Lifting the minimum wage isn’t reckless – it’s what low earners need

Stand by for something “reckless and dangerous”.

That’s what former prime minister Scott Morrison said Prime Minister Anthony Albanese would be if he asked the Fair Work Commission to grant a wage rise big enough to cover inflation. It would make Albanese a “loose unit” on the economy.

Yet Albanese and his industrial relations spokesman Tony Burke are preparing to do just that ahead of the commission’s deadline of June 7, in time for the increase to take effect on July 1.

The increase would amount to a dollar an hour, lifting Australia’s minimum wage from A$20.33 an hour to A$21.36. New Zealand has just lifted its minimum from NZ$20.00 to NZ$21.20.

Despite what Morrison and his team said about in the campaign about previous governments avoiding recommending specific recommendations, Morrison’s predecessors Fraser, Hawke and Howard did it for years, and state governments are still doing it.

Back in March, when Australia’s official inflation rate was 3.5%, before it had climbed to 5.1%, Victoria recommended 3.5%.

And the government of which Morrison was a part wasn’t shy about telling employers what to pay.

In 2014 its employment minister Eric Abetz counselled “weak-kneed” employers against “caving in” to union demands, setting off a “wages explosion”.

Of course, there’s no guarantee that the Fair Work Commission will heed the new government’s push for a $1 an hour increase.

The commission is perfectly capable of determining what wage rises to grant, after taking into account all submissions. In all but one of the past ten years it has granted more than the prevailing rate of inflation at the time.

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Whether it will do that again remains to be seen next month. But to get ahead of that announcement, here’s how the commission explained its thinking in its most recent decision in June last year.

Most workers aren’t on awards

In ruling on a minimum wage increase, what matters most to the commission is employers’ ability to pay (the profits share of national income had climbed during five years in which the wages share had shrunk) and the living standards of Australia’s lowest paid.

Only the lowest paid 2% of workers get the national minimum wage, and a further 23% get the minimum award rates the commission adjusts at the same time.

Last year, the commission found some households on the minimum wage had disposable incomes below the poverty line, and it was reluctant to see them fall further.

It was also reluctant to grant a flat dollar increase that would boost the position of low earners relative to higher earners, saying past flat dollar increases “compressed award relativities and reduced the gains from skill acquisition”.

A percentage rather than a flat increase would particularly benefit women, because, at higher levels, women were “substantially more likely than men to be paid the minimum award rate” and less likely to be paid via contract or an enterprise bargain.

In deciding what percentage increase to award, it gave considerable weight to the most recent increase in the consumer price index (CPI). Right now, that’s 5.1%.

The Commission dismissed suggestions, put forward again in the context of the latest 5.1% increase in the CPI, that it should use the separately calculated “employee living cost” index, which has come in at 3.8%.

The employee living cost index has been climbing by less than the CPI because it includes mortgage rates, which have been falling, whereas the CPI does not.

Low earners aren’t mortgagees

The commission made the point that low-paid workers were less likely to own a home than higher-paid workers, making the CPI a better measure for them.

But not a perfect measure. The Australian Bureau of Statistics has begun dividing the CPI into “discretionary” (non-essential) purchases and other, essential, purchases.

The commission says low income households spend more of their income on essentials than higher earning households, making “non-discretionary” inflation especially relevant. Non-discretionary inflation is running at 6.6%.

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The commission rejected suggestions the increase it proposed could push Australians out of work or make it harder for young Australians to find work.

Which isn’t to say that couldn’t happen. During the 1970s and 1980s high wage growth fed both high inflation and high unemployment, so-called stagflation.

Wages aren’t destroying jobs

But back in the 1970s and 1980s, wages were climbing faster than the combination of price growth and productivity growth, making increases hard for employers to pay. Of late, the profits share of national income has been climbing rather than falling, giving employers an increasing ability to pay.

And whereas back then most workers were paid via the awards set by the commission, today most are paid via enterprise agreements negotiated firm by firm, meaning increases in awards only flow through to workers on agreements to the extent that they and employers are able to agree on them.

And what the government is proposing is not an increase markedly greater than inflation, of the kind that fed stagflation though the 1970s and early 1980s, but an increase in line with prices – even though employers might be able to pay more.

If what the government is proposing strikes the commission as reckless or dangerous, it will reject it. The increases it has granted to date have added to neither unemployment nor (particularly) to overall wages growth.

