Labor is caught in a web of contradictions
A public soaked in cheap money and fiscal entitlement faces a world where both have to be cancelled.
Australia now confronts its decisive transition – the battle against inflation and its expectations – with the Albanese government yet to decide how it presents this challenge to a public soaked on cheap money and fiscal entitlement in a world where both have to be cancelled.
The dilemma facing the government and our economic institutions was on graphic display this week – Reserve Bank of Australia governor Philip Lowe, now a converted hawk, predicted the cash rate will triple to 2.5 per cent while the Fair Work Commission under president Iain Ross lifted the minimum wage by 5.2 per cent to protect the low paid and deliver an increase in line with inflation.
The RBA pledges to defeat inflation while the FWC seeks to maintain real wages where feasible. Both institutions are doing their heroic job. Yet the contradiction between beating inflation and retaining real wages will be untenable as the future unfolds. The Albanese government’s woes on energy prices and unreliability are just the start. Our economic policies and institutions are heading into inevitable and sharp adjustments in a transformed world of higher prices.
Lowe’s prediction that inflation will tip 7 per cent this year destroys the foundations that have underwritten national politics for the past 30 years. Our politics is now trapped in an agonising slow-motion contradiction between past and future. The monetary and fiscal policies that enshrined the compassion politics on which Anthony Albanese was elected are slated for elimination while the fight against inflation will involve shock and hardship for a community unprepared in financial and cultural terms.
Local and global markets are on the march. The US central bank raised its key interest rate by 0.75 per cent – the biggest leap since 1994 – to combat an inflation rate of 8.6 per cent and signalled further aggressive increases throughout this year. US Federal Reserve chairman Jerome Powell said: “We’re not trying to induce a recession now.” But the risks of the US downturn are rising given the extreme delicacy of the bank’s challenge. “It’s not going to be easy,” Powell said.
Australia has forgotten too much about the reality of inflation. Being realistic, we face hefty increases in interest rates, higher prices for most sensitive household items, sharp increases in power bills, falling property prices, falling home valuations, a lower sharemarket – and future falls in real wages.
The country is going to be poorer and feel poorer.
This is not the 1970s revisited, and exaggerated warnings about stagflation are unhelpful. Yet it constitutes a substantial departure from the mood and assumptions on which Albanese was elected. The latest 3.9 per cent unemployment figure, with an extra 61,000 jobs, reveals a surging economy – yet this strength is a problem when the goal is beating inflation.
The government faces a wages contradiction. Higher wages are its mission. Employment Minister Tony Burke said of the FWC decision: “What this shows is there is no better time than now to get wages moving again.”
That’s ambition. But Labor faces a collision with the law of economics – higher wages drive higher inflation drives higher interest rates. How does Labor explain this reality so inconsistent with its election messaging?
Interviewed by Inquirer, Burke says: “Our wages policy will be informed by the jobs summit. That’s the start point. Historically the best way to deliver both a productivity dividend and a wages outcome has been through the bargaining system. But that system has nearly ground to a halt. Out of the summit I want to ensure we have solid ideas on how to get it moving again.” In short, reviving enterprise bargaining is the goal.
The inflation priority invests this with urgency. Lowe’s message is that the bank is on a mission. Bringing a 7 per cent inflation rate down to earth – or to the bank’s 2-3 per cent zone – demands steady increases in interest rates this year. How much? In his ABC interview Lowe says that’s unclear but “we’ll do what’s necessary”. He warns the public to get ready. But the markets think even more is necessary.
Sentiment points to another 50-basis-point increase next month, with markets expecting the cash rate will rise above 3 per cent next year. Mortgage holders will be punished and everyone will be punished on power bills.
Asked about Labor’s future policy on real wages, Burke says: “You deal with the economic circumstances in front of you.” Asked if real wage cuts will be necessary to combat inflation, he says: “Wages are not one of the current inflation pressures. Current inflation rates are not being driven by high wage increases. Both the governor of the Reserve Bank and the secretary of Treasury have previously stated that as long as wage increases don’t go higher than inflation plus productivity they are not inflationary. But Burke is a realist. Economic advice changes with events.
Labor will need to shift its policy and rhetoric yet work on the enterprise bargaining system to deliver down the track.
Albanese had a political victory this week. With an inflation rate of 5.1 per cent the government didn’t want workers going backwards and the FWC agreed. “It justifies our position,” the Prime Minister said. He said many people on the minimum wage “are the heroes who saw us through the pandemic”. But Albanese, sooner or later, must enter the real world. Compassion politics is sweet. But it constitutes a false dawn when the central bank is marching to an anti-inflation beat. At what point does Labor break the bad news that real wages will need to go backwards?
The grand paradox of the week, however, is that on energy policy the government’s long-run strategy remains in place. It is not ruined by short-term market failures – just the reverse.
