Treasurer Jim Chalmers backs ‘sustainable wage increases’ amid tightening rates crises

Jim Chalmers has called for ‘sustainable wage increases’, arguing business would struggle to afford persistently large pay rises.

Treasurer Jim Chalmers has made clear that wage rises needed to be ‘sustainable’, amid spiking cost of living. Picture: NCA NewsWire/Sarah Marshall

Jim Chalmers has called for “sustainable wage increases”, arguing that inflation would return ­towards more normal levels in 18 months’ time and that business would struggle to afford persistently large pay rises.

The fastest-paced rate tightening cycle in history threatens to heap more misery on households with mortgages, with Westpac on Friday saying the Reserve Bank would lift rates by a further 2 percentage points to 3.35 per cent by February, with half of that increase delivered in the next two RBA board meetings.

With inflation expected to peak at about 7 per cent by the end of this year, the Treasurer on Friday acknowledged the pressure plunging real wages was putting on Australian households, and that he wanted “wages growth to be strong and sustainable”.

“For the best part of a decade now, we’ve had stagnant wages in this country and that’s why people no matter how hard they’ve worked, they’ve fallen further and further behind,” Dr Chalmers said in Brisbane.

“And that’s especially the case now that we do have this genuine cost-of-living crisis in our economy. People are finding it incredibly difficult to keep up with the high and often rising costs of groceries and petrol and electricity, and other essentials,” he said.

Ahead of an economic statement to parliament on Thursday, Dr Chalmers said “we won’t have inflation up near 7 per cent forever”.

“My message to Australians is inflation will get worse before it gets better, but it will get better. We expect inflation to start moderating throughout the course of next year and return to something more normal soon after that.

“We want to see wages growth in this economy.

“We want people to be able to keep up with the cost of living, but those wage increases need to be sustainable, so that businesses can afford to pay them when inflation moderates.”

Reserve Bank governor Philip Lowe has warned there was a risk of a “wage-price spiral” should higher wage claims based on inflation lead to a self-reinforcing cycle with consumer price growth.

Unions are negotiating outsized pay rises to help workers keep pace with the soaring price for essentials such as petrol, food and electricity.

Teachers in Queensland recently secured a 11 per cent wage rise over three years. It included a provision for a 3 per cent annual “cost-of-living bonus” where inflation exceeded the pay rise in any given year, laying the foundation for a 7 per cent wage increase come next July.

As businesses battle surging costs and struggle to find appropriately qualified staff amid the tightest labour market in decades, employers were alarmed when the Australian Manufacturing Workers Union said it could pursue wage claims of 8 per cent.

Westpac chief economist Bill Evans. Picture: Alan Barber

Westpac chief economist Bill Evans said his new forecast for a peak RBA cash rate of 3.35 per cent was well above his previous 2.6 per cent estimate.

“Just as the (RBA) board overstimulated the economy in the face of the Covid threat, so it will be prepared to tighten to address what it perceives as the greater risk: losing control of inflation expectations at this time of rising inflation and very tight labour markets, rather than finetuning the economic downturn,” Mr Evans said.

Mr Evans said a more aggressive anticipated rate cycle would further slow the economy next year, leaving real GDP growth at an estimated 1 per cent, rather than 2 per cent. Unemployment would still fall to 3 per cent by the end of this year, Mr Evans predicted, but then push up to 4.2 per cent in 2023, before moving higher again in 2024.