Low earners versus homeowners

The commission will certainly reject any suggestion that it ignore the next increase in compulsory superannuation contributions, due to lift employers’ contributions from 10% of salary to 10.5% in July.

The contributions are a cost to employers and a benefit to employees. It has taken them into account in the past.

And it should reject, as repugnant, Morrison’s suggestion that it should clamp down on wage rises for Australia’s least paid, so homeowners can continue to enjoy historically unprecedented low mortgage rates.

Homeowners, almost all of them, are much better off than Australia’s least paid.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Elections used to be about costings. Here’s what changed

The last week of campaigns used to be frantic, behind the scenes. In public, right up until the final week, the leaders would make all sorts of promises, many of them expensive, with nary a mention of the spending cuts or tax increases that would be needed to pay for them.

Then, in a ritual as Australian as the stump jump plough, days before the vote the leaders’ treasury spokesman would quietly release pages and pages of costings detailing “savings”, which (astoundingly) almost exactly covered what they were spending, meaning they could declare their promises “fully funded”.

It was a trap for oppositions. Whereas governments seeking reelection could have their savings costed by the enormously-well-resourced departments of treasury and finance before campaigns began, oppositions were forced to rely on little-known accounting firms with little background in government budgeting.

The errors, usually not discovered until after people voted, were humiliating.

Costings time was danger time

In 2010, a treasury analysis of the opposition costings prepared by the Coalition’s treasury spokesman Joe Hockey and finance spokesman Andrew Robb found errors including double counting, booking the gains from a privatisation without booking the dividends that would be lost, and purporting to save money by changing a budget convention.

The Gillard government evened the playing field in 2011 by setting up an independent Parliamentary Budget Office to provide oppositions with the same sort of high-quality advice governments got, helping ensure they didn’t make mistakes, and enabling them to publish the advice in the event of disputes.

Ahead of the 2019 election the PBO processed 3,000 requests, most them confidential.

This means you should take with a grain of salt Treasurer Josh Frydneberg’s assertion that Labor has “not put forward one policy for independent costing by treasury or finance” – these days opposition costings are done by the PBO.

But the PBO didn’t end the costings ritual. In fact, it institutionalised it.

The ritual derives from the days when, on taking office, new governments proclaimed themselves alarmed, even shocked, at the size of the deficits they inherited. From Fraser to Hawke to Howard, they used the state of the books they had just seen to justify ditching promises they had just made.

The Charter of Budget Honesty improved things

Howard applied a sort-of science to it, memorably dividing promises into “core” and, by implication, “non-core” in deciding which to ditch.

Then that game stopped. Since 1998, Howard’s Charter of Budget Honesty has required the treasury and department of finance to publicly reveal the state of the books before each election, making “surprise” impractical.

But the legislation that set up the Parliamentary Budget Office entrenched the costings ritual by requiring each major party to hand it a list of its publicly announced policies by 5pm on election eve, in order for the PBO to publish an enduring account of their projected impact on the budget.

Which is why the parties have remained keen to get in early and find savings.

Sometimes, savings backfire

In 2016 this led to a human and financial tragedy. Three days before the election Treasurer Scott Morrison announced what came to be called “Robodebt” as part of a savings package designed to to offset spending. It was to save $2 billion.

Five years later in the Federal Court, Justice Bernard Murphy approved the payment of $1.7 billion to 443,000 people he said had been wrongly branded “welfare cheats”, ending what he called a “shameful chapter” in Australia’s history.

The costings document the Coalition released on Tuesday is less dramatic.

It says it will offset $2.3 billion in new spending over four years with a $2.7 billion boost in the efficiency dividend it imposes on departments to restrain spending.

Labor abandons the game

Labor will release its costings on Thursday, and here’s what’s changed. It says it won’t offset its spending.

Shadow Treasurer Jim Chalmers wants to be judged not on the size of spending, but on what the spending is for.

The most important thing here is not whether deficits are a couple of billion dollars each year better or worse than what the government is proposing. What matters most is the quality of the investments.

He points to the hundreds of millions borrowed to support the economy during the pandemic, the $20 billion he says was spent on companies that didn’t need it, and the $5.5 billion spent on French submarines that now won’t be built.

