The MYEFO mystery: so much stimulus, so little wages growth

Yesterday's MYEFO shows the government pumping huge amounts of money into an already strong economy — but with little of it flowing through to real wage growth. What gives?

What does it take to get wages growing in Australia?

According to Josh Frydenberg, who will go down in history as the biggest spending peacetime treasurer and the man who dramatically expanded the size of government in Australia, it will take half a decade of government spending above 26% of GDP, $340 billion of deficits, three years of unemployment in the low 4% range and massive business investment. That will eventually deliver wages growth of… 3.25% in 2025. That’s still well below the average level of the Labor years — including during the financial crisis.

That forecast is higher than in the May budget, which had wages reaching a measly 2.75% in 2025. But inflation has been upgraded in the forecasts as well. Real wages growth will be just 0.75% for workers in 2025.

For context, workers’ wages went backwards by over 2% in 2020-21 and will fall by another 0.5% this year. It could be the late 2020s before workers reach the level of real wages they had prior to the pandemic.

A key reason why wages growth is so abysmal despite the kind of strong employment growth revealed yesterday in the November jobs figures is also to be found in MYEFO. The government has significantly lowered its forecast of net overseas migration to a loss of only 41,000 this year, and is planning for 180,000 migrants next financial year — or nearly double the 96,000 it forecast back in the May budget. Net migration will surge in the years following — to 213,000 in 2023-24 and 235,000 in 2024-25.

That’s the Coalition-business wage suppression plan in action — make sure there is a ready supply of temporary labour from overseas to prevent wages growth, even in the face of strong demand for labour generated by massive government spending.

Australian workers will pay the price of a decade of lower real wages.

But even with upgrades to inflation forecasts, CPI will only be in the middle of the Reserve Bank’s target band through to 2025. Inflation is the hot topic of conversation in economic circles following the Bank of England’s rate rise yesterday and the US Federal Reserve’s dramatic change to its monetary policy earlier this week in the face of the highest inflation in the United States for decades — driven by labour shortages, supply chain problems and high demand.

At the end of its final meeting for 2021, Fed officials this week indicated they expected to raise interest rates at least three times in 2022 and further rises in the following two years. They also slashed its bond-buying purchases by twice as much as they had announced at the last meeting in early November, a pace that would put them on track to end the program altogether in March. They now expect inflation to run at 2.6% next year, materially higher than previous forecasts, and the unemployment rate would fall to 3.5% — near if not exceeding full employment. The current US jobless rate was 4.2% in November.

Some local commentators continue to believe the US Fed’s moves will dictate monetary policy here. And financial markets in Australia have priced in the RBA taking the cash rate, currently 0.1%, to at least 0.75% by the end of next year.

Reserve Bank governor Philip Lowe continue to tell them they’re wrong. He must be sick of saying it over and over again, but he was repeating it yesterday in a speech in Wagga (where he grew up and worked at his dad’s servo). He believes the bank will not be increasing interest rates in 2022.

“The Reserve Bank board will not increase the cash rate until actual inflation is sustainably in the 2-3% target range. We are still a fair way from that point. In our central scenario, the condition for an increase in the cash rate will not be met next year.”

Lowe again ticked the boxes for everything he’s been saying in recent months about the what will drive the RBA to lift rates: wages. Wages growth is still stuck in the twos — check. Public sector wages policies are hampering growth — check. Wages growth is only back to the levels it was at before the pandemic — check. Wages growth will only pick up “gradually” — check.

The government and employers remain hell-bent on suppressing wages. Markets expecting a rate rise should be prepared to be patient — another word Lowe has used over and over again lately.