Real wages to take larger hit as inflation pressures grow: Chalmers

The nation’s workers are being told to prepare for an even bigger fall in their after-inflation wages as Treasurer Jim Chalmers signals a “confronting” economic future that will force the government to find new ways to relieve supply chain issues across the country.

As Nobel laureate economist Joseph Stiglitz warned Australia was in an economically fragile position, Chalmers said he will use an address to parliament next week to reveal how the lift in inflation and the Reserve Bank’s aggressive increase in official interest rates will hit growth and the household sector.

Treasurer Jim Chalmers says the hit to real wages will be larger than expected in the March budget.Credit: Alex Ellinghausen

The budget was delivered in the last week of March, six weeks before the Reserve Bank started to lift interest rates and a month before it was revealed inflation was running at a near-20-year high.

Since then, inflationary pressures domestically and around the globe have intensified, the RBA has increased interest rates at three consecutive meetings and is expected to lift them again in August while the jobless rate is at a 48-year low of 3.5 per cent.

Chalmers said he would update almost all the budget’s key economic forecasts with many people likely to be surprised by the extent of the hit to real wages.

“[It] will be in many ways confronting when it comes to our expectations of inflation, when it comes to the impact of interest rate rises on growth, when it comes to what this spike in inflation means for real wages,” he said.

“There will be aspects of this ministerial statement that people will find confronting.”

The March budget forecast real wages to go backwards by 1.5 per cent in the just completed 2021-22 financial year. Wages were then expected to out-pace inflation through 2022-23 and 2023-24.

But since then, inflation has lifted by much more than expected. The Reserve Bank now believes it could reach 7 per cent by year’s end.

Chalmers’ economic update is likely to show real wages going backwards through 2022-23, which would mark a third successive year of inflation outpacing wages growth.

He said there was no credible forecast that suggests wages could keep up with inflation at present, while the RBA’s higher interest rate settings would affect broader economic growth.

The treasurer said the budget had to do more policy heavy lifting by focusing on ways to lift overall productivity, especially by improving supply chain networks across the country.

“Almost every element of our economic plan is about making our supply more resilient, making sure that we can get the workers that we need, making sure we can get the goods to market, making sure that we can lift the speed limit on the economy,” he said.

While Chalmers will update the state of the economy, it won’t be until October that the Treasurer hands down a new 2022-23 budget. That will include savings the new government says it has found since taking office.

Stiglitz, who is touring Australia and meeting with politicians including Prime Minister Anthony Albanese and Chalmers with support from the independent think tank the Australia Institute, said the US was very close to if not already in a recession, with poor employment figures and the Federal Reserve hiking interest rates at a rapid pace.

Anthony Albanese with Nobel laureate Joseph Stiglitz. The US economist says Australia is in a fragile economic position.Credit: Twitter

He said Australia was in a much more robust position than the US, but if the government did not focus on improving economic supply including more workers and improved local manufacturing, the country was at risk.

Australia was “not as likely” to tip into a recession, Stiglitz said, unless a combination of European Union and US policies drive recessions and growth in China remains sluggish.

“That means that the global economy will be particularly weak, and particularly weak for Australia. And that means, I think, you are in a fragile position,” he said.

Hiking interest rates is only one “very blunt” measure to get inflation down, Stiglitz said. The government should look at measures to increase the labour force, including through immigration, and its planned changes to childcare. Policies to improve manufacturing productivity and green energy investment would also help, he said.

Stiglitz said there was only a small risk that the government cut back spending by too much. But one thing the government should look at is introducing a windfall tax to big businesses that make a huge profit from exports, including the gas and mining industries.

“When you see such redistribution caused by high energy prices, and the money going out of the country because they’re foreign-owned, disproportionately, it seems to be almost a no-brainer,” he said.

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