In sporting parlance, Chalmers has walked away from the field.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Stand by for the oddly designed Stage 3 tax cut that will send middle earners backwards and give high earners thousands

The Reserve Bank is pushing up interest rates to take money out of our hands.

The first increase in the current round will add about A$65 a month to the cost of paying off a $500,000 mortgage.

The second will add a bit more. If, as the bank’s forecasts assume, there are another four such increases this year, that’s a further $275 a month, and so on.

The point, in the words of the Reserve Bank Governor Philip Lowe, is to “slow the economy, to get things back onto an even keel”.

In a helpful video, the Governor explains that rate rises take money out of mortgagee’s hands directly, make it harder to borrow, make people “feel less happy”, and hit the prices of houses and other assets so people “don’t feel as confident and they don’t spend as much”.

Which is fair enough, if the Governor decides that’s what’s needed.

So why on earth are we scheduled to do the opposite?

As the RBA takes, the government will give

From mid-2024 the government will put an awful lot of money in to people’s hands. Stage 3 of the income tax cuts will cost $15.7 billion in its first year.

By way of comparison, that’s almost as much as the $16.3 billion will be spent on the Pharmaceutical Benefits Scheme that year, and more than the $10.5 billion that will be spent on higher education.

That it is mistimed ought not be a surprise. Stage 3 was legislated in 2018.

The treasurer at the time, back in the year Grant Denyer won the Gold Logie, was Scott Morrison, who said he was legislating Stages 1, 2 and 3 of the tax cuts all at once (and Stage 3 six years ahead of time) in order to provide “certainty”.

A tax switch settled years ahead of time

So uncertain was the treasury about the future back then that it only forecast the economy two years ahead, and produced less reliable and more mechanical “projections” for the following two years, neither of which extended to 2024.

At the time the Reserve Bank had been cutting interest rates (12 times in a row), at the time inflation was 1.9%. It looked as if the economy could do with a bit of a boost, albeit a boost which wouldn’t be delivered for six years.

In saying that things have changed, it’s fair to also acknowledge that things might change back again. We can’t be sure what will be needed in 2024, although we can be a good deal more sure than we were back then.

Backed by Labor

The Stage 3 tax cuts were opposed by Labor at first, but are now backed by Labor treasury spokesman Jim Chalmers after “weighing up a whole range of considerations”.

They are overwhelmingly directed at high earners.

Of the $184.2 billion the parliamentary budget office believes Stage 3 will cost in its first seven years, $137.9 billion is directed to Australians on $120,000 or more.

Part of Stage 3, the part that cuts the rate applying to incomes over $45,000 from 32.5 cents in the dollar to 30 cents, will benefit most taxpayers.

The bigger part extends that low rate all the way up to $200,000, abolishing an entire rung of the tax ladder paid by the highest earners.

For those very high earners, the part of their income that was taxed at 37 cents will be taxed at 30, as will part of the rest that was taxed at 45 cents.

A politician, on a base salary of $211,250, will get a tax cut of $9,075. A registered nurse on $72,235 will get a tax cut of $681 according to calculations prepared by the Australia Institute.

More broadly, a typical middle earner can expect $250 a year, whereas a typical earner in the top fifth can expect $4,230 according to a separate analysis by the parliamentary budget office.

The fate of the middle earner will be made worse by the loss of the $1,000+ middle income tax offset which wasn’t extended in this year’s budget, sending the middle earner backwards.

The typical female earner will go backwards too after the loss of the offset, getting half as much as the typical (higher earning) male, according to the budget office.

A tax switch that’ll send some backwards

The logic is (or was) that middle and higher earners would need big tax cuts to compensate them for bracket creep (which is wage rises pushing them into higher tax brackets), though there’s been a lot less of that than expected.

Were it not for the fact that Labor supports and will implement it, Stage 3 would provide a stark contrast with Labor leader Anthony Albanese’s approach unveiled on Tuesday of asking the Fair Work Commission to lift the minimum wage to compensate for inflation.

Such an increase would go to low wage earners first, and flow through more slowly to award wages. It would give the greatest help to those who needed it the most when they needed it, rather than years in the future when things might be quite different.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Why the RBA should go easy on interest rate hikes: inflation may already be retreating and going too hard risks a recession

One of the stranger things about the Reserve Bank’s announcement of why it’s lifting interest rates by 0.25 percentage points is that it suggests inflation will come down by itself.

