Australians were suffering from weak wages growth long before the coronavirus pandemic
Think about your income.
In the past four years (before the “coronacession”), were you getting regular pay rises?
From 2016 to 2019, the Remuneration Tribunal awarded them an annual 2 per cent pay rise four years in a row.
That may not sound like much, but it took their base salary from $195,130 to $211,250 — an 8 per cent increase.
It meant by the end of those four years, they had taken home an extra $39,900 than they otherwise would have if their pay had remained at $195,130.
Now think of your own circumstances.
Did you enjoy an 8 per cent pay rise between 2016 and 2019?
If you didn’t, it might illustrate why consumer spending had become so soft prior to COVID-19.
Once you adjust for inflation, average weekly ordinary time earnings (for adult employees working full time) grew by just 0.5 per cent a year for the five years to November 2018.
Weak wages growth has become a national problem.
Australians hit by financial double whammy
Prior to COVID-19, household budgets were being hit from both sides — they were experiencing persistently weak income growth and a rising tax burden.
It had household budgets under real pressure.
Belinda Allen, a senior economist at Commonwealth Bank, explained the situation in a note to clients last week.
She said part of the reason why the household savings ratio had jumped to a record 19.8 per cent this year — the highest level since 1974 — may be because people were using their unprecedented stimulus payments to rebuild the savings they lost over 2016-2019.
People aren’t spending any government stimulus — they’re holding on to it.
So why are people saving?
Put simply, because they are uncertain about the future. And household finances have been shaky for some time.
Growth in real household disposable income has averaged 3.1 per cent since 2007, but between 2016 and 2019 it averaged just 1.4 per cent.
That occurred because there was a slowdown in both income growth and non-labour income growth — things like social security and rental income.
Money for non-essentials has become so tight, any unexpected or unplanned expense could throw out entire household budgets.
And at the same time, taxes were increasing.
The ratio of tax paid as a share of gross income was 11.8 per cent in mid-2010, but it climbed to 15 per cent by the end of 2019.
Bracket creep was the main driver. Inflation, and any pay rises people did manage to receive, slowly pushed incomes into higher tax brackets, so the proportion of weekly income going to taxes was increasing over time.
Ms Allen said reports the Federal Government was planning to bring forward legislated tax cuts in this year’s budget would help to alleviate pressure on household budgets.
“If the income-tax paid share was reduced to 13.7 per cent, the average of the period since 2002, $13 billion less taxes would have been paid over the past 12 months, representing just over 1 per cent of real household disposable income,” she said.
“If the tax to income ratio fell to 11.8 per cent, which was the low reached in 2010, this would have seen $45 billion less taxes paid over the past 12 months, or 4 per cent of real household disposable income each year.”
She said personal income tax cuts delivered now would help to free up permanent cash flow in households by boosting their income and reducing their tax burden.
The theory is, by reducing taxes people will have more money in their pockets, which means more money will be spent in the economy.
However, tax cuts won’t solve the whole problem.
Workers need more cash at their disposal
They’ll only address one symptom of a larger phenomenon that has bedevilled the economy — households have been struggling because wages haven’t been growing.
And the issue of weak wages growth existed long before the pandemic and bushfires.
Weak wages growth had caused weak consumption, which had contributed to weak inflation growth, which saw inflation expectations falling.
Those at the coalface negotiating wage increases — union officials — have been lowering their inflation expectations since the global financial crisis.
Expectations for what the inflation rate will be in 12 months for both union officials and market economists have been consistently weak since December 2012.
And both groups of experts, who are paid to be realistic about the state of the economy, have still proven to be too optimistic when it comes to inflation.
The actual inflation rate has been well below their expectations for years.
Take the December quarter in 2018; trade union officials had predicted a 2 per cent inflation rate and market economists had pegged 2.2 per cent. But the actual inflation rate came in at 1.8 per cent.
The “coronacession” has put a spotlight on the structural problems in the economy that tax cuts alone won’t address.
“The other key issue is wages growth and employment prospects,” Ms Allen wrote in her note to clients.
“Wages growth has already slowed and will continue to do so. The Wage Price Index slowed to just 1.8 per cent [annual growth] in the June quarter of 2020, the lowest growth rate in the 22-year history of the series.
“Pay cuts and wage freezes have seen the myth of downward wage rigidity busted and a further slowdown is expected, taking real wage growth into negative territory.”
Cutting staff versus cutting wages
The myth of the so-called “downward wage rigidity” Ms Allen referred to is the economic theory that employers find it difficult to cut wages during downturns and instead find it easier to cut staff.
But we’ve seen multiple examples of pay cuts and wage freezes this year, as employers have tried to keep as many staff on as possible.
That’s going to put further pressure on wage growth in the coming years because workers will have to fight to regain those losses.
Our federal politicians who have already seen 8 per cent growth in their base salary since 2016 will benefit from any tax cuts the Government brings forward.
But they’re not the ones who need it — given they’re already in the highest income group in the country.
Tax cuts are no substitute for strong wage growth.
Consumers are likelier to spend more when their wages are growing strongly.
And weak wages growth existed well before COVID-19.