Friday, 26 May, 2023
RBA governor warns Labor over wages
Phillip Coorey, May 26, 2023 – 6.00pm
Reserve Bank of Australia governor Philip Lowe has warned federal Labor MPs that generous wage rises they were backing would make inflation worse unless they were accompanied by increases in productivity, in what sources said was a series of tense exchanges this week.
As Labor and the unions back wage rises, in some cases linked to the current headline inflation rate of 7 per cent, Dr Lowe stood his ground during a private briefing on Wednesday with members of parliament’s economics committee.
Sources familiar with events said some Labor members of the committee had effectively accused Dr Lowe of demonising wage rises, when he stated that increases above 2 per cent to 3 per cent without a corresponding offset via a productivity increase would be inflationary.
And that, he said, meant the RBA would have to resort to the only “blunt instrument” at its disposal, which was to keep increasing interest rates.
“He repeated himself again and again because they kept coming at him, they were very persistent,” said a source.
The questioning then changed tack when the MPs – led by West Australian Tania Lawrence and Victorian Sam Rae – put to Dr Lowe that low-paid workers, who were the most affected by the interest rate rises so far, were therefore in need of a pay rise.
Dr Lowe responded to the effect of “there is nothing I can do about that”, and restated the bank’s statutory duty was to push down inflation using the blunt instrument of rate rises.
“He was trying to say that his job is not to always deliver good news and there is no way out of here that doesn’t have an impact,” said a source.
One of the Albanese government’s core promises was to restore real wages growth and, while stopping short of advocating specific figures, it has backed a series of wage claims made since the election a year ago.
This includes last year’s decision by the Fair Work Commission to give aged care workers a 15 per cent pay rise from July 1, at a cost to the budget of $14.1 billion. It has also given in-principle support to an application for a 7 per cent increase to the minimum wage, saying the nation’s lowest paid should not go backwards.
The government argued an inflation-linked wage rise for those on the minimum wage would not be unsustainable or inflationary, and would only cause problems if pursued by the broader workforce.
Citing previous comments by Dr Lowe that there had been no wage-price spiral, Treasurer Jim Chalmers has stated repeatedly that wages have not been the driver of inflation which has resulted in 11 interest rate rises in a year.
However, Dr Lowe’s warning to the committee this week indicates that the bank thinks more generous wage rises will start to become part of the problem without productivity increases.
Dr Lowe told the MPs he did not care what lifted productivity, be it technology or otherwise, but that it needed to lift alongside wages.
Labour productivity, represented by the level of output produced per hour of work, is the same today as it was three years ago, after falling 4.2 per cent since its peak in March last year.
Higher productivity growth allows the economy to expand at a faster pace without generating inflation, and is also the dominant driver of real wages growth over the long term.
Also this week, Workplace Relations Minister Tony Burke dismissed claims by BHP that Labor’s plan to crack down on the use of labour hire would cause a $1.3 billion increase in wages without a corresponding productivity increase.
Mr Burke argued the whole idea of clamping down on labour hire was to lift wages, and that companies should pay using their large profits.
As The Australian Financial Review reported on Thursday, Dr Lowe also told the committee during the briefing that more rate rises would come.
Dr Lowe, whose five-year tenure ends in September, said he had no tolerance for lingering high inflation and would do what he thought was needed to bring it down.
With headline inflation running at 7 per cent, the bank expects it to fall to 4.5 per cent this calendar year, and then to further decline to 3 per cent, which is at the top of the RBA’s target band, by mid-2025.
Unemployment, currently 3.7 per cent, is expected to increase to 4 per cent by the end of the year and to reach 4.5 per cent by June 2025.
One source said Dr Lowe sounded “not that confident” about being able to walk this “narrow path” when all the risk factors, such as a global downturn, were factored in.
“It was pretty pessimistic,” the source said of the briefing.
There is little expectation, either within the bank or government, that Dr Lowe will be offered another term.
Earlier this month, the RBA refuted claims by the ACTU and the Australia Institute think tank that high inflation was driven by corporate profiteering.
“This debate has particular resonance at a time when household budgets are being stretched by rising prices and interest rates because it bears on perceptions of how fairly the nation’s income is being split between workers’ income and corporate profits,” the RBA said.