition’s 2013 so-called “budget emergency”, also used to blame the preceding government. The nation’s allegedly dire fiscal position was cited by Bill Shorten as justification for not adopting the EIAC’s key recommendations: ‘We can only do what is responsible and sustainable and unfortunately the budget we inherited from the previous government is heaving with a trillion dollars of Liberal debt, so [we] can’t do everything.’

    The strategy of deflecting accountability for policy choices on grounds of fiscal constraint has become less credible, given the robust post-pandemic economic recovery and the boom in commodity prices – all of which has generated large improvements in the Commonwealth government’s fiscal position. As illustrated in Figure 1, the government’s underlying cash deficit for the current financial year (2022-23), once expected to be $100 billion, has shrunk dramatically.

    Sources: Australian Government, Budget Papers, Monthly Financial Statements. Author’s calculations.

    Indeed, the Commonwealth Government’s latest Monthly Financial Statements show that it is on track to post a very small deficit, or even a surplus, for the 2022-23 financial year. As of March 2023 the underlying cash balance (UCB) had improved by $23.3 billion over the estimates in the October 2022-23 Budget. If the year-to-date deficit changes little in the last quarter, and with higher GDP than previously estimated, then the UCB in 2022-23 would come in at a diminutive -0.5% of GDP. That’s insignificant by any meaningful economic standard.

    Further upside is possible. If the average monthly improvement from November 2022 to March 2023 continues in the last quarter of the financial year, the UCB in 2022-23 would be a surplus of $2.8 billion.

    Australia’s public debt load – also measured appropriately as a proportion of GDP (rather than in big scary ‘trillion dollar’ terms) is also modest when compared to the nation’s peers and to its own historical record. Our general government debt (including state governments) is lower than any G7 economy, and half the size of the average for advanced economies. The same cannot be said, however, for Australian households: their debt is higher than any G7 economy, and ranks second (behind only Switzerland) among all industrial countries (see Figure 2).

    Figure 2: Government and Household Debt

    Sources: International Monetary Fund, World Economic Database. Bank for International Settlements, Credit to the Non-Financial Sector.

    Having switched from “opposition mode” into “governance mode,” it makes sense for Labor to start to talk up the nation’s public finances. Such a narrative would be plausible given that Australia’s fiscal position is robust and sustainable: now and into the foreseeable future. That is the current assessment of the International Monetary Fund in its latest Article IV Consultation, amongst others.

    The prospect for further substantial improvement in the UCB over the forecasts – and perhaps even a surplus – should raise expectations about what the government can do to ease cost-of-living pressures. Arguably, however, a liveable unemployment benefit should be prioritised regardless of the economic and fiscal outlook.

    The EIAC’s Jobseeker proposal is estimated to cost $24 billion over four years. Implementing all of the EIAC’s other recommendations brings the cost to $36 billion. The annual cost of the full package would amount, respectively, to just 0.3% of GDP in the next financial year. Such expenditures, while having a diminutive impact on the Commonwealth Government’s fiscal position, would literally transform the lives of the unemployed.

    When all is said and done whether a nation should have a liveable unemployment benefit is a question of principles. There is an obvious option for Labor to allay its worries about the budgetary or inflationary pressures of a liveable Jobseeker payment: namely, jettison the 2024-25 Stage 3 tax cuts, that are estimated to cost $300 billion over the first nine years. Tax cuts that mainly benefit high-income earners make no sense in an economic landscape where over 90% of the pre-tax income gains from growth in national income have in recent experience gone to the highest-income 10% of households.

    The reluctance of the government to discard or redesign the Stage 3 tax cuts is attributed by some to the Labor Party’s pre-election commitments. It remains that the tick boxes for good governance do not include steadfast adherence to suboptimal policy positions. Overseeing regressive tax cuts, while being unwilling to meaningfully improve the lot of the least well-off, has those principles back-to-front.

    Dr Brett Fiebiger is a post-Keynesian economist. His research focuses on macroeconomic policy, growth theory and income distribution.

    The post Affordability of a Liveable Jobseeker Payment is a Non-Issue appeared first on The Australia Institute's Centre for Future Work.

  • The Reserve Bank’s decision to raise rates shows a total lack of coherency

    Yesterday the Reserve Bank shocked markets and most economists by raising the cash rate to 3.85%. But it didn’t just contradict outside observers, it contradicted the views of the RBA board just one month ago when it decided to keep rates steady.

    Policy director Greg Jericho, writes in his Guardian Australia column that in the month since the April RBA meeting data on inflation has suggested faster than anticipated slowing, the economy overall is now expected to slow more quickly, and there is no sign of long-term wages growth rising beyond what would be consistent with 3% inflation.

    And yet despite this, the board decided to raise rates.

    The decision smacks of a board reacting less to economic conditions and more to the recent Review of the RBA which recommended taking the decisions to change rates away from the current board.

