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  • Bolstered by a biased tax system, house prices keep rising

    Bolstered by a biased tax system, house prices keep rising

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on June 15, 2023

    As interest rates rise, the gains from negative gearing increase.

    Despite rising interest rates, the latest figures from the Bureau of Statistics show that Australia’s house prices rebounded in the March quarter of this year. Policy director Greg Jericho writes in his Guardian Australia column that since the beginning of the pandemic property prices around Australia have risen 26% while at the same time average household disposable income has increased just 8%.

    This disparity has massive consequences for affordability. Had for example the median property price in Sydney risen in line with household incomes since June 2020, instead of being $1.15m it would be $954,000 – a $196,000 difference.

    Underlying the strength of the market even in the face of rising interest rates is the fact that Australia’s tax system is biased towards property investors.

    The most recent taxation statistics covering 2020-21 showed for the first time the number of investors recording property net profits was greater than those recording a loss. Such a situation only occurred because of the record low interest rates at the time. We know that the past 12 months will have seen a large spike in the number of people negative gearing their properties and thus not surprisingly housing remains an attractive investment not in spite of rising interest rates, but because of rising interest rates.


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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

  • The economy is slowing as households get smashed by yet more rate rises

    The economy is slowing as households get smashed by yet more rate rises

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on June 8, 2023

    A slowing economy and households closing their wallets is bad news with a Reserve Bank determined to keep raising rates

    The March quarter saw Australia’s economy grow a rather pathetic 0.2% and fall 0.3% in per capita terms. As policy director Greg Jericho writes in his Guardian Australia column, the economy is slowing at a pace that normally would see the Reserve Bank thinking about cutting rates.

    And yet as poor as these figures are, worse is likely to come as the March quarter does not include the two most recent rate rises and only a small amount of the impact from the rate rises in February and March. Both the Treasury and the RBA estimate the Australian economy will go backwards on a per capita basis over the next year and these figures suggest their estimates are if anything too optimistic.

    Households are reducing their savings as wages fail to keep up with inflation. Over the past 2 quarters, household consumption grew at an annualised pace of just 1%. Whenever household consumption has grown that slow the economy has either been in a recession or teetered on the edge.

    And yet despite acknowledging there was uncertainty over household spending, the RBA on Tuesday decided to raise rates in order to essentially slow household spending.

    All they have done is once again hit households that already need a standing 8 count.

    The figures pleasingly showed that total wages are now growing solidly due to both increased employment and better wage growth. But this has not come at the expense of profits, indeed corporate profits in the March quarter rose 3.2% – faster than the 2% increase in unit labour costs. Real unit labour costs rose just 0.2% in the March quarter while real unit profit costs rose 1%.

    This again highlights that profits more than wages drive inflation, and raising rates to slow wage growth by raising unemployment is a poor monetary policy that only risks an unnecessary recession.


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  • The level of public housing needs to return to previous levels

    The level of public housing needs to return to previous levels

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on June 1, 2023

    Australia needs more housing, and we definitely need more public housing

    There is rarely a debate in Australia that generates more heat than housing. The causes of housing unaffordability and the solutions to it are varied and often get bogged down in power plays and political scaremongering. But as policy director Greg Jericho notes, building more homes is a pretty obvious solution, and more public housing needs to be at the forefront.

    The NSW Productivity Commission this week released a report into housing in NSW that recommended “Building more homes where people want to live.” To this end it suggested raising average apartment heights in suburbs close to the CBD, allowing more development near transport hubs and encouraging townhouses and other medium-density development.

    All of this is worthy. And if combined with the reform of the negative gearing and the capital gains discount will do much good.

    But the report noted that “New South Wales experienced a 45% surge in priority applicant households on the social housing register, with 6,519 priority social housing applicants waiting for assistance as at 30 June 2022”. And yet it did not mention public housing or any social housing solutions at all.

    In the past public housing was a much greater share of Australia’s housing market.

    In 1983 14 public housing building approvals were made for every 100 private sector ones. Now it’s 1.7:100.

    The level of new housing per head of population has fallen and it is thus little wonder that house prices have risen beyond the means of many.

    We need more housing and we desperately need more public housing.

    In the 2019 election campaign, the ALP pledged 250,000 new houses over 10 years. That has now become 30,000 over 5 years under the proposed Housing Fund. It is time for more ambition from the government and more housing for low and middle income earners.


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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

  • Real wages falls and interest rates rises signal tough times for households and the economy

    Real wages falls and interest rates rises signal tough times for households and the economy

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on May 25, 2023

    You can’t sustain household spending while real wages continue to fall, and households are starting to let everyone know

    The Australian economy – like all economies – is about people. And yet too often company profits are used as a judge of economic health. Throughout the pandemic and in the years since, company profits have soared while the real wages of workers has fallen. This situation is inherently unsustainable with an economy dependent upon household consumption. As policy director Greg Jericho writes in his Guardian Australia column, we are beginning to see households struggle to keep going.

