CBA's chief economist just renewed his call for a discussion on wages policy

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  • Last night’s budget forecast was underpinned by optimistic assumptions about wage growth
  • Domestic wage growth remains historically low, and CBA chief economist Michael Blythe says there should be more discussion about wages policy.
  • Blythe said policy makers should consider tax-cuts for companies that commit to lift wages and capital investment.

Last night’s Federal budget showed the Turnbull government expects to return the budget to surplus by the 2020 financial year.

Factored into that forecast is a steady increase in income tax receipts as a result of higher wage growth – despite promises of tax cuts in the budget. Wage growth is forecast to rise to 3.25%, up from the current growth rate of 2%.

As my colleague David Scutt pointed out, those projections look somewhat optimistic — and the government has a poor track record when it comes to wage forecasts.

Aside from the government’s fiscal position, an improvement in wage growth is also a key factor in the outlook for the broader economy given that domestic consumption comprises around 60% of GDP.

And according to CBA chief economist Michael Blythe, a specific plan to boost wages should be on the agenda for policy makers.

“Wages are the key to many parts of the economic and policy story at the moment,” Blythe said.

“A wages boost would alleviate some of the strains on household budgets and reduce the risks from high levels of household debt.”

When it comes to the challenges faced by the Australian consumer, Blythe said the federal government’s introduction of income tax cuts “should be applauded”.

However, even that misses the point to some extent from a policy perspective.

“Economists talk endlessly about monetary policy and fiscal policy. But wages policy should be on the agenda as well,” Blythe said.

He noted that wage growth is generally viewed as a flow-on effect of a growing economy as businesses become more profitable.

Companies then look to invest capital and hire more staff, at which point wage growth begins to pick up. In that context, Blythe said most economists would also welcome further company tax cuts.

But while business conditions for Australian companies are at all-time highs and the economy added a record number of jobs in 2017, wage growth has remained stubbornly low.

In addition, the Turnbull government’s push for a lower company tax rate has been difficult to achieve. In that environment, Blythe questions how long we can actually afford to wait.

He advocates for some more concrete ideas to boost wage growth, and repeated his assertion from late-April that Japanese-style wage incentives for local businesses should be considered.

“One possibility worth debating is the idea being discussed in Japan of skewing tax cuts to those companies that agree to lift wages and capex,” Blythe said.

For now, policy makers continue to keep faith that strength in other areas of the economy will underpin their optimistic wage-growth forecasts.

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