After the election: challenges ahead

Emerging from the other side of election day, one thing is clear: the Albanese government has an uncertain road ahead. The government has inherited an economy with real challenges. Prices are rising faster than wages (and we’ve recently seen the first interest rate rise in over a decade), Australian businesses and households are still recovering from the effects of the COVID-19 pandemic, and the country is still dealing with the consequences of ongoing supply chain disruptions.

Wages growth emerged as a key policy issue during the campaign, and will be a prominent policy focus for the newly elected government.
Growth in the Wage Price Index (WPI) has been relatively stagnant over the past decade, with data released last week confirming annual wage growth at just 2.4%, while the Consumer Price Index (CPI) is rising at a rate of 5.1%. Real wage growth is calculated as the difference between growth in the WPI and growth in the CPI – and as shown in Chart 1, Australian real wages have been shrinking since mid-2020.

Chart 1: Real wage growth, March 2002-March 2022

Source: Australian Bureau of Statistics (ABS).

The latest Reserve Bank guidance was for relatively slow aggregate wages growth in the near term, with growth in the WPI forecast to reach 3% by the end of the year. While the previous government focused on maintaining low unemployment to boost wages, the Albanese government has pledged a policy focus on stimulating real wage growth.

The challenge will be how to encourage higher wages while not reinforcing inflation growth. Without simultaneous productivity growth, real wage growth can drive inflation through increased labour costs for businesses which can then be passed on to consumer prices. Wage growth without productivity may also result in job losses, as the cost of hiring employees increases without any associated gains in delivery.

This makes incentivising productivity one of the most important policy focuses for the Albanese government.

We’ve seen some key productivity enhancing policies as part of the new government’s election promises, including a focus on improvements to child care accessibility through higher child care subsidy rates and an expansion of subsidy rate eligibility.

The new government has also made a number of commitments to boost infrastructure spending and domestic manufacturing capabilities. Successful implementation of these policies could enhance productivity in Australia, but might also be particularly challenging in such a tight labour market.

Migration was overlooked during the campaign, but may be a sleeper issue for productivity growth. The post-COVID return of migration in greater numbers could go a long way toward filling our current skill shortages, and allowing businesses to lift their output. The new government should be focusing on removing any bottlenecks in the bureaucracy around bringing migrants back in greater numbers, and have a considered look at what that new level of migration should be.

The electoral success of both the Greens and independent candidates focused on national issues will add weight to climate change being a major agenda item. And a major future productivity driver is a focus on climate change mitigation. Deloitte Access Economics’ Building the Lucky Country report Australia remade: A country fit for the age of disruption explores opportunities to shape a more economically sophisticated Australia, and addresses the benefits that a focus on investment in decarbonisation technology can offer Australia when it comes to addressing climate challenges while also raising living standards.

Labor’s key election promise of sustainably lifting wages is important, but not easy. And supressing price growth – while boosting productivity – can be an early defining measure of the Albanese government’s success.