    The Budget delivered this month by Treasurer Jim Chalmers revealed that the next financial year starting in little over a month is set to be one of the worst in the past 40 years. Household consumption is expected to rise just 1.5% – the 5th worst since 1985-86. Even worse if we account for an expected 1.7% rise in population this means in a per capita sense, real household spending is about to fall.

    And when household spending slows, so too does the entire economy.

    We have already see the beginnings of this with sharp slowing in the volume of retail spending being done, all while the amount of money we are spending rises. In effect we are paying more for less. This means the “nominal” figures in the retail trade data hides the weakness in the economy and the pain households are going through.

    With mortgage repayments rising nearly 80% in the past year, households are switching from spending in shops and on services that employ people, to paying off their loans – driving up the profits of banks ever more, but in doing so actually slowing the economy.

    The Reserve Bank is getting what it wanted – a slowing economy, less money being spent and rising unemployment.  But with conditions only seen in recessions expected in the next year, the risk that this slowing will lead to the economy stopping completely is rising, and the Reserve Bank must not raise rates any further and be extremely mindful of the pain they have already caused to households struggling from the fastest increase in loan repayments in over 30 years at the same time as real wage fall faster than they have on record.


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  • Wages are growing solidly but real wages continue to plummet

    Wages are growing solidly but real wages continue to plummet

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on May 18, 2023

    Wages are growing the best they have for 11 years, but real wages are now back at the level they were 14 years ago

    The good news of the strongest wages growth since 2012, writes policy director Greg Jericho, in his Guardian Australia column, is tempered by the fact that real wages have fallen back to levels last seen in early 2009.

    The 3.7% growth in the wage price index demonstrates that workers are finally seeing some return for the tighter labour market in which unemployment is at around 50-year lows. It also reflects that public servants are also becoming free of the wage caps over the past decade that had purposefully kept wages down.

    In the March quarter for the first time in more than a decade, public-sector wages grew by 0.9%. Private-sector wages have also grown above 0.75% for 4 straight quarters – the first time since September 2012.

    But even with this very good wage growth, workers are seeing their living standards fall. In real terms, wages fell 3.1% in the past year and are now 5.4% below where they were before the pandemic. This destruction of purchasing power will take many years to recover. And it highlights that wages should rise faster than inflation and with workers being the ones who have suffered the most from inflation, they should not be expected to suffer once inflation is back within normal ranges.


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  • Don’t worry about a budget surplus, worry about a slowing economy

    Don’t worry about a budget surplus, worry about a slowing economy

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on May 11, 2023

    Rather than be a budget that will fuel inflation, the budget is actually closer to austerity than stimulation

    The Budget announced this week by Treasurer Jim Chalmers revealed a projected surplus in 2022-23 before returning to a deficit in the future years. In response many commentators and economists have suggested that the budget is therefore expansionary and will fuel inflation. But as policy director, Greg Jericho notes in his Guardian Australia column given the projected slowing economy, if anything the budget should be more expansionary.

    Most of the claims around the budget fueling inflation are based on the movement of the budget from surplus in 2022-23 to deficit in 2023-24. And usually, this would suggest that the government is stimulating the economy. But when we look at the actual figures within the budget, the overwhelming reason for the shift from surplus is due to parameter changes relating to oil, gas, coal and iron ore prices. The spending measures the government is proposing are hardly expansionary at all. Their direct impact on total household income is minimal, and the largest spending is on reducing medical and energy bills rather than directly giving households more money.

    When we look at the forecasts for public demand growth we see a level of expansion that is more akin to an austere budget than one attempting to stimulate the economy.

    But when we also look at the forecasts for economic growth over the next two years we see an economy slowing quite abruptly in a world that is teetering on a global recession. In the past, such weak forecasts for household spending and GDP growth would have seen governments spending more and lifting economic growth.

    This budget appropriately deals with the concerns of inflation by directly lowering the costs of energy and medical bills – it demonstrates that governments do have a role to play in lowering inflation and that it need not be done purely by the traditional view that the government must slow the economy. The economy is already projected to slow, and by this time next year the calls will likely be less about why the budget is not in surplus and more about what is the government doing to simulate the economy


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    Commonwealth Budget 2025-2026: Our analysis

    by Fiona Macdonald

    The Centre for Future Work’s research team has analysed the Commonwealth Government’s budget, focusing on key areas for workers, working lives, and labour markets. As expected with a Federal election looming, the budget is not a horror one of austerity. However, the 2025-2026 budget is characterised by the absence of any significant initiatives. There is

    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

  • 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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  • 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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  • 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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