The immediate crisis is a perfect storm that has shattered public confidence and raised the spectre of east coast blackouts. The alarm was driven by coal-fired plant outages, high gas prices and shortages, the impact of the war in Ukraine, policy blunders over a decade and generators gaming the system. The government offered full support for the move by the Australian Energy Market Operator to intervene and take effective control of the system to halt blackouts. Every step in this saga eventually will be passed to consumers in higher prices.
Yet Albanese and Energy Minister Chris Bowen, in a consensus-staged event on Thursday, highlighted Labor’s medium-term 43 per cent emissions reduction target as the key to consistent policy and generating fresh investment. Predicting salvation amid the chaos, Bowen said: “Today, Australia turns the climate corner. For years, the Australian government told the world that was all too hard. Told Australians it was too hard. Told the world that Australia wasn’t up to it.” Bowen said the current crisis made the transition to investment certainty only more urgent, a view backed by the business, union and environmental groups in attendance.
Anyone deluded into thinking this week’s crisis would drive Labor to increasing its emission reduction ambition or offering concessions to coal-fired power has been quickly disabused.
The political reality remains in place – Labor has wide institutional and public support for its 43 per cent reduction target that will become the Australian benchmark.
“The problem is there is not enough investment in renewable energy,” Bowen said. “There hasn’t been enough investment in storage. We can store renewable energy if we have the investment. That investment has been lacked for the past decade. That is the problem.”
Labor is the renewable energy party. There could not be a stronger enunciation of Labor’s views and priorities. It plans to test the political nerve of its opponents by introducing legislation when parliament sits next month to authorise its 43 per cent target. This will not be supported by the opposition.
Opposition climate change and energy spokesman Ted O’Brien tells Inquirer: “Our challenge moving forward is not to have an argument about what our long-term targets should be. The question is how we get there. The first question we will ask about the 43 per cent target is: what is the plan to get there, at what cost and who pays?
“The most important promise from Labor at the election was to cut the cost of power bills. That is the promise I will hold them to account for.”
In government, the Coalition opposed the legislation of the target. There is no prospect that the new Opposition Leader, Peter Dutton, will shift ground and help to legislate Labor’s target. That means the political heat falls on the Greens and the teals.
Greens leader Adam Bandt has kept his final options open while attacking Labor and saying that when the legislation comes before the parliament the Greens will insist that Labor stop opening new coal and gas prospects – a demand Labor will reject.
This showdown early in the life of the new parliament will have profound political and symbolic import. Labor does not need the legislation to implement its policy. But Labor wants a test of progressive opinion on the floor of parliament. The Greens remain haunted by their 2009 decision to vote down the Rudd government’s emissions trading scheme – an event that has had ramifications to the present day. The moral: don’t let the perfect be the enemy of the good.
The Greens feel empowered by their expanded numbers at the recent elections. The question is whether success has made them more pragmatic or merely left them as ideological as before. As for the teals, early signals that they will reject Labor’s 43 per cent target suggest a future bordering on ideological irrelevance.
Albanese’s relentless message this week is that he will blame the immediate energy crisis on what he calls the Coalition’s “decade of denial” of proper energy policy. And he can probably get a lot of traction with that blame game. It will be far more difficult, however, over the coming year to blame higher interest rates on the former Morrison government.
This week the major employers issued stark warnings that the FWC’s decision “will add fuel to the inflation fire”. As the year advances, the government will be judged by whether its economic policies succeed or fail in the quest to tame inflation.
In truth, nine of the past 10 minimum wage decisions have seen an increase higher than the previous consumer price index. The FWC was never likely to break its pattern and repudiate the new government. But nobody should doubt the risks; higher wages in this climate will set new benchmarks in a situation whereby nobody is sure how high inflation will rise.
In his response, Australian Industry Group chief executive Innes Willox said: “The cost increase will be difficult to absorb for businesses that are already struggling to cope with big increases in material and energy costs, interest rate rises, supply chain disruptions and labour shortages.”
Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the increase was “too much” in the current situation and will cost businesses $7.9bn a year with the certainty that jobs will be put at risk.
After the wage decision, in a joint statement Albanese, Jim Chalmers and Burke claimed the credit for the extra $40 a week for full-time minimum-wage workers along with award minimum rates for about 2.6 million workers increasing by 4.6 per cent – a figure below inflation.
“This is a great result for these workers,” the ministers said. “But it’s only the beginning. The government is determined to get wages moving again. Our submission to this wage review was simply the first step.”
Burke said the conventional economic wisdom on wages – that low unemployment would automatically drive wages – had not materialised. If the Liberals were to be believed then 3.9 per cent unemployment would have done the job – but it hadn’t. But, as Burke tells Inquirer, the government’s wage focus must now move to productivity and restoring enterprise bargaining.
High inflation imposes ugly choices on governments. Much of the economic success of the 1980s was because Bob Hawke and Paul Keating used the Accord to deliver real wages cuts. If the hard decisions are not imposed then the consequences of rising inflation are even worse.
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