How far must real incomes fall?

GDP growth parted company from income growth in 1999 – and there's every sign real wages are now set for a decline. How unions behave will make a significant difference for everyone.

An interesting piece of communication dropped into my letterbox yesterday – a survey from a local Labor MP asking residents to tick boxes to register which federal budget measures they were most unhappy about.

There are two ways to read the document, depending on which team you’ve decided to back in our wretchedly tribal political culture.

If you follow the number two team on the ladder, the Shorten Wanderers, the survey was a wonderful exercise in grass-roots democracy. Tell Labor which things you hate the most, and those are the issues they’ll address in parliament.

If you back current premiers, the Abbott Victory, the survey performs quite a different role -- getting householders to dwell on the budget nasties over the kitchen table is a clever way of keeping the doom-and-gloom narrative front-of-mind.

Whichever it was, across the nation voters are starting to get over the ‘sticker shock’ of Hockey’s horror budget. The ANZ-Roy Morgan consumer confidence survey released yesterday showed a second good improvement in two weeks. As I said last time, that’s heartening.

But is it enough? Australians have radically changed their consumption habits since the worst years of the credit crunch, with savings rates growing from nil to over 10 per cent in the course of a decade (see chart below). 

Graph for How far must real incomes fall?

Saved money doesn’t get locked up in stone vaults, of course. As much as some have saved, others have borrowed via the bank (and resurgent non-banks) and there are fears the stampede of investors into the leveraged investment-property market will see many lose their shirts -- in pockets of inner-city apartments at the very least.

That’d be shirt pockets, I suppose.

RBA chief Glenn Stevens has reminded punters that “house prices do not always go up” and many commentators warn that rather than stabilise or fall, house prices have lurched even higher as a multiple of household incomes.

Then again, Business Spectator’s own Adam Carr has launched a spirited defence of debt levels in Australia -- arguing, as Mark Bouris, executive chairman of non-bank lender Yellow Brick Road, did recently, that our economy has a unique place in the global economy that makes high levels of debt appropriate at this time.

The fly in the ointment comes via the ‘Dog Days’ thesis advanced by Ross Garnaut (see: Abbott's 'fiscal emergency' is the symptom, not the disease, July 11).

Garnaut argues that as the long terms-of-trade boom subsides – meaning that customers for our exports are willing to pay less in relation to the prices we pay for imports – real wages must also subside.

As this process occurs, Australians can either borrow more from abroad to finance current levels of affluence ... until our credit runs out and the debt-riddled economy falls over. Well that’s the short version.

Or alternatively, with wise governance, real incomes will fall and Australian consumers will just take it on the chin – realising that all those cheap imports were just a phase, and that level of wealth wasn’t sustainable. Again, that’s the short version.

But is there a third option, in which the terms of trade fall, but we just sell much higher volumes of our commodities to foreigners to help pay for our current standard of living?

Not really. As Stephen Bartholomeusz pointed out in May, miners are bracing for a period of much lower prices that just won’t be offset in their profit-and-loss statements by higher volumes.

And even if they were, it’s important to remember who benefits from miners shipping record volumes of iron ore, coal or (in the years ahead) LNG – mining company shareholders – a good majority of them non-Australians.

It does seem likely, therefore, that paying more for all those lovely foreign-made goods, while seeing less resources money flowing through the economy, will equate to at least a small decline in real wages.

To give some idea of what’s at stake, the Bureau of Statistics published a chart on the most recent set of national accounts, showing how growth in GDP and growth in real incomes – which normally proceed in lock-step – parted company around 1999.

On the chart below, the top line represents the real incomes that Australians have enjoyed. While we didn’t sell a proportionally higher volume of exports to the world, we did manage to sell them at record prices (iron ore and coal in particular).

The bottom line shows GDP plodding upward at a less exciting pace – a pace it could maintain (well if we’re lucky).

Graph for How far must real incomes fall?

But absent the terms of trade boom, the terms-of-trade component of real incomes will vanish. Poof!

Now, to get back to the Carr-Garnaut argument, the question of whether we’re over-indebted will be answered by drilling down into the data and asking ‘which Australians can afford a fall in real wages, and which cannot’?

Renters without huge unsecured debts might take a decline in real incomes in their stride. Likewise wealthy Australians with large debts probably also have room to move.

Sandwiched in between will be younger, over-leveraged Australians who will find the family budget stretched to breaking point. Let’s hope that cohort isn’t large.

Meanwhile, as real wages fall there is every sign the unions will be clamouring for money to replace the shortfall. ACTU secretary Dave Oliver has said he will push to “shield” workers from a “cruel and unfair budget by pushing through workplace claims to pass the costs on to employers’’, according to The Australian.

That may, ultimately, be a message a bit like the Labor survey mentioned above – a good way to remind workers of the budget nasties, and keep the Shorten Wanderers in the game for the 2016 Australia Cup.

Or it may signal a union movement that has lost the discipline shown during the Accord years from 1983 through to the end of the Keating era.

Back then, unions agreed to wage restraint in return for a social wage (Medicare, the super guarantee and so on).

This time, the Garnaut thesis argues, they will need to show wage restraint to allow the legitimate pain of a fall in real wages to happen, without a corresponding spike in wage-push inflation (which would undo all the good work).

If they were to play ball, the dollar could fall, the cost of living would rise, but we’d stand some chance of competing in global markets – and eventually rebuild real incomes.

Without such restraint, we’re likely to score an own goal. 

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