A numbers game to be played out in election campaign

Opposition Treasury spokesman Jim Chalmers. Picture: Zak Simmonds

Two numbers in Josh Frydenberg’s 2022 cost-of-living election budget stand out. One demonstrates the remarkable success of the government. The other Labor will see as wishful thinking.

They are the budget forecast for unemployment and the forecast for wages growth. During the election campaign these numbers could be just as important as any cost-of-living cash splash.

The unemployment rate is forecast to reach 3.75 per cent in the September quarter of 2022. More Australians in work means almost three-quarters of the $133.5bn improvement to the budget outlook since MYEFO has been led by stronger household incomes. It blows the increased company tax receipts out of the water.

The Treasurer says this is not luck and the budget will deliver more jobs and higher wages.

But will it really?

The wages price index is forecast to be 3.25 per cent by mid-next year, rising to 3.5 per cent over the forward estimates. Inflation is forecast to moderate from 4.25 per cent this year to 3 per cent in 2022-23 and 2.75 per cent in 2023-24. Ergo, we should see real wages increase.

Forecasting inflation in a volatile world is tricky.

The cash splash will fuel inflation. Add to that uncommitted spending the government has for campaign spending. The figure is not split out from the “not for publication” commercial-in-confidence decisions, but sits at $985.4m. Price cuts at the bowser and dollar handouts are temporary, but the once-temporary low- and middle-income tax offsets brought in during the pandemic have not been withdrawn and now look baked in.

The basic supply/demand and price dynamic to drive up real wages growth has proved disturbingly elusive – just ask the RBA governor. Labor knows it and is already telling anyone who will listen that the government has been more wrong than right on its promise of wages growth.

Business argues that wage rises must come with productivity increases. Productivity comes with business investment and long-awaited reform.

The budget forecast on business investment growth looks surprisingly bullish given the ongoing concerns voiced by the Business Council of Australia. Non-mining investment, expected to drive growth in overall business investment over the next two years will rise by 7 per cent in 2021-22 and 9 per cent in 2022-23. What is not in the budget, however, is the proportion of fixed capital investment as a share of GDP, the capital intensity of the economy. Even if the capex forecast proves true, it will still leave Australia at low levels of capital investment to GDP by historical standards.

BCA chief executive Jennifer Westacott said “long-term business investment remains the missing link. The budget shows a sever investment decline in the outer years, coupled with GDP growth back to 2.5 per cent – that is not the basis of sustained wages growth.”

But the skills package is welcome news, including initiatives to incentivise small businesses to upskill workers.

Business confidence in February was at its highest in four months, according to NAB. The government’s problem is it will take time to see these investments deliver productivity increases, and wages growth remains unclear.

Missing, not at all unexpectedly in this budget, is any attempt at reform, either on tax or industrial relations, which business has long argued is key to productivity.

Watching all this are Labor and the unions, which are prepared to look to other solutions for real wage rises if the fall in unemployment and further tightening of the labour market does not work.

The risk for business is that a Labor government will change the enterprise bargaining landscape to empower unions to force business to deliver higher wages, with greater industrial action allowed and access to arbitration if unions cannot get agreement.

This risk should focus the minds of business leaders to address wage increases, before inflation pressure makes it impossible for the RBA to hold fire on rate rises driving the unemployment number lower.