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  • Commonwealth Budget 2023-24

    Macroeconomics

    Commonwealth Budget 2023-24

    Significant Progress for Workers, Much More to Do
    by Greg Jericho, Fiona Macdonald, Eliza Littleton, Charlie Joyce and Jim Stanford

    Authors

    Greg Jericho

    Chief Economist

    Fiona Macdonald

    Acting Director, Centre for Future Work

    Eliza Littleton

    Senior Economist

    Charlie Joyce

    Researcher

    Jim Stanford

    The Commonwealth government’s 2023-24 budget reveals a progressive government seeking to help lower paid workers and those struggling to pay bills, support public health care, and pursue investments towards a net zero economy. But it is very much a first step, and leaves much more work to be done to repair past harms done to workers, low-income Australians, public services and infrastructure, and the environment.

    This briefing reviews the main features of the budget from the perspective of workers and labour markets. Some of its measures are very positive, such as fiscal support for higher wages for aged care workers, increased JobKeeper benefits, and enhanced Commonwealth Rent Assistance.

    Contrary to concerns that a big-spending budget would exacerbate inflation, this budget will have little impact on overall aggregate demand. In fact, it will pro-actively reduce inflation through its new $500 energy relief plan. Contrary to conservative economists who claim this budget will fuel inflation, in reality the forecasts confirm historically slow growth in public demand in both 2022-23 and 2023-24.

    Despite these positive measures, the budget also contains disappointing aspects. Most importantly, the Stage 3 tax cuts remain on schedule. And while they are only set to begin in 2024-25, they hang over these budget figures like a dark spectre.

    The budget papers also confirm the economy is far from buoyant. The next 18 months are expected to see economic growth well-below average. Households are reacting to three years of falling real wages, and eleven painful increases in interest rates, by severely constraining consumer spending. Slowing job creation and declining real wages are taking their toll on overall economic growth, highlighting again that the key to a strong economy is strong employment and wage growth.

    Please read our research team’s full review of this historic budget.



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  • Affordability of a Liveable Jobseeker Payment is a Non-Issue

    Affordability of a Liveable Jobseeker Payment is a Non-Issue

    by Brett Fiebiger

    Brett Fiebiger

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    Commonwealth on Track for Diminutive Deficit or Surplus in 2022-2023

    In the lead-up to its 2023-24 budget, the Labor Government finds itself in an awkward position, accepting that the Jobseeker payment is “seriously inadequate” and an impediment to regaining work, yet professing that it lacks the financial capacity to afford a meaningful increase anytime soon.

    The Economic Inclusion Advisory Committee’s (EIAC) April 2023 Interim Report recommended raising Jobseeker from 70% of the Pension up to 90%. The current Jobseeker base rate for a single person with no children is $693.10 per fortnight. Lifting it up to 90% of the current Pension payment of $971.50 per fortnight would provide the unemployed with an extra $181.25 per fortnight (or $12.25 per day).

    Labor has baulked at the cost of the EIAC’s Jobseeker proposal. There is speculation that the upcoming budget will include a $50 per fortnight increase in the Jobseeker payment for those over 55 years of age. It is unclear if that increase will apply to everyone over 55 years of age, or just to the 55 to 59 year old cohort who are currently ineligible for the additional $52 per fortnight already available to those over 60 and who have been unemployed for longer than nine months.

    A $3.57 per day rise in the Jobseeker payment for those over 55 years of age (or between 55 and 59) seems rather stingy. One might expect that the plight of the unemployed—among the least well-off and most financially-constrained members of society—would be a high priority in the middle of a cost-of-living crisis.

    Before last year’s election, the Labor party abandoned a previous pledge to raise Jobseeker payments, on concerns about growing Commonwealth government debt. The EIAC then only came about as a concession to gain Senator David Pocock’s support for the Secure Jobs Better Pay Act 2022.

    Labor’s meme of “inheriting a trillion dollar debt that will take generations to pay off” has echoed the Coalition’s 2013 so-called “budget emergency”, also used to blame the preceding government. The nation’s allegedly dire fiscal position was cited by Bill Shorten as justification for not adopting the EIAC’s key recommendations: ‘We can only do what is responsible and sustainable and unfortunately the budget we inherited from the previous government is heaving with a trillion dollars of Liberal debt, so [we] can’t do everything.’

