- The Australian government is betting big on a lift in wage growth to boost revenues and bring the budget back to surplus.
- It sees Australia’s wage price index accelerating to 3.25% in the 2019/20 fiscal year, up from 2.1% at present.
- This forecast comes despite an expectation that it will be slow progress in lowering Australian unemployment.
The Australian government is betting big on a lift in wage growth to boost revenues and bring the budget back to surplus.
According to Treasury forecasts, Australia’s wage price index — currently sitting at just 2.08% — will lift to 3.25% in the 2019/20 fiscal year, an outcome it expects will help to boost household spending, nominal GDP growth and, as a result, budget revenues.
However, as seen in the chart below from the Commonwealth Bank, that’s been said before.
Year after year, its forecasts for wage growth have been far too optimistic, constantly overstating what’s been seen in reality.
Despite the track record, that hasn’t stopped Treasury from forecasting that a pick-up in wages is just around the corner. Indeed, as seen in the chart, it’s predicted that every year since 2011.
This year’s budget is no exception.
Of all of Treasury’s updated forecasts, most economists believe the biggest downside risk to government revenues comes from another undershoot in wages given the level of excess capacity that still exists within Australia’s labour market.
Unemployment, currently sitting at 5.5%, still remains well above the 5% level where wage growth is expected to accelerate.
Treasury’s own forecasts don’t have unemployment falling to this level until 2021/22, some four years away, yet it still expects wage growth to accelerate.
Adding to downside risks for wages, no one can say with any certainty that Australia’s full employment level, or the non-accelerating inflation rate of unemployment (NAIRU), is actually 5%.
It’s a guesstimate, and won’t be truly known until wage growth actually accelerates meaningfully.
Recent evidence from the United States, United Kingdom and Japan, among others, suggests the level where wages do pick up is now far lower than in the past.
Like Australia, wage growth in those developed economies remains muted despite labour market conditions being far tighter than here.
Despite this, Australia is expected to buck the global trend.
We’ll find out whether Treasury has finally nailed its wage forecasts in the years ahead, but on recent evidence both at home and abroad, the risks appear slanted to the further disappointment ahead.
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