Pay rises evaporate as inflation devours earnings gains

Everybody likes a pay rise but the latest trumpeted figures showing an average wage rise of 4% after a decade of minimal wages growth is a long way from unvarnished great news.

For a start, the wage rise has been more than adequately swallowed by inflation, with consumer prices having risen by 5.4%.

Admittedly the latest inflation figures showed a moderation to just 4.3% in the year to November, although that is still above the average wage rise and coming down from a much higher peak.

Secondly, the wage rises have been heavily skewed towards those on lower incomes, with the two lowest pay groups recording increases of 6.7% and 5.0% in the year to September.

That could well be stimulatory for the economy because lower income workers spend more of their pay but it also reflects the focus on bigger pay rises for those on minimum rates and in select industries, such as the federally funded 15% pay rise for aged care workers.

Finally, while inflated prices have effectively been swallowing all of these wage rises and a bit more, the Federal Government has also been benefitting big time from the boost in income tax revenue as bracket creep and fiscal drag automatically collects more tax dollars from all workers.

Where has productivity gone?

The missing ingredient in all of this and the only meaningful and enduring solution to bring about sustainable and real after tax and inflation wage rises is increased productivity.

Without an economy-wide change that sees every worker producing more with less, the current wage rise/inflation cycle is nothing more than an elaborate and fairly unconvincing and unrewarding game of a dog endlessly chasing its tail.

It is worth remembering that the mid-year Federal Budget update released in December forecast that wage growth will move ahead of inflation by early this year.

Treasurer Jim Chalmers is very keen to credit his government’s policies with getting wages moving faster than under the previous 10 years of coalition leadership and at the fastest pace for 15 years but it would have meant a lot more if larger than previous wage rises had arrived while inflation was still low.

“Securing meaningful, responsible, sustainable wages growth is central to our economic plan – and our approach has been tailored to support lowest-paid workers doing it toughest,” Dr Chalmers said.

Workers not seeing the benefit of higher wages

However, in real, on the ground terms, workers are yet to feel much difference in their hip pockets between the coalition years when wages were stagnant and inflation benign and the current situation of higher wage rises and higher inflation.

There is one potential productivity booster that is arriving this year in the form of the stage three tax cuts originally put in place by the previous Morrison Government.

Under the changes, which are due to start from July 1, most Australians earning between $45,000 and $200,000 will for the first time be on a 30% tax rate.

Despite the controversies around this tax cut being centred around higher wage earners, the productivity benefits should occur by reducing the tax disincentives facing workers who want to earn more.

In practical terms it really amounts to a handing back of a lot of fiscal drag and bracket creep that has occurred over many years due to rising average income tax rates.

Workers make better decisions than governments

Returning this money to workers is an important reform because they are in a better position to assess the best way to “spend” the extra money – either through actual consumer spending, investment or saving.

The alternative of the Government keeping the money to spend as it sees fit is less productive, something we have seen proved many times before from pink batts right through to Covid stimulus payments.

So, while it might seem annoying or frustrating if you are not one of the workers getting the tax cut, the reality is that everybody will be better off if Australia can finally get some much-needed productivity growth into the economy.

The tax cuts will also compensate for the fact that wage growth has been concentrated on lower incomes so far, hopefully broadening wage growth and increasing employment without pushing up inflation.

With a bit of luck, the Federal Budget will still remain in surplus despite the tax cut, which would be a good result all around.