    The strategy of deflecting accountability for policy choices on grounds of fiscal constraint has become less credible, given the robust post-pandemic economic recovery and the boom in commodity prices – all of which has generated large improvements in the Commonwealth government’s fiscal position. As illustrated in Figure 1, the government’s underlying cash deficit for the current financial year (2022-23), once expected to be $100 billion, has shrunk dramatically.

    Sources: Australian Government, Budget Papers, Monthly Financial Statements. Author’s calculations.

    Indeed, the Commonwealth Government’s latest Monthly Financial Statements show that it is on track to post a very small deficit, or even a surplus, for the 2022-23 financial year. As of March 2023 the underlying cash balance (UCB) had improved by $23.3 billion over the estimates in the October 2022-23 Budget. If the year-to-date deficit changes little in the last quarter, and with higher GDP than previously estimated, then the UCB in 2022-23 would come in at a diminutive -0.5% of GDP. That’s insignificant by any meaningful economic standard.

    Further upside is possible. If the average monthly improvement from November 2022 to March 2023 continues in the last quarter of the financial year, the UCB in 2022-23 would be a surplus of $2.8 billion.

    Australia’s public debt load – also measured appropriately as a proportion of GDP (rather than in big scary ‘trillion dollar’ terms) is also modest when compared to the nation’s peers and to its own historical record. Our general government debt (including state governments) is lower than any G7 economy, and half the size of the average for advanced economies. The same cannot be said, however, for Australian households: their debt is higher than any G7 economy, and ranks second (behind only Switzerland) among all industrial countries (see Figure 2).

    Figure 2: Government and Household Debt

    Sources: International Monetary Fund, World Economic Database. Bank for International Settlements, Credit to the Non-Financial Sector.

    Having switched from “opposition mode” into “governance mode,” it makes sense for Labor to start to talk up the nation’s public finances. Such a narrative would be plausible given that Australia’s fiscal position is robust and sustainable: now and into the foreseeable future. That is the current assessment of the International Monetary Fund in its latest Article IV Consultation, amongst others.

    The prospect for further substantial improvement in the UCB over the forecasts – and perhaps even a surplus – should raise expectations about what the government can do to ease cost-of-living pressures. Arguably, however, a liveable unemployment benefit should be prioritised regardless of the economic and fiscal outlook.

    The EIAC’s Jobseeker proposal is estimated to cost $24 billion over four years. Implementing all of the EIAC’s other recommendations brings the cost to $36 billion. The annual cost of the full package would amount, respectively, to just 0.3% of GDP in the next financial year. Such expenditures, while having a diminutive impact on the Commonwealth Government’s fiscal position, would literally transform the lives of the unemployed.

    When all is said and done whether a nation should have a liveable unemployment benefit is a question of principles. There is an obvious option for Labor to allay its worries about the budgetary or inflationary pressures of a liveable Jobseeker payment: namely, jettison the 2024-25 Stage 3 tax cuts, that are estimated to cost $300 billion over the first nine years. Tax cuts that mainly benefit high-income earners make no sense in an economic landscape where over 90% of the pre-tax income gains from growth in national income have in recent experience gone to the highest-income 10% of households.

    The reluctance of the government to discard or redesign the Stage 3 tax cuts is attributed by some to the Labor Party’s pre-election commitments. It remains that the tick boxes for good governance do not include steadfast adherence to suboptimal policy positions. Overseeing regressive tax cuts, while being unwilling to meaningfully improve the lot of the least well-off, has those principles back-to-front.

    Dr Brett Fiebiger is a post-Keynesian economist. His research focuses on macroeconomic policy, growth theory and income distribution.


