To scrap or not to scrap the wages cap, that is the question.
Premier Dominic Perrottet alleges Labor’s approach to wages policy is “so radical” it will blow a big hole in the budget and jeopardise the state’s infrastructure pipeline. Labor leader Chris Minns says that’s a desperate scare campaign.
Wages policy has been a major focus during the NSW election campaign and featured in the first leaders’ debate at 2GB radio last month.Credit: Dominic Lorrimer
Suddenly, the pay packets of 430,000 government employees are at the centre of a key NSW election battleground. At the heart of the political skirmish is a cap on wages growth for public servants introduced by the government soon after it won office in 2011.
The cap was first set at 2.5 per cent. It was reduced during the COVID-19 crisis then lifted to 3 per cent as inflationary pressures grew last year. An additional 0.5 per cent is on offer next financial year if “productivity improvements” can be achieved to absorb the cost of the increase.
Labor wants to remove the cap, arguing that will allow greater flexibility in negotiating public sector wages and work practices.
Last year Minns suggested public sector wages should keep pace with inflation. “We certainly want to move to a system where we can negotiate with our own employees if we were elected the government of NSW in March 2023,” he said in April. “That means paying a lot more than 2.5 per cent, that means obviously keeping pace with inflation.”
Since then, the inflation rate has surged to 7.8 per cent, the highest in three decades and nearly 5 percentage points higher than the government’s wages cap.
Minns’ move to broadly link inflation to public sector pay last year opened the door to a Coalition attack, allowing Perrottet to prey on the ambiguity surrounding Labor’s wages policy.
Last month the premier released wage scenarios, calculated by NSW Treasury, showing public sector pay increases in line with inflation forecasts could cost the state budget $8.6 billion over the next four years.
“The NSW Labor plan to unleash public sector wages is a recipe for economic disaster that will stall our economy and take NSW backwards,” Perrottet said.
Shadow treasurer Daniel Mookhey hit back, saying the government was “frothing about a fictional policy Labor has not announced”.
Minns claimed last month he had “never made it part of Labor’s pitch” to lift public sector wages to meet inflation. He also cited a NSW Treasury forecast that inflation will fall to 2.5 per cent by mid-2025 and said any public sector pay rises above that level would need to be funded by “budget savings and productivity gains”.
But so far Minns has not identified what specific savings or productivity improvements he has in mind.
Labor governments in other states have not increased public sector wages in line with inflation. New enterprise agreements recently approved by the Queensland Labor government for nurses, teachers and police officers had “pay rises of 4 per cent in both 2022 and 2023 and 3 per cent in 2024”, a Reserve Bank report noted this month.
Employee expenses for the NSW government are expected to reach $41.2 billion this year, rising to $45.9 billion in 2025-26.
The Sydney Morning Herald has calculated the additional cost to the budget of three potential scenarios if NSW public sector wages were allowed to rise above the current 3 per cent cap policy.
Employee expenditure of 0.5 per cent above current forecasts (made under the cap) would cost the budget $1.33 billion over the next three financial years. Employee expenditure 1 per cent above the current forecasts would cost $2.67 billion over that period, while employee expenditure 2 per cent above would cost an additional $5.37 billion. (Those estimates do not include potential revenue increases due to higher collections of GST and other state taxes).
It is important that wages policy is debated during the NSW election campaign – public sector salaries and superannuation will account for around 42 per cent of all state expenditure this financial year.
The NSW government employs more than 430,000 people (when all full-timers and part-timers are counted) with health workers and teachers together making up almost 60 per cent of that total.
The Coalition’s wages cap has helped constrain state expenditure during the past decade, but the policy has been controversial.
Wages growth for NSW government employees has trailed growth for private sector workers in the state for the past three years, Bureau of Statistics figures show.
Public sector wages in NSW have failed to keep up with inflation for some time meaning the living standards of frontline workers such as teachers, nurses and firefighters have been declining.
Government wage caps, in NSW and elsewhere, have been blamed for entrenching real wage stagnation, a major economic challenge during the last decade.
Unions NSW assistant general secretary Thomas Costa said the wage cap is a blunt instrument that undermines the incentive for productivity gains within the workforce.
“Essentially, it restricts the ability of the parties to negotiate based on the individual interest of that department and the employees of that department,” he said. “So there’s no ability to trade off conditions or work through conditions, you have to try and make things cost neutral, which just becomes an impossible exercise; too onerous, too difficult, and so the parties just don’t negotiate agreements, they just arbitrate awards.”
Economic circumstances have forced the NSW government to shift the wages cap several times in recent years calling into question the point of a threshold that changes so regularly.
The Coalition will likely come under pressure to raise its cap yet again, should it win government.
Public sector wages growth in NSW rose by just 2.5 per cent last year Bureau of Statistics figures released on Wednesday show – way behind private sector wages growth of 3.6 per cent.
The Reserve Bank forecasts economy-wide wages growth to hit 4.25 per cent nationally later this year – far higher than the NSW cap.
A re-elected Perrottet government will find it difficult to justify wage outcomes for the state’s public servants which trail so far behind workers in other sectors.
If the pay of NSW government workers continues to lag, the state runs the risk of losing its best workers to higher-paid alternatives elsewhere.
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