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The Glaring Reason Why Morrison's Hopeful Deficit Targets Will Never Be Realised

Scott Morrison's rose-coloured labour market assumptions will be sabotaged by his own government's war on workers and wages.

10/05/2017 1:36 PM AEST
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"Even as wage growth plumbs new depths, the Coalition doubles down on its aggressive efforts to suppress wages and reinforce employer power in the labour market."

The Coalition government has a contradictory attitude toward Australian workers and the wages they earn. On one hand, they are consistently antagonistic to the institutions that support wages and distribute income more equally: such as minimum wages, unions, and pay equity.

These traditional wage-boosting policies conflict with the Coalition's business-friendly vision of economic progress; after all, anything that cuts business costs should contribute to trickle-down growth. But when it comes time for workers to pay their taxes (and for the Treasurer to table his Budget), suddenly the attitude shifts. Now, the higher wages go, the better.

In short, like recent musings about "good debt" and "bad debt", the government has a two-sided view. Wages that get taxed and contribute to deficit reduction are good. But wages that empower workers and impose costs on business are bad.

In reality, of course, the government can't have it both ways.

Australian wages are experiencing unprecedented weakness -- and the scale of the problem is worse than usually reported. There are several different ways to measure labour incomes. The most common, called the wage price index, is meant to capture changes in a weighted composite measure of hourly pay -- sort of like the consumer price index, except for wages.

On Budget night, however, suddenly wage growth is rehabilitated as a cause for celebration, and a source of fiscal salvation. Government modelers waved their magic wands, and suddenly Morrison is now counting on a dramatic and positive rebound in wage growth to power his deficit reduction timetable.

It's been inching along at a record-slow pace: just 1.9 percent growth over the latest year (compared to over 4 percent in the mid-2000s). Since that's slower than inflation (currently just over 2 percent), that means the purchasing power of a typical hour's labour is shrinking.

But the wage price index only tells part of the story. Higher hourly wages won't translate into higher incomes if workers can't get enough hours of work. And that's exactly what's been afflicting millions of Australian workers.

Part-time work accounts for over 60 percent of all new jobs created in the past two years, and a record number of Australians (over 1.1 million) are working fewer hours than they need. So average weekly earnings (equal to hourly wages times the number of hours worked) have been growing even more slowly: just 1.5 percent over the past year.

Finally, when we consider the inadequate pace of job-creation, the outlook for total wages and salaries paid in the economy is even worse. For all three reasons -- poor job-creation, slow growth in hourly wages, and inadequate hours -- total labour compensation grew more slowly last year than any time since the Global Financial Crisis. In fact, aggregate wages actually shrank in the fourth quarter of 2016, even as GDP (and company profits) grew impressively.

Morrison himself has acknowledged the negative impact of wage stagnation on the government's bottom line, saying he is "very concerned" about how poor wage growth is affecting government revenues. But that won't convince his government to relax its hostility to the precise policies that would help wages recover.

If anything, even as wage growth plumbs new depths, the Coalition doubles down on its aggressive efforts to suppress wages and reinforce employer power in the labour market. Witness its endorsement of the big cut in penalty rates for Sunday and holiday workers, its opposition to a real increase in the minimum wage, and its continuing crusade to criminalise union activity (not just strikes, but even bargaining on mundane matters like training, overtime and safety).

On Budget night, however, suddenly wage growth is rehabilitated as a cause for celebration, and a source of fiscal salvation. Government modelers waved their magic wands, and suddenly Morrison is now counting on a dramatic and positive rebound in wage growth to power his deficit reduction timetable.

In contrast to stagnant weekly earnings (and falling aggregate compensation), Morrison's Budget is banking on a steady acceleration of wage growth. In the first year of his budget he expects hourly wages to rise 2.5 percent, accelerating to 3.75 percent by the fourth year. Total wage income (which is the base for income taxes, the GST, and more) is assumed to be even more ebullient: up 3.5 percent in the first year, accelerating to over 5 percent annual growth by the fourth (see graph).

Centre for Future Work

This wage expansion would certainly help Morrison's bottom line: painlessly pumping billions of additional revenues into Commonwealth coffers, on the strength of new household incomes. It would also help Australian families, grappling with record personal debt (four times larger than Commonwealth debt) and sky-high housing costs.

But this happy result won't happen by assumption. It will only happen if the government recognizes that workers need help to win a fair share of the GDP they produce -- and then underpins their efforts with wage-friendly policies and labour market institutions.

In his budget and recent comments, Scott Morrison has acknowledged the downside of today's precarious, austere labour market: not just for the economy, but for his own budget. And his projections confirm that the key to deficit reduction lies in putting Australians back to work in secure, well-paying jobs.

In the real world, however, his rose-coloured labour market assumptions will be sabotaged by his own government's continuing war on workers and wages. And that's one important reason why his hopeful deficit targets will not be realised.

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