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    Centre For Future Work to evolve into standalone entity

    The Centre for Future Work was established by the Australia Institute in 2016 to conduct and publish progressive economic research on work, employment, and labour markets. Supported by the Australian Union movement, the centre produced cutting edge research and led the national conversation on economic issues facing working people: including the future of jobs, wages

  • RBA Review a Missed Opportunity

    Macroeconomics

    RBA Review a Missed Opportunity

    by Anis Chowdhury

    Author

    Anis Chowdhury

    The Commonwealth Treasury has released the report of a three-person panel charged with reviewing the structure, governance, and effectiveness of the Reserve Bank of Australia (RBA). Treasurer Jim Chalmers accepted in principle all 51 of the panel’s recommendations, ranging from creating a separate board to make decisions on interest rates, to giving the Bank a simpler dual mandate to pursue both price stability and full employment.

    The report represents the most important reconsideration of monetary policy in Australia since the advent of inflation targeting three decades ago. But the “new look” RBA after this review may even do more harm to the economy than in the past. This is because the independent review panel missed the opportunity to question the deeper myths and assumptions regarding the central bank’s infallibility and their ideological bias.

    In this report, Centre for Future Work Associate Dr Anis Chowdhury catalogues the assumptions and failures of conventional inflation targeting policy, and the misleading nature of so-called ‘independent’ central banks. He argues the review panel missed an historic opportunity to reconsider those assumptions, and help craft a more balanced and democratic macroeconomic policy framework.



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  • The Reserve Bank’s decision to raise rates shows a total lack of coherency

    The Reserve Bank’s decision to raise rates shows a total lack of coherency

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on May 3, 2023

    Wages growth is rising slowly and inflation is falling faster than expected, and yet the RBA decided to hit the economy again with another rate rise.

    Yesterday the Reserve Bank shocked markets and most economists by raising the cash rate to 3.85%. But it didn’t just contradict outside observers, it contradicted the views of the RBA board just one month ago when it decided to keep rates steady.

    Policy director Greg Jericho, writes in his Guardian Australia column that in the month since the April RBA meeting data on inflation has suggested faster than anticipated slowing, the economy overall is now expected to slow more quickly, and there is no sign of long-term wages growth rising beyond what would be consistent with 3% inflation.

    And yet despite this, the board decided to raise rates.

    The decision smacks of a board reacting less to economic conditions and more to the recent Review of the RBA which recommended taking the decisions to change rates away from the current board.

    The Reserve Bank suggested a month ago it needed time to pause and review. Nothing in the intervening time has suggested they made a mistake in not continuing to raise rate, and yet the bank seems determined to slow the economy and raise unemployment to 4.5%.

    The bank is so beholden to neo-liberal views of the non-accelerating inflation rate of unemployment that it is determined to keep raising rates until unemployment rises to a level it believes is “full employment”.

    We know the current level of inflation is largely driven by corporate profits and some overhang of supply-side issues and savings from the pandemic/lockdown period. At no point is there any sign that wages are rising in a manner that is fueling inflation and yet the RBA continues to attack inflation like we are experiencing the mining boom of the 2000s which saw wages and jobs grow strongly, rather than the current boom which is seeing profits grow exponentially and real wages plunge .


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  • Inclusive and Sustainable Employment for Jobseekers Experiencing Disadvantage

    Employment & Unemployment, Insecure & Precarious Work, Public Sector, Procurement & Privatisation

    Inclusive and Sustainable Employment for Jobseekers Experiencing Disadvantage

    Workplace and Employment Barriers
    by Fiona Macdonald

    Author

    Fiona Macdonald

    Acting Director, Centre for Future Work

    This report provides an overview of workplace and job-related factors found to act as barriers to sustainable and inclusive employment for people in groups likely to experience labour market disadvantage. Key findings are that job quality, working arrangements, inclusivity and opportunity for participation at work all matter for inclusive and sustainable employment, along with individual and external systemic and structural barriers to work.

    Employment policy and employment assistance for jobseekers focus on individuals’ skills and job readiness, and on job placement. Less attention is given to ensuring placements are into sustainable employment in inclusive workplaces. That is, placement into jobs that people can keep, that support wellbeing and provide opportunity for long-term employment pathways, and in workplaces where people feel safe and are able to participate. Recruiting and placing people experiencing labour market disadvantage into jobs may not lead to positive outcomes if people are not able to retain jobs and benefit from their employment.

