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29 December 2014
by John Kelly

The Government’s Economic Credentials in Freefall.

If you want more evidence that the present government is doing its best to wreck our economy, a stark example was revealed just before Christmas, one that should satisfy the most hardened of LNP supporters. It further illustrates their lack of understanding of how our economy works.

When reporting the national accounts figures in early December, Joe Hockey stated that, “We have falling commodity prices and we have weaker wage growth.” We all knew about the falling commodity prices and why that was happening but little has been said about weaker wages growth and why that has an impact on demand.

The LNP believes higher wages lead to higher costs and therefore higher unemployment. That’s why they oppose them at every opportunity. But wages growth as at September 2014 was just 2.6% for the year, which translates to a drop of $2.3 billion in tax revenues from the 2014-15 budget estimates. No wonder Hockey was looking so despondent when presenting the national accounts. And guess what? Unemployment is increasing.

You would think it was a no-brainer. Higher wages means higher tax revenue as well as greater demand for goods and services which then feeds into more employment opportunities. But, it seems our three amigos, Abbott, Hockey and Abetz, don’t see it that way. The irony is that if they had their way, the wages growth figure would be even lower.

In an address to the Sydney Institute last January, Eric Abetz chided employers for being too willing to give in to excessive wage demands. In addition to that he said, “Employers and unions must be encouraged to take responsibility for the cost of their deals, not just the cost to the affected enterprises, but the overall cost in relation to our economic efficiency and the creation of opportunities for others.”

On the face of it one would say this is perfectly reasonable. But the subsequent actions of the minister throughout 2014 suggest a different outcome in terms of economic efficiency. On July 1 he cancelled the Commonwealth guidelines for cleaners on government contracts that guaranteed them $22.02 per hour.

When their existing agreements expire they will receive the minimum wage of $17.49 an hour, a 20% cut. That means they will pay less tax.

The offer of 1.5% to the defence forces, the one that got Jacquie Lambie all fired up, was going to be the benchmark for pretty much every other wage offer that would be put on the table. In addition, Abetz own staff were offered a 0.5% increase. Other government agencies will get nothing.

All of these decisions are contributing to low wages growth that will continue to impact on tax revenues. As Bill Mitchell, director of the Centre of Full Employment and Equity at the University of Newcastle told Peter Martin of The Age:

“It’s as if they don’t join the dots. They’ve got a range of little narratives that they pull out at different times to suit different needs. One is wage restraint. That’s to placate business. Another is the health of the economy. Another is fiscal deficits. They don’t seem to realise that they are connected,” he said.

This is the reason real wages are stagnant and consumer buying power isn’t moving. This hasn’t happened since the late 1990s when Peter Costello began producing surplus budgets and starved the economy of money.

On that occasion consumer demand continued to grow but was financed not by wages growth, but by a massive increase in private sector debt, namely household credit card debt. Households were borrowing to meet their needs.

Credit card debt today suggests that not much has changed. If wages growth is constrained to the present 2.6%, credit card debt will continue to rise and tax revenue will continue to fall. Ultimately this will lead to a private sector debt bubble and a recession. It’s not rocket science.

It is pretty obvious that the average man and woman in the street already realises this. Their opinion of the government’s economic credentials is in decline. An opinion poll taken in November reveals that Tony Abbott’s popularity with all voters, but particularly women, suffers in all areas of management, but particularly in the area of the economy.

“While 29 per cent of men rated as good the government’s performance on economy and finances”, only 16 per cent of women did,” writes Jacqueline Maley of The Age.

Perhaps Abbott’s recent reference to the carbon tax and women’s concerns about household budgeting missed another more crucial factor, i.e. wages growth or lack of it. The problem is neo liberal ideological paranoia. So much of what they believe centres on the private sector thriving.

But the private sector is not thriving and if it is allowed to continue this way without some injection of government spending similar to Kevin Rudd’s 2008 stimulus, the economy will implode. That’s not rocket science, either.