    The Reserve Bank suggested a month ago it needed time to pause and review. Nothing in the intervening time has suggested they made a mistake in not continuing to raise rate, and yet the bank seems determined to slow the economy and raise unemployment to 4.5%.

    The bank is so beholden to neo-liberal views of the non-accelerating inflation rate of unemployment that it is determined to keep raising rates until unemployment rises to a level it believes is “full employment”.

    We know the current level of inflation is largely driven by corporate profits and some overhang of supply-side issues and savings from the pandemic/lockdown period. At no point is there any sign that wages are rising in a manner that is fueling inflation and yet the RBA continues to attack inflation like we are experiencing the mining boom of the 2000s which saw wages and jobs grow strongly, rather than the current boom which is seeing profits grow exponentially and real wages plunge .

    The post The Reserve Bank’s decision to raise rates shows a total lack of coherency appeared first on The Australia Institute's Centre for Future Work.

  • Latest inflation figures show the RBA was right not to raise rates in April

    The March quarter consumer price index figures showed a 7.0% annual rise, however as Policy Director, Greg Jericho, notes in his Guardian Australia column, the monthly inflation figures that were also released on Wednesday showed annual growth had fallen to 6.3%.

    This fall was down from a peak of 8.4% in December and is the slowest growth since May last year.

    The figures reinforce the belief that the RBA board was right to ignore the views of many economists both within and outside the Reserve Bank. Not only is inflation falling but the biggest drivers of inflation in the March quarter were in areas with prices mostly determined by governments or in highly regulated sectors such as the gas and electricity markets. There was little sense of prices rising due to excess demand, rather the combination of price setting in the public sector and by commercial companies making use of high world prices for resources and ongoing supply issues in the housing market served to drive nearly two-thirds of the total increase in overall inflation the March quarter.

    Increasing interest rates would have done nothing to lower prices in these areas – indeed in the rental market any further rates rises would likely be just used as reason for increasing rents more.

    The Reserve Bank was right to stop raising rates. Should the slowing of inflation shows signs of ending before reaching the RBA’s target of 3% it can always cut rates then. For now, inflation is falling as hoped and attention must be drawn to those suffering the most from the rising prices – notably low-income households and those paying off a HELP debt that is set to be indexed by 7.1% – well above the current levels of wage growth.

    The post Latest inflation figures show the RBA was right not to raise rates in April appeared first on The Australia Institute's Centre for Future Work.

  • The Stage 3 tax cuts are bad economics combined with terrible politics. They should be dumped.

    During the 2022 election campaign the ALP in a desperate and misguided move to avoid being wedged, agreed to implement the horrendously inequitable Stage 3 tax cuts. But, as Policy Director Greg Jericho writes in his Guardian Australia column agreeing to bad policy in opposition means you own the bad policy in government – except you get no credit for it and all of the blame.

    While the Stage 3 tax cuts have always been wildly expensive and unfair, with around half of the benefit going to the richest 3%, but the removal of the low-middle income tax offset (LMITO) has made them even more unfair and politically foolish for the ALP.

    Because the LMITO was targeted most at those earning between $50,000 and $90,000 and the Stage 3 tax cuts are least targeted towards those people, it means the removal of the $1,500 LMITO for someone on the median income of $65,000 will only be replaced by a $500 tax cut under Stage 3.

    This means the ALP if it continues to implement Scott Morrison’s tax policy will go to the next election in a position where middle-income earners will be paying more tax than they did in 2022 while people on $200,000 will be $9,075 better off.

    That is a weird strategy for a progressive political party to pursue.

    In reality, the Albanese government will get no credit for implementing the Stage 3 cuts and will get all the blame for leaving around 75% of taxpayers worse compared to the last year of the Morrison government.

    It is time to dump the tax cuts and for the Albanese government to deliver policies that it would be proud to defend. Fairer tax cuts, increase Jobseeker, invest in renewables and other vital infrastructure and improve services.

    The post The Stage 3 tax cuts are bad economics combined with terrible politics. They should be dumped. appeared first on The Australia Institute's Centre for Future Work.

  • Wealth inequality across generations will only fuel voter disenchantment

    While income inequality is an often discussed topic, wealth inequality is just as pernicious though often less discussed issue. Worse still the inequality of wealth across generations has lasting impacts for people into retirement.

    Policy director Greg Jericho writes in his Guardian Australia column how economic policies of the past few decades has served to provide those with wealth more of it, while depriving younger people of gaining a foothold that previous generations had.

    The issue is most acute with housing. Housing affability is often debated with some suggesting that because of lower interest rate than in the past owning a home is not as difficult as in the past. But the reality is that the size of the mortgage relative to incomes is so much greater than in the past that even with lower interest rates payments account for much more income than they used to. Whereas for those entering the housing market in the 1980s one incomes was often more than enough, now two incomes is a necessity.

    But what is often forgotten is that while interest rates were higher at times in the 1980s and 1990s those rates fell and with them did the payments all the while incomes rose. As a result those who bought homes in the 1980s and 1990s saw their repayments as a share of income fall to very low levels – levels unheard of now.

