Although the Treasury has raised its expectations for wage gains, this is well shy of the rise it just made in its inflation forecasts. The pay packets may be a little bigger, but your purchasing power will be greatly reduced.
How much less? The Treasury expects inflation-adjusted wages to be nearly 4% lower by mid-2023 than its matching forecasts suggested just four months ago. Ouch.
However, there are some silver linings here. While the economy will be smaller than previously expected and the news about your purchasing power has worsened, much of the other news in the updated Treasury forecasts is not so bad.
Believe it or not, national income is stronger than previously predicted. Yes, stronger. This is not because the global economic slowdown is not taking the paint off commodity prices. Is.
However, the Treasury has long predicted a front plant like coal and iron ore prices. And while the prices of these major export earners are back, this is not happening as fast as the Treasury had allowed. The result is better-than-expected expectations for Australian export prices, and a related boost to national income.
And there is a second area of good news. By mid-2023 there will be more jobs and fewer people unemployed than previously forecast. How can a smaller economy create more jobs? In part, this is happening because of COVID-19. Now so many people are calling in sick that bosses need to hire more workers, just to get the same workforce they had before.
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But more jobs from a smaller economy isn’t just a side effect of the pandemic. While a cost of living squeeze is terrible if you’re a gambler, it’s an opportunity if you’re an entrepreneur. With wages becoming less and less of total business costs, each individual worker is generating more profit. In turn, this means that workers are now more competitive against “machines” than they once were.
So there is good news amid the current economic challenges. Even so, however, the politics of these new forecasts are not pretty either.
The good news is only for a relative handful of people: those who get new jobs or get higher benefits. However, these winners are being swamped by the number of losers as wage gains increasingly fall short of price increases.
Much of this pressure on your purchasing power is the backlash from war, flooding and China’s struggles with COVID. And none of them are under the control of the government in Canberra.
But the public isn’t often interested in excuses, even good ones, and voters can remain grumpy. A key test will be whether the government holds its nerve as the temporary petrol tax cut ends in two months.
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Another takeaway is that the Treasury believes the Reserve Bank should switch to decaf when it comes to raising interest rates. For which? Both the Treasury and the RBA are rightly concerned about the risk of a wage/price cycle developing. But it takes two to tango, and the Treasury’s wage forecasts are relatively relaxed and comfortable. If this turns out to be correct, then wages are not set in a spiral, meaning neither are prices. If so, then the Reserve Bank may stop raising rates earlier than the markets think and at lower levels.
And one last exit. You will have heard some terrible things about the budget outlook. Most people think that the debt driven by COVID is the biggest challenge. And it would be much better for the world and Australia, and the Australian budget, if COVID had never existed. It is therefore not surprising that this speech by the treasurer refers to spending pressures, including the rising cost of public debt.
However, while higher interest rates are a negative budget, higher prices are not. They have risen in part because profits are rising and higher wages are positive for the tax take. In fact, the 2021-22 budget deficit is likely to be more than $30 billion better than projected just four months ago, with another $30 billion carried over to this year as well.
But that’s a story for another day. For now, the new government wants Australians to know that the economy is facing challenges and that it is already underway.
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