- The federal government’s December budget showed a pickup in income tax receipts.
- That can be a positive leading indicator for wage growth, according to Commonwealth Bank.
- But CBA still highlighted structural factors which mean any uptick in wages will be gradual.
The federal government has reported a rise in pay-as-you-go (PAYG) tax receipts from Australian workers.
That may be a good sign ahead of this Wednesday’s headline release of Q4 wages data from the ABS (11:30a AEDT).
“The trajectory in wages growth has turned. The growth rate in PAYG receipts per employee has been trending higher and is consistent with a slightly stronger outcome for wages growth in Q4,” CBA senior economist Kristina Clifton says.
PAYG is a system for paying tax in installments to the federal government, based on what an individual is expected to earn over the course of the financial year.
The detail was part of the government’s budget update for the December quarter, which Clifton combed through for clues ahead of key data releases for wages and GDP.
“The budget outcomes are influenced by the economy so changes in budget flows can provide a reading on how the economy is tracking,” Clifton said.
Tax data has the added benefit of being more timely than Q4 GDP data from the ABS, which is scheduled for March 7.
And when it comes to wage growth, higher PAYG tax receipts typically act as a good leading indicator (2 months in advance) for wages to start trending higher.
This chart from CBA shows the correlation:
Clifton says the rise in PAYG receipts is also consistent with strength in Australia’s labour market, which added a record amount of jobs in 2017.
So it follows that with more people in jobs, a higher amount of income tax receipts will be generated.
But Clifton notes that despite strong jobs growth, Australia still has a relatively high rate of underemployment — a measure of those who have a job but would like to work more hours.
“We expect the recovery in wages growth to be gradual as there is still spare capacity in the labour market,” Clifton says.
So while the government’s budget numbers suggest this week’s Q4 wage data could surprise to the upside, structural headwinds still remain.
The median forecast this Wednesday is for quarterly wage growth of 0.5% leaving the annual rate at 2% — still near historic lows after a bad miss in the September quarter.
The release of Q4 wage data on Wednesday has taken on added significance amid an extended run of record-low wage growth.
And given the connection between wage growth and inflation, upcoming wages reports figure to play a key role in determining the outlook for the broader economy and future interest rate moves by the RBA.