The Real Consequences of Phony Wage Forecasts
The Commonwealth budget will be unveiled by Treasurer Josh Frydenberg on Tuesday afternoon. It’s top secret until he rises to deliver his budget speech. But we can already predict, with 100% certainty, one key feature of the budget. Without doubt, it will forecast an imminent and substantial acceleration in the pace of Australian wage growth — which has been creeping along at record low rates (of about 2% per year) since 2013.
Nobody will be surprised by this optimistic projection. But nobody will believe it, either. That’s because this will be the sixth consecutive Coalition budget to forecast a happy surge in Aussie pay packets — promised year after year, even as the pace of actual wage increases fell lower and lower.
From its very first budget for 2014–15, the Coalition government argued that low wage growth was a temporary anomaly, and that better times for workers were just around the corner. In each budget, wage increases were predicted to bounce back from depressed levels to 3.5% or higher (in line with pre-2013 experience).
Problem is, there was no basis for those optimistic claims. Governments can’t just “wish” higher wages into existence, by publishing rosy official forecasts. They have to confront the reasons for Australia’s wages crisis — and do something about them. Like raising the minimum wage, to a “living wage” level. Boosting pay equity. Strengthening the awards system. And above all, repairing Australia’s crumbling system of collective bargaining, so that workers can regain a bit of bargaining power to negotiate with their employers.
The graph below illustrates the comedy of errors which has been the government’s wage forecasts. The thick line shows actual wage growth. The lighter lines show the consecutive budget wage forecasts. In each case, wages were foreseen to suddenly rebound from the doldrums, and shoot back up to healthy, normal levels. And in each case, wage increases stayed low — to a large degree because of the government’s own wage-suppressing policies (like strict caps on wage increases for its own employees, underfunding of public and caring services, and continued attacks on union activity and collective bargaining).
These consistent, one-sided errors have not been funny for Australia’s workers. Their wages have grown barely enough to keep up with prices (implying zero growth in real wages). If the government’s optimistic forecasts had actually come true (starting with that first budget in 2014–15), the average full-time worker would be getting $4000 more in annual wages today, than they actually are.
Knowing that another prediction of imminent wage increases will be laughed out of Parliament, the government will now use promises of personal income tax cuts to rekindle hope in a better future — just in time for next month’s election. “We know your wages haven’t been growing as fast as you’d like (or we promised),” the Treasurer might concede. “But we’ll let you keep more of your own money, and that’s just as good.”
Actually, it’s not. It can’t be. It is mathematically impossible for tax cuts to provide the same boost to living standards over time as regular, normal wage increases. First of all, tax cuts have a downside: they inevitably correspond to lost public services, infrastructure, and income supports (that are financed with taxes). So workers don’t end up any better off.
But even measured in terms of disposable cash incomes, wage increases are a far more powerful engine for improving living standards. They deliver a compounded improvement in disposable incomes, year after year — since each year’s wage increase is applied against a larger starting base. That cannot happen with tax cuts: in fact, their savings get smaller over time.
At the Centre for Future Work, we have compared the increases in disposable income resulting from normal wage increases to the “savings” from personal tax cuts that will likely be included in this year’s budget. They are not even in the same league. Just one normal annual wage increase (in the range of 3.5%, as recommended by RBA Governor Philip Lowe) outstrips the value of tax cuts, many times over. But over several years, the value of wage increases speeds far ahead.
For example, a worker earning $60,000 per year would see a $210 increase in disposable income from the likely tax cuts which Mr. Frydenberg will announce on Tuesday. But they would receive around $1400 extra disposable income (almost 7 times as much) from a single year with a 3.5% wage increase. And close to $6000 (over 20 times as much) from 3 consecutive years of normal wage increases.
The maths are undeniable. The only way to sustainably improve Australians’ standard of living is by restoring wage growth to healthy, traditional rates, and allowing workers to share fully in the benefits of the wealth they produce. Gimmicky tax cuts can’t hide the deep and lasting damage done by years of wage stagnation.
Jim Stanford is Economist and Director of the Centre for Future Work. Read his full pre-budget report on wages and taxes, co-authored with Troy Henderson: Wages, Taxes and the Budget: How to Genuinely Improve Living Standards.