Needless Wage Cap Will Undermine Victoria's Success

The Centre for Future Work has released new research estimating the negative impacts on wages and spending power of the Victoria government’s proposed 2% cap on wage increases for the state’s large public sector workforce.

In recent years, Victoria’s economy has consistently been the strongest in Australia: with the most new jobs, the fastest growth in wages, and the biggest expansion in output. The state government has been both a key cause of that growth, and a major beneficiary of it. New expenditures on expanded public services and infrastructure have been crucial engines of the state’s growth. In turn, that strong growth generated huge fiscal dividends for the state government, through a robust, diversified and growing revenue base.

Given this positive history, it seems inexplicable that the state government would now mimic tools of fiscal austerity that have been implemented, with negative and unintended consequences, in other Australian jurisdictions. The government has imposed a stringent cap on public sector wage increases: 2% per year over the coming four-year period. That cap falls well below relevant benchmarks: including growth rates for state GDP, state revenues, overall state wage growth, and Reserve Bank targets for both wage and price inflation. It also falls far below what the state’s elected representatives will receive in their own wage increase this year – including, in particular, the Premier and Treasurer, who have been awarded an 11.8% salary increase.

The wage cap would artificially suppress total state public sector compensation by over $3 billion over the coming four years – compared to normal compensation patterns. It would short-circuit a badly-needed recovery in wage growth that is just taking hold in Victoria’s broader labour market. It would damage consumer spending, exert a chilling impact on private sector wage settlements, and do particular damage to regional communities which depend especially strongly on public sector jobs and incomes. The negative spillover effects of this unnecessary cap would extend throughout Victoria’s economy, totalling far more than the direct $2 billion hit to wages.

The wage cap would be exacerbated by a secondary, equally puzzling austerity measure announced in the state’s 2019-20 budget: an increase in the so-called “efficiency dividend,” to take effect form 2020-21, that would impose an effective and homogeneous budget cut on departments and programs. This expanded “efficiency dividend” is justified as a tool for eliciting greater efficiency in service delivery; in practice it amounts to a mindless, across-the-board cut in expenditures, service delivery, and potentially employment.

There is no fiscal problem that justifies either of these austere measures. The state government is not experiencing a deficit; it plans to generate consistent annual operating surpluses over the next four years. Its total revenues will continue to grow strongly. Financial analysts and debt rating agencies are unanimous that the state’s net debt and interest payments are fully manageable, and the government’s net worth remains strongly positive.

In sum, the Victoria state government enjoys a healthy and enviable fiscal position; there is no fiscal argument at all for the imposition of these unnecessary forms of fiscal austerity. The government’s flirtation with austerity, despite the proven success (both economic and political) of its previous, more expansive approach, is puzzling and concerning. And it will undermine the positive economic success which explains why Victoria currently leads Australia in employment, growth, and incomes.

The state government in Victoria faces no fiscal challenges that could justify either of these forays into the realm of austerity. The paper concludes with five key recommendations:

  1. The state government should abandon the imposition of a wage cap on state public sector workers.
  2. Instead, the state government should enter into normal negotiation of enterprise agreements in all broader public sector enterprises and agencies. The state’s fiscal outlook is obviously a relevant and important factor in those negotiations, but it does not justify the imposition of direct wage controls.
  3. The state government should abandon the proposed increase in the annual “efficiency dividend,” which has proven to be a blunt and ineffective budgetary strategy.
  4. Instead, the state should undertake an open-ended program review of departments and agencies. The goal of this review should be enhancing genuine efficiency – defined as improving the effectiveness and quality of public service delivery – rather than attempting to attain a target budget cut.
  5. Finally, the state should commit to no forced redundancies during the course of that program review. Any identified redeployments (motivated genuinely by improving service and better allocating existing resources) should be attained through relocation, retraining, and voluntary severance.

Please read the Centre’s full report, Messing With Success: Victoria’s Puzzling Turn to Austerity, by Troy Henderson and Dr. Jim Stanford. The report was commissioned by CPSU Victoria.


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