    And while the arguments about whether housing is more or less affordable can turn on definitions of affordability, the fact is that for the first time fewer than half of people aged 30-34 own their own home. That’s not through choice, but through the reality of a housing market that is locking out younger people.

    This in turn sees younger generations have less wealth at their age than did their parents and grandparents.

    It is little surprise that Millennials are not becoming more conservative in their voting as they age in the same way that did Baby Boomers and Gen Xers. The wealth inequality will have ongoing repercussions for political parties who have in the past taken it as given that older voters will vote for them.

    The post Wealth inequality across generations will only fuel voter disenchantment appeared first on The Australia Institute's Centre for Future Work.

  • With the impact of rate rises still to come the RBA is wise to pause

    Since April the Reserve Bank has increased the cash rate by 350 basis points from 0.1% to 3.60% – the fastest and largest increase since the late 1980s. But as policy director Greg Jericho notes in his Guardian Australia column, perhaps as much as a third of the rate rises have yet to fully flow through to the economy.

    While the interest rate of new mortgages has risen the full amount, the average rate of all mortgages has only risen around 209 basis points – with many mortgage holders still yet to have their repayments increase due to the rate rates in December, let alone those in February and March.

    The Reserve Bank noted this in its statement and stressed the need to gather more information before deciding whether to increase rates or keep them steady.

    The most recent GDP figures show the economy overall has slowed and the signs of inflation are that the peak has been reached and much like the USA, it is not heading down. While the path to 3% inflation might take some time there seems little sense of long-term expectations rising and the 350 basis points worth of rises makes it clear the RBA is prepared to act if it believes inflation is accelerating.

    The Centre For Future Work has been calling for a pause in the rates and it welcomes this decision by the RBA. There is minimal risk from observing the data after 10 successive rate rises. And workers whose wages have not kept pace with inflation will be relieved that the RBA is paying heed to warnings that slowing the economy too fast in an environment where inflation has peaked only increases the risks of sending the economy into a recession

    The post With the impact of rate rises still to come the RBA is wise to pause appeared first on The Australia Institute's Centre for Future Work.

  • Stop the fear, give workers a fair pay rise

    It took roughly one day after the New South Wales election for conservative media groups to begin spreading fear about union power and public sector wage blowouts. But as labour market policy director, Greg Jericho writes in his Guardian Australia column these fears are massively overblown and also ignore the reality of how much workers have lost out over the past few years.

    In NSW public-sector wages grew just 2.5% in 2022, well below private-sector wage growth in that state and massively below inflation which rose 7.6% in that state last year.

    Public-sector wage caps were notionally introduced to get the budget back into surplus, but that was just a fib – once the budget returned to surplus the caps remained. The purpose of the wage caps has always been to drive down private-sector wage growth, a point made abundantly clear by former Treasurer Matt Kean when he told an audience at a Business NSW function that removing the public-sector wage cap would see their companies “competing for labour against the public service who were paying huge wage increases.”

    But the reality is the wage cap not only keeps private-sector wages down it has smashed the living standard of public sector workers whose real wages are now more than 5% lower than they were 2 years ago.

    The fear of wage rises must stop.

    The post Stop the fear, give workers a fair pay rise appeared first on The Australia Institute's Centre for Future Work.

  • The housing market has cooled, but housing unaffordability remains a long way off

    The most recent data on the value of dwelling around Australia reveals the prices in most capital cities have fallen over the past year and are likely to keep doing so for some months. But the data also shows that housing affordability remains a long way from repairing the decades of damage.

    In his Guardian Australia column, policy director, Greg Jericho, notes that the impact of interest rate rises has definitely caused the housing market to come off the boil. In most capital cities median house prices are now below what they were a year ago. Coming as this does off data suggesting wages are not rising as fast as the Reserve Bank feared, and amid the ructions in the USA financial system after the Silicon Valley Bank collapse, the Reserve Bank certainly has enough reason to not raise rates again.

    But while the fall in house prices does help those trying to buy a home, the decrease in affordability is highlighted by the fact that while house prices are mostly below what they were a year ago, they are well above what they were 2 years ago in all capital cities. And those rises have been well above the growth in wages in that time.

    Jericho notes that in Sydney for example, wages and house prices from 2003-2013 largely rose in line but over the past decade house prices have surged above wages. Had prices instead continued to rise in line with wages the median house price in Sydney would now be $863,000 rather than $1,270,000.

    This disconnect is replicated around the country with house prices being some 60% above what they would have been had they risen along with wages. In Hobart the current median house price of $727,000 is some 133% above the price it would have been had they rinse in line with wages in Tasmania of $297,000.

    This disconnect highlights the need for tax reform of the housing market, an increase in supply including increased median density housing, and especially public housing.

    And above all we need wages to no longer be left behind.

    The post The housing market has cooled, but housing unaffordability remains a long way off appeared first on The Australia Institute's Centre for Future Work.