    Employment can provide people with benefits that improve wellbeing in various ways, including through increasing income, providing routine and increasing social contact. However, where job quality, pay or working conditions are poor, employment can also have cumulative negative effects. Placing people experiencing disadvantage in jobs in which they are insecure, underemployed, or cannot establish daily routines; or placing them in workplaces in which they experience poor or discriminatory treatment and disempowerment, are not likely to produce sustainable employment outcomes or create social value.

    This report calls for a greater focus on workplace and job-related factors, including employer knowledge, employment practices, work organisation, job quality and employment arrangements, to addressing barriers to employment for disadvantaged jobseekers. Emphasis on employment placement alone is not likely to produce sustainable employment outcomes. Action is required to tackle barriers present in workplaces and in employment arrangements.

    This report was commissioned by Jobsbank, a Victorian-based not-for-profit organisation that works with business and other partners to support sustainable, inclusive employment and make social procurement work. In Victoria, the Government’s Social Procurement Framework aims to improve employment outcomes for people from groups experiencing labour market disadvantage through requiring suppliers and contractors tendering for high value government contracts to employ people from these groups. The Victorian Government’s Fair Jobs Code promotes fair labour standards, secure employment and job security, equity and diversity, and cooperative workplace relationships and workers’ representation. This report recommends that employers be encouraged to develop strategies to meet these standards through collaboration with unions and community groups as one obvious way to address workplace and employment factors that create barriers to sustainable and inclusive employment for disadvantaged jobseekers.



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  • Latest inflation figures show the RBA was right not to raise rates in April

    Latest inflation figures show the RBA was right not to raise rates in April

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on April 27, 2023

    Inflation is falling steadily but hitting low-income households the most.

    The March quarter consumer price index figures showed a 7.0% annual rise, however as Policy Director, Greg Jericho, notes in his Guardian Australia column, the monthly inflation figures that were also released on Wednesday showed annual growth had fallen to 6.3%.

    This fall was down from a peak of 8.4% in December and is the slowest growth since May last year.

    The figures reinforce the belief that the RBA board was right to ignore the views of many economists both within and outside the Reserve Bank. Not only is inflation falling but the biggest drivers of inflation in the March quarter were in areas with prices mostly determined by governments or in highly regulated sectors such as the gas and electricity markets. There was little sense of prices rising due to excess demand, rather the combination of price setting in the public sector and by commercial companies making use of high world prices for resources and ongoing supply issues in the housing market served to drive nearly two-thirds of the total increase in overall inflation the March quarter.

    Increasing interest rates would have done nothing to lower prices in these areas – indeed in the rental market any further rates rises would likely be just used as reason for increasing rents more.

    The Reserve Bank was right to stop raising rates. Should the slowing of inflation shows signs of ending before reaching the RBA’s target of 3% it can always cut rates then. For now, inflation is falling as hoped and attention must be drawn to those suffering the most from the rising prices – notably low-income households and those paying off a HELP debt that is set to be indexed by 7.1% – well above the current levels of wage growth.


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  • Minimum wages and inflation

    Macroeconomics

    Minimum wages and inflation

    by Greg Jericho and Jim Stanford

    Authors

    Greg Jericho

    Chief Economist

    Jim Stanford

    New research from the Centre for Future Work at the Australia Institute has revealed how rises in the minimum wage have almost no impact on inflation and given the collapse in the value of the minimum wage in real terms over the past 2 years, a 7% increase is a necessary recompense for Australia’s lowest paid workers.

    Each year the Fair Work Commission conducts the Annual Wage Review (AWR) which determines the national minimum and award wages. And each year it is met with a chorus of cries from business groups, conservative politicians and commentators that Australia’s economy will surely break should the minimum wage be raised too much.

    Over the past two years however, the minimum wage has risen by less than inflation, causing a significant decline in the real purchasing power of millions of workers covered by the Modern Award system. This marks the first time in a quarter-century that the minimum wage has had a deflationary impact on the economy (that is, increased by less than the inflation rate) over successive years.

    Despite this fall, once again, submissions from business groups to this year’s AWR have called for rises below inflation, and have cited concerns about a wage-price spiral as justification for advocating a further erosion of low-paid worker’s living standards.