“A further rise in inflation is expected in the near term,” the RBA says, “but as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2-3%.

So why raise rates now, for the first time in more than a decade? The bank says it is about "withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”, which is fair enough.

But our latest burst of inflation is weird, and resistant to rate hikes. If the Reserve Bank isn’t careful, too many more rate hikes like this might help bring on a recession.

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Labor’s Anthony Albanese is as good as correct when he says “everything is going up except your wages” – not completely correct, because wages are going up, by a minuscule 2.3% per year on the official figures; but essentially correct, because when it comes to prices, almost every single one is going up.

Every three months the Bureau of Statistics prices around 100,000 goods and services. They account for almost everything we buy, the exceptions including illegal drugs and prostitution, where pricing would be “difficult and dangerous”.

Among the types of bread the bureau prices are rye, sliced white, and multigrain, from all sorts of stores in every capital city. Where the bureau doesn’t price a type of loaf, it is a fair bet its price moves in line with the loaves it does price.

Then it groups these 100,000 or so prices into “expenditure classes”, 87 of them. “Bread” is one, “breakfast cereals” is another. Furniture and rent are two others.

Rarely do the expenditure classes move as one. Typically, only 50 or so of the 87 climb in price. But in the March quarter just finished, an astounding 70 climbed in price; according to Deutsche Bank economist Phil O'Donaghoe, that’s the most ever in the 72-year history of the consumer price index.

And the prices that climbed most – by far – were the ones we had little choice but to pay.

Necessities up, treats not as much

The bureau divides the 87 classes of goods into “non-discretionary” and “discretionary”.

It classifies bread as non-discretionary, biscuits as discretionary; petrol as non-discretionary, new cars as discretionary, and so on.

In the year to March, non-discretionary inflation (the price rises we can’t avoid) was a gargantuan 6.6% – well above the official inflation rate of 5.1%, and the highest in records going back to 2006.

Discretionary inflation – the price rises on the treats we splurge on if we’ve got the money – was only 2.7%.

Not since 2011 has the gap been that wide, which makes this inflation unusual.

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While price rises are extraordinarily widespread – because most things need diesel to move them, and we were hit with floods, COVID-linked supply problems and the invasion of Ukraine all at once – they don’t seem to be the result of splurging.

These price rises are more like a tax.

The usual response to the usual hike in inflation is to hike interest rates. It’s a way to take away access to cash and push up mortgage and other payments so people have less money to spend and push up prices.

But this hike in inflation is doing that by itself, as the government recognised in the budget by handing out $250 cash payments to compensate.

These price rises are like a tax

If the big price rises are beyond our control and making us poorer, hiking interest rates to make us poorer still, in the hope we will splurge less on things whose prices we can influence (and whose price rises are small) might not achieve much.

Done repeatedly, the Reserve Bank could push up interest rates because inflation is high, discover inflation is still high, push interest rates higher in response, notice inflation is still high, push interest rates even higher in response… and so on, until it had brought on a recession.

A recession is already a risk with these sorts of price rises. If big enough, they can force consumers to cut other spending to the point where the economy stagnates and creates unemployment in the face of inflation – so-called “stagflation”.

Another response would have been to wait. Seriously. The floods, invasion and supply problems pushing up prices in recent months are likely to pass, pushing down inflation and pushing down a lot of prices.

Inflation might have already fallen

It might have already happened. The oil price has fallen 11% from its peak, down 2.5% in the past two weeks alone. And inflation has fallen – on one measure, to zero.

The official Bureau of Statistics measure of inflation is produced every three months, but for 13 years now the Melbourne Institute of Applied Economic and Social Research has produced its own simpler monthly measure, which tracks the official rate pretty well.

Although missing a lot (tracking fewer types of bread, and a national rather than a city-by-city measure) it is produced quickly and more often, providing a better insight into prices in real time.

The latest, released on Monday, points to an inflation rate of zero in April.

That’s right. While some prices continued to rise as always, enough prices fell to offset that. The high inflation in the lead-up to March stopped or paused in April.

Rate hikes need only be mild

It’s different in the United States. There, inflation is supercharged by wage growth averaging 9% and the Federal Reserve is about to lift interest rates aggressively.

Here, wage growth in the year to December was just 2.3%. We’ll get the figures for the year to March in a fortnight. There’s a good case for future rate hikes to be a good deal less aggressive.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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