The core of the Federal Government’s election budget is a belief that not only will the revenue boost that emerged late last year will continue into 2019-20, but that more importantly wage growth will wake up and surge over the next two years, with the rise starting in the next few weeks.
That optimism is contrary to the view expressed last week in Adelaide by Reserve Bank Governor, Phil Lowe who saw “a gradual pick-up in wages growth, a gradual lift in inflation, and a gradual reduction in the unemployment rate.”
The budget papers shows the Turnbull government expects wages to rise by 2.25% in the year to July, up from the current rate of 2%, before growing sharply to 3.25% by 2019-20.
The government has stuck with its mid-year economic update last December of 2.25% for the year to this June when it cut its forecast for the wage price index forecasts from last year’s budget’s estimate of 2.5%) — it still expects wages to rise 2.75% next financial year and then start growing by 3% and above following that.
That could be a heroic assumption and in fact we will get a timely update about that with the Wage Price Index for the March quarter out later this morning. Some economists forecast a rise to 2.21% or 2.2% – others say no change.
And there are doubters – RBA Governor Phil Lowe said in a speech in Adelaide last week that workers should prepare for wage growth to stay around 2% for some time yet, warning homeowners loaded with debt that there will be a rise in interest rates when conditions begin to return to normal.
“Increases in wages of around 2 per cent have become the norm in Australia, rather than the 3–4 per cent mark that was the norm a while back,“ Dr Lowe said last week.
There’s an $140 billion of extra spending over the next few years in the budget, tax cuts, a crackdown on the black economy and cash and more.
The return to surplus has been brought forward a year, with a $2.2 billion surplus forecast for 2018-19 and a more substantial $11 billion in 2020-21, while this year’s deficit has been significantly trimmed to just $14.5 billion.
There’ll be a immediate tax cut of around $500 a year, or $10 a week for average wage earners; we’ll have to wait until 2022-23 for more substantial tax cuts driven by increases in tax thresholds and the eventual abolition of the 37% tax level.
There’ll also more money in urban and regional infrastructure investment, as already announced ahead of the budget, with a number of new road and rail projects and a new $1 billion urban congestion fund designed to address metropolitan bottlenecks.
But can wages growth reignite as quickly as the budget forecasts?
It’s the core policy of the budget depends. But offsetting that is the slowing growth rate of job creation – the budget admits that labour market growth will slow to 1.5% from 2.75% in the year to June, unemployment will only fall to 5.25% by June next year (as the Reserve Bank has already forecast) from 5.6% at the moment inflation will rise slowly to 2.25% by June next year from 2% this year and nominal GDP will slow from 4.25% this year to 3.75% in 2019-20.
In fact the pace of job creation has slowed from around 3.3% late last year to 3% now and is forecast to go lower.
Nominal GDP growth is the best indicator of how much revenue the budget could bring in and after the 5.9% in 2016-17, the slowdown is palpable, and yet the Treasurer has found tens of billions of dollars more to throw at voters.
And over at the Reserve Bank, they believe it will all be ‘gradual’, especially wages.
"As the labour market tightens, wages growth is expected to pick up gradually. The wage price index measure of wages growth, which abstracts from compositional change, has increased a little but remains low. Broader measures of labour income growth have, as noted above, been subdued. The Bank’s liaison suggests that a higher share of firms are now expecting a pick-up in wages growth over the year ahead, although most still expect little change,” the bank said in its second Statement of Monetary policy for 2018 last Friday.
Overall economic growth is expected to lift from the lacklustre rate of 2% in 2017 to 3% by 2019-20.
The March retail sales figures yesterday were a surprise (and no doubt for the government) – no growth month on month and a 0.2% lift in seasonally adjusted volumes for the quarter, which points to another quarter of weak household spending.
That’s what Dr Lowe was saying in his remarks in Adelaide a week ago:
“While low growth in wages has helped boost employment, it has also put the finances of some households under strain, especially those who borrowed on the basis that their incomes would grow at the old rate," he said. "Perhaps more importantly, sustained low wages growth diminishes the sense of shared prosperity that we have in Australia."
The budget predicts that could be about to get worse as banks tighten their belts. "Risks remain around future household consumption and saving behaviour but this has been the case for several years and the household sector has shown resilience over this time," the budget’s economic outlook stated.
"There is also a risk that household spending may be affected by any unanticipated financial conditions, possibly as a consequence of the royal commission." It’s all about wages and in his remarks in Adelaide last week, Dr Lowe used the word ‘gradual’ seven times in describing wage growth, inflation, falling unemployment.
"The other key point is that the progress we are making is only gradual: our central scenario is for a gradual pick-up in wages growth, a gradual lift in inflation, and a gradual reduction in the unemployment rate. While we might like faster progress, it is encouraging that things are moving in the right direction and are likely to continue to do so,“ Dr Lowe said. In contrast the budget sees a rapid growth in wages in the next few months.