    But research by Greg Jericho and Jim Stanford shows that minimum wage increases over the past 25 years have had little to no impact on inflation at all. It also demonstrates that a 1% increase in the minimum wage and all Modern Award wages – even if completely passed through into higher prices – would result in a virtually undetectable 0.06% increase in economy-wide prices. So small is this that a mere 0.2% fall in profits would be enough to cancel any impact on prices at all.

    The research reveals that the call from the Australian Council of Trade Unions for a 7% increase in the national minimum wage would make up a portion (but not all) of the real wage losses, workers have experienced in the past two years. Even if fully passed on in higher prices, with no reduction in current record-high business profits, a 7% minimum wage hike would at most translate into an increase of just 0.4% in economy-wide prices.

    Alternatively, that 0.4% rise could be offset by just a 1.4% reduction in total corporate profits.

    With inflation passing its peak, there is no cause for concern that a minimum wage rise of 7% (equal to the annual rate to the March quarter) would add fuel to the inflation fire.

    This reinforces recent research by the Centre for Future Work that profit margins are presently at record highs in Australia, because companies have increased prices since the pandemic far more than their own input costs. This gives companies ample cushion to absorb the cost of higher minimum wages, with no impact on prices at all.

    In sum, the impact of minimum wage increases on average prices is thus little more than a rounding error. But for the 20% of employees who earn either the national minimum wage or wages set under Modern Awards, a strong minimum wage increase will be vital. It will ensure that the lowest paid, who have already been most hurt by inflation, are not forced to suffer more due to an inflationary upsurge that was ultimately spurred by higher profits, not wages.



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  • 7% Minimum Wage Rise Would Tackle Inflation, not Feed it: Research

    7% Minimum Wage Rise Would Tackle Inflation, not Feed it: Research

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    A 7% National Minimum Wage rise for low paid workers would help tackle the rising cost of living for those on award wages while having a virtually undetectable impact on economy-wide prices, new research from leading economists at the Centre for Future Work has found.

    The data comes as the Fair Work Commission deliberates about how much to boost the nominal wages for some of Australia’s lowest paid workers including cleaners, early childhood educators, hospitality workers and carers who are struggling in the cost of living crisis.

    Key Points:

    • The national minimum wage (NMW) has increased less than inflation for the past two years.
    • By June the NMW will be at least 4.2% in real value below where it was in 2020.
    • Despite this business groups continue to advocate for another below inflation increase.
    • Research from the Centre For Future Work reveals that the impact of a NWM rise on inflation is negligible and much less than that driven by profits.
    • Over the past 25 years there has been no correlation between increases in the NMW and inflation growth over the following year.
    • The ACTU’s call for a 7% rise would at most cause economy-wide prices to increase by an average of 0.4% – even if wage increases were fully passed on to consumers by companies.
    • That increase in prices would fit easily within the RBA’s inflation target range (2.5% plus or minus 0.5%).
    • With company profits at historic records, companies could readily absorb the costs of a higher minimum wage, rather than passing them on to consumers. They could fully absorb those costs through a reduction of just 1.4% in total company profits.
    • Suggestions that business can’t afford a 7% increase are false.
    • Suggestions that it would set off inflation are wrong.

    “This research shows that for low paid workers struggling with the cost of living a 7% wage is a solution to, rather than the driver of, inflation,” said Dr. Greg Jericho, Policy Director at the Australia Institute’s Centre for Future Work.

    “Over the past 25 years there has been no correlation between increases in the National Minimum Wage and inflation growth in the following year.

    “We need to move from thinking that workers are the ones who must always carry the burden. After 3 years of soaring profits during the pandemic, many sectors of the economy can afford to slightly reduce their margins and still make strong profits.

    “Low-paid workers have suffered a massive loss of real wages at the same time company profits have been rising. The 7% rise would be a small recompense for the workers who have seen their living standards deteriorate over the past two year.

    “Previous Australia Institute research has demonstrated how excess corporate profits, not wages, are driving post-pandemic inflation in Australia.

