The RBA boss wants you to follow his path away from recession — even if that means more real wage cuts for workers

"We are not on a preset path," Reserve Bank Governor Philip Lowe observed on Tuesday, in the economic understatement of the week.

Thống đốc Ngân hàng Dự trữ Philip Lowe cảnh báo về nhược điểm nếu áp dụng biện pháp chống lạm phát của ông

Indeed, the path ahead looks no more predetermined than it has for the past two-and-a-half years.

Since COVID came along, followed by the war in Ukraine, no official forecast has survived more than a few months.

The outlook remains uncertain, but Lowe is trying his best to show the way — the path he would like everyone to stick to.

The so-called plan

The RBA Governor sees the inflation wave cresting at 7 per cent by year’s end, before gently easing in the new year after a further series of interest rate rises. A recession will be avoided and employment will remain strong. That’s the plan.

It involves some pain for mortgage holders along the way, but no economic crisis. Don’t panic. And definitely don’t do anything unnecessary that could drive inflation even higher and send the economy onto an entirely different path.

Lowe has publicly outlined this preferred path scenario twice in two weeks. He’s keen to get the message out.

Last week he appeared on the ABC’s 7:30 program to talk about his chosen course. This week he delivered a speech to the American Chamber of Commerce in Australia.

He wants everyone to know about the planned path. He is showing the way. And he’s warning of the dangers involved if we veer off course and end up somewhere else entirely.

Now, the tricky bit

To stay on the path, Lowe wants everyone to do their bit. This includes workers who might have hoped for some real wage growth after the election of a Labor government, which campaigned successfully with an argument about “everything going up except your wages”.

Minimum wage earners will see an increase of 5.2 per cent after a decision by the independent umpire last week, something the newly elected government was quick to welcome.

The RBA boss, however, doesn’t want that repeated across the workforce. Inflation might be headed to 7 per cent, but Lowe is advocating a wage rise of half that amount.

“Three-and-a-half per cent is kind of the anchoring point that I want people to keep in mind,” he says. In other words, it’s a continued real wage cut for most workers in the short term — if we’re to stay on Lowe’s preferred path.

Labor isn’t exactly celebrating that suggestion of only modest wage growth, but nor is it disputing the logic of avoiding a wage-price spiral. That would be far worse economically and politically for the Albanese government.

Another potential obstacle 

But wages aren’t the only threat that could see us veer off the path. Government spending is the other risk.

So far Treasurer Jim Chalmers appears to be heeding the warnings from the RBA.

From July 1, more than $12 billion will be pumped into the economy in the form of turbo-charged Low and Middle Income Tax Offset payments, announced before the election by the Morrison government and promptly backed in by Labor.

Beyond that, Chalmers has resisted calls for additional cost of living relief. In fact, he’s begun laying the groundwork for cuts, telling the Australian Financial Review on the weekend there was “a case for a more substantial look” at spending in his October budget.

State governments, however, appear to have missed the memo.

States back big spending

On the very day Lowe delivered his speech about the path ahead and repeated his warnings about veering off course, two state Treasurers announced big spending budgets.

In NSW, the Coalition government is boosting spending by more than $24 billion over the next four years. Almost half of that, or $10 billion, will flow in the coming 12 months, when the government just happens to be facing an election.

The spending, to be clear, is not all bad or necessarily inflationary. New childcare centers, an extra year of pre-kindergarten education and tentative steps towards replacing an inefficient stamp duty with land tax, should all have a productive benefit. They’re all aimed at growing the economic pie.

Less productive is the $7.2 billion in “cost-of-living” measures announced by the NSW Treasurer to help with everything from road tolls, school costs, and energy bills.

Similarly, the Queensland budget wasn’t all bad. A big boost in health funding should ease pressures on the system.

But an extra $6.8 billion to help Queenslanders with “cost of living pressures” is again pumping more money and stimulus into the economy — just as inflation climbs higher.

The temptation for politicians to pump cost of living relief into voters’ pockets is understandable. Whether it wins votes is debatable, as the recent federal election showed.

Whether it further fuels inflation and drives us off Lowe’s path, we’re about to see.

“It’s a fairly narrow path,” Lowe said in his speech on Tuesday. “It’s highly unlikely that we’ll get it exactly right. We’ll make mistakes. I hope the mistakes are not too large and we can self-correct.”

Nothing is preset.


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