Stagnant wages, a higher tax burden, and labour market ‘slack’. Was this the federal government’s plan all along?

 In Uncategorized

In the years leading up to the 2020 pandemic, the federal government told us it had an economic plan and the plan was working.

It told us that repeatedly.

It said the central element of its plan was "budget repair." 

But it also wanted to deliver lower taxes, to increase the number of jobs, and to grow the economy, among other things. 

So how did it do?

Budget speeches explains what the plan is

The government was elected in 2013, nearly eight years ago.

Its first Treasurer, Joe Hockey, said this in his first budget speech: "The budget we announce tonight is the first word and not the last word on budget repair."

But how do you "repair" a budget? 

Well, remember the phrase "budget repair" is actually a metaphor that's designed to frame the way you think about government finances.

Think about the framing for repair.

If something needs repairing it's obviously broken, and there might be someone who can fix it, and you should let that person fix it since it's broken.

Why would you try to stop them?

It's very clever politically, but it can be damaging economics.

Why? Because if you think repairing the budget means getting the budget to record "surpluses" instead of "deficits", you're asking the government to take more money out of the economy than it puts into it.

That's because the only way to record a budget surplus is for government revenue (taxes and non-tax receipts) to be higher than government spending (payments).

But if the economy's already weak, what happens when the government deliberately takes more money out of the economy (via higher levels of taxation) to try to achieve that surplus?

In the graph below, have a look at what happened to tax receipts after 2007-08, the last year of the Howard Government.

Notice how the tax take dropped dramatically, and remained much lower during the years of the Rudd and Gillard Labor governments.

Australia's economy was hit by the global financial crisis in that period, and the government's tax revenue (from businesses and individuals) took a battering.

But notice how the tax take increased from 2014-15 to 2018-19, after the Coalition government started pursuing its plan of returning the budget to surplus come hell or high water.

It got within a whisker of achieving that surplus in 2018-19, and it did so, in part, with help from the tax-to-GDP ratio lifting to 23 per cent.

Ever since it came to power in 2013, the level of taxation at the federal level has been higher under this government, on average, than it was under the previous Labor government.

What about wages?

You might argue that the tax take has been higher under this government because the economy has been in a better shape than it was under Labor.

And that would be true, as far as economic growth is concerned.

But the health of the economy isn't just measured by economic growth.

You have to look at what's happening to people living inside the economy, to see if the growth is benefiting them via higher wages, quality jobs, and increasing living standards.

So, have a look at what's happened to wages growth in recent years.

Or how about we look at the unemployment and underemployment rates.

Just before the lockdowns last year, the unemployment rate was sitting at 5.1 per cent, which translated into 703,400 unemployed people.

And the underemployment rate was sitting at 8.6 per cent, which translated into 1,178,000 underemployed people.

Together, that meant there were nearly 1.9 million people who were either unemployed or underemployed.

Nearly 14 per cent of the labour force.

Or how about we look at employment growth.

When the Coalition came to power in 2013, then-prime minister Tony Abbott set a goal of creating 1 million jobs in five years.

At the 2013 election, there were 11,477,300 people with a job. Four-and-a-half years later, there were 12,506,800.

That means there were a little over 1 million extra people with a job after four-and-a-half years.

So he achieved his goal ahead of schedule.

But over that period, the unemployment rate only managed to decline from 5.7 per cent to 5.6 per cent, while the underemployment rate increased from 7.4 per cent to 8.4 per cent.

And despite all those jobs being "created" in less than five years, wages growth was still sitting near a 20-year low, at 2.1 per cent (it's even lower now).

So what happened?

Well, what the government hasn't make explicit is that many of those jobs were going to imported labour.

That's why that job creation wasn't helping to tighten the labour market and generate wage pressures.

On the contrary, it was preventing the unemployment rate from falling below 5 per cent.

Coincidently, Treasury and Reserve Bank officials have been using an unemployment rate of 5 per cent as a deliberate policy tool in recent years to suppress wages and inflation growth.

So the government has been working in tandem with them.

But significantly, those same officials have recently admitted that the economy could have handled a lower level of unemployment over the five years to 2020, somewhere between 4.5 per cent and 5 per cent.

So where would that leave the government's plan?

By business reporter Gareth Hutchens (Original ABC Article)