    “The fact is that average real wages in Australia fell 4.5% last year, the largest drop in a single year on record. That needs to be fixed, starting with the lowest paid who are carrying Australia.”

    The past two years have seen the minimum wage rise by less than inflation, causing a significant decline in the real purchasing power of millions of workers covered by the Modern Award system. This marks the first time in a quarter-century that the minimum wage has had a deflationary impact on the economy (that is, increased by less than the inflation rate) over successive years.


  • The Stage 3 tax cuts are bad economics combined with terrible politics. They should be dumped.

    The Stage 3 tax cuts are bad economics combined with terrible politics. They should be dumped.

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on April 20, 2023

    The Stage 3 tax cuts were always bad, but with the removal of the low-middle income tax offset, they become a terrible political strategy as well

    During the 2022 election campaign the ALP in a desperate and misguided move to avoid being wedged, agreed to implement the horrendously inequitable Stage 3 tax cuts. But, as Policy Director Greg Jericho writes in his Guardian Australia column agreeing to bad policy in opposition means you own the bad policy in government – except you get no credit for it and all of the blame.

    While the Stage 3 tax cuts have always been wildly expensive and unfair, with around half of the benefit going to the richest 3%, but the removal of the low-middle income tax offset (LMITO) has made them even more unfair and politically foolish for the ALP.

    Because the LMITO was targeted most at those earning between $50,000 and $90,000 and the Stage 3 tax cuts are least targeted towards those people, it means the removal of the $1,500 LMITO for someone on the median income of $65,000 will only be replaced by a $500 tax cut under Stage 3.

    This means the ALP if it continues to implement  Scott Morrison’s tax policy will go to the next election in a position where middle-income earners will be paying more tax than they did in 2022 while people on $200,000 will be $9,075 better off.

    That is a weird strategy for a progressive political party to pursue.

    In reality, the Albanese government will get no credit for implementing the Stage 3 cuts and will get all the blame for leaving around 75% of taxpayers worse compared to the last year of the Morrison government.

    It is time to dump the tax cuts and for the Albanese government to deliver policies that it would be proud to defend. Fairer tax cuts, increase Jobseeker, invest in renewables and other vital infrastructure and improve services.


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  • Profits and Inflation in Mining and Non-Mining Sectors

    Macroeconomics, Wages & Entitlements

    Profits and Inflation in Mining and Non-Mining Sectors

    More detail on the causes and consequences of the profit-price spiral
    by Greg Jericho and Jim Stanford

    Authors

    Greg Jericho

    Chief Economist

    Jim Stanford

    New research from the Centre for Future Work at the Australia Institute has shed further light on the role of higher corporate profits in driving higher prices in Australia since the COVID pandemic.

    A previous report from the Centre showed that 69% of excess inflation (above the Reserve Bank’s 2.5% target) since end-2019 arose from higher unit corporate profit margins, while only 18% was due to labour costs. The new research provides detail on the distribution of those excess profits across different sectors in the Australian economy.

    By far the biggest profits were recorded in the mining sector, where corporate operating profits surged 89% since the onset of the pandemic. Those profits resulted from sky-high prices for fossil fuel energy (including petroleum products, gas, and coal). Thanks to those price hikes, the mining sector now captures over half of all corporate profits in the entire Australian economy.

    Less spectacular but significant increases in corporate profits are visible in several other sectors of the economy, too – not just mining. Profits swelled rapidly in wholesale trade, manufacturing, transportation, and other strategic sectors.

    In these strategic industries, businesses could exploit supply chain disruptions, consumer desperation, and oligopolistic market power to increase prices well beyond production costs.

    In other sectors (including arts & recreation, hospitality, and telecommunications) profits have been flat or falling since the pandemic.

    Early signs in 2023 that inflation (and corporate profits) had peaked, and were returning to normal, have been thrown into question by a renewed threat of profit-price inflation: the OPEC+ cartel decided earlier this month to curtail oil production to boost world prices.

    Policy-makers need to acknowledge the role of record profits in driving recent inflation – and develop alternative policy responses (such as price caps in strategic markets, excess profit taxes, and targeted fiscal support for working and low-income households) to manage current inflation in a fairer and more effective way.



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