For all the Coalition’s boasts about superior economic management, Anthony Albanese’s primary task will be to navigate his new government through the minefield bequeathed to him by his predecessors.
Mounting deficits, a mountain of debt, an overstimulated economy and ill-disciplined spending are all operating in a macro-economic environment that no longer reacts or behaves the way the textbooks say it should.
That will be no easy task.
After almost a decade in government without ever once producing a budget surplus — despite promises to the contrary — the Coalition managed to double the nation’s debt even before the pandemic hit.
Its legacy? At least another decade of deficits and a trillion-dollar national debt.
Ideology often trumped economics as the Coalition repeatedly shut off sources of revenue and added billions of dollars of unnecessary expenditure.
It canned the mining tax after politicising it as an evil. In the process, it denied generations of Australians their rightful inheritance and — instead of investing in health, education and aged care — transferred the proceeds to foreign investors.
Then there was the carbon tax. It dumped the Gillard government’s revenue-neutral carbon price and replaced it with a massive and inefficient subsidy, handing out billions of dollars to polluters in a scheme that now has been transformed into… a carbon price.
And while it could rightly claim credit for shielding much of the country from the ravages of the worst recession in a century, it did so via a $90 billion scheme, Jobkeeper, that hosed extraordinary amounts of cash onto a large number of recipients who simply didn’t need it.
That cash — along with an additional $240 billion COVID spending — has helped ignite an inflationary tinderbox.
And, as a parting gift, the stage-three tax cuts — now endorsed by the incoming Albanese government — will strip $37 billion a year from revenue by early next decade, line the pockets of middle and high-income earners and turbo-charge inflation. More on that later.
Wages in the doldrums
It is difficult enough to try to fix the mistakes of others. In some cases, such as the mining tax, it just isn’t worth the political mileage to revisit old battlegrounds.
But what do you do when all the old rules no longer apply?
Two cornerstones of economic theory appear to have come adrift in recent times that will make life ever tougher for the new government. Both revolve around inflation: one the relationship between wages and inflation and the other, economic growth and inflation.
For 30 years, consumer prices for everyday goods have been in check. Suddenly, they’re surging out of control and most of the current crop of politicians and monetary chiefs are in unfamiliar territory.
For years, the Reserve Bank was being castigated for not generating enough inflation. Suddenly, now, there’s way too much.
Wages, however, have remained stubbornly subdued, squeezing spending power in what essentially is a real pay-cut.
It became one of the defining issues of the election: pressures around the cost of living. The burning question was whether the minimum wage should be raised to the same extent as the cost of consumer items.
As the election entered its final week, two days of data drops from the Bureau of Statistics were supposed to resolve the battle. Everyone expected to see a lift-off in wages. The RBA had even taken the unusual step of raising interest rates during the election campaign in anticipation.
Except, it didn’t happen.
When the data emerged, we saw the lowest unemployment in 48 years at just 3.9 per cent. With inflation powering ahead at 5.1 per cent, wages should have shown at least some early signs of momentum. Instead, the gulf between consumer prices and earnings widened as wages grew by just 2.4 per cent.
It was a devastating blow for Scott Morrison, but now becomes an enormous challenge for Anthony Albanese.
No pay for performance
It was also an unnerving week for economists. According to what’s known as the Phillips Curve, wages are supposed to rise when unemployment drops.
Part of the accepted economic wisdom, it was a theory formulated by a Kiwi, A. William Phillips — who worked as a crocodile hunter in Australia before a groundbreaking stint at the London School of Economics in the 1950s.
His theory makes perfect sense. When there’s a shortage of workers due to low unemployment, business owners are forced to offer more money to attract employees. In tough times, when a lot of people are out of work, wages stagnate.
But for much of the past decade, wages have been decoupling from employment.
Somewhere around 2011, just after the Global Financial Crisis, the relationship began to break down in Australia.
As the economy recovered, the Reserve Bank predicted wages growth would return. The graph below charts the RBA predictions each year against what actually happened.
Instead of growing in 2011, wages growth slumped. So, the next year, the RBA figured it merely had been delayed and made a similar prediction for 2012. It didn’t happen again.
Increasingly desperate and exasperated, the RBA boffins repeated the projections each and every year for the next six years.
Full marks for perseverance.
Tax cuts, fuel and scorched earth
There’s no clear answer to why wages are stuck in neutral. The RBA postulated that employers were offering other incentives, such as one-off bonuses, extra days off and other benefits. Anything except permanent pay rises.
Perhaps the reason it can do this is that the jobs market is not an entirely free market. It is governed by tight laws, particularly around industrial action.
Our industrial relations system has been designed specifically to keep wages under control.
From industrial chaos in the 1970s, strike action and industrial disputes have fallen to negligible levels. Private sector wages have been restrained by Enterprise Bargaining Agreements while state governments have kept pay rises in check.
Unwinding those arrangements would be nigh on impossible, meaning sustained wage rises in Australia are highly unlikely any time soon.
After a year of making himself and the opposition a small target, however, the incoming prime minister took the unusual step of attaching a number to the upcoming tribunal deliberations on the minimum wage.
Less than a fortnight out from the election, Mr Albanese nailed his colours to the mast, saying he “absolutely” supported a 5.1 per cent pay rise for the 2 per cent of workers on the minimum wage.
Mr Morrison was quick to respond, backed up by many in the business community. Such an increase, he said, was “like throwing fuel on the fire of rising interest rates and rising costs of living”.
There’s no doubt wage rises fuel inflation. But, if limited to those earning the bare minimum, they would be negligible.
Wage rises deliver more spending power, adding to inflation. But so too, do tax cuts.
And when it comes to inflationary pressure, the mammoth restructuring of our income tax system in 2024 will deliver it in spades.
The Parliamentary Budget Office delivered its verdict a fortnight ago on the stage-three cuts, pushing up the overall cost by a further $22 billion.
All up, the tax cuts will inject $206 billion into middle and upper-income earners’ pockets in just its first eight years of operation.
If consumer prices are still rising at this pace, that’s going to force interest rates much higher.
Fuel on the inflationary fire? Or scorched earth?