How Rudd will try to keep wages down

With sharemarkets in turmoil, mounting speculation that the US is slipping into recession and rising inflation at home, it’s little wonder that all eyes have been on Treasurer Wayne Swan and his trusty offsider in Finance, Lindsay Tanner, since the Labor Government got down to work after the festive season break.

In particular, the focus has been on the upcoming budget and how Labor will balance fiscal responsibility (in a period of rising inflation) with its bountiful election promises. Although the tax cuts have been quarantined as simply too politically risky – remember Paul Keating’s infamous “L.A.W.” tax cuts – there can be no doubt that more than one interest group hopeful of government largesse in the budget is going to walk away disappointed.

This is because Labor, from Prime Minister Kevin Rudd down, comprises fully paid-up members of the economic conservatives club. That’s not only the message they want imprinted on the electorate’s collective psyche; it reflects their own economic thinking, as symbolised by Rudd and Swan visiting the Reserve Bank together. (Try and remember the last time a Prime Minister and Treasurer made a joint visit to the bank.)

In this economic and political environment there’s little doubt it will be a fiscally tough budget; media focus will be on winners and losers as Cabinet decides how the cake will be cut.

But cutting budget spending is not the only political balancing act confronting Labor in its early days of office; by 14 March 2008 it will have to make a submission to the Fair Pay Commission (FPC) – it will bring down two more national wage decisions before it is abolished in 2010 – that will set the wages for more than one million low-paid workers.

The bureaucracy, especially Treasury and Finance, will want a low number; so too will employers – they always do. Judged by their public utterances to date, so too will Rudd and Swan.

Not so the unions. Although the first decision by the FPC in 2006 gave about 850,000 low-paid workers (earning $700 or less a week) an increase of $27.36 a week and $22.04 to about another 350,000 workers earning more than $700 a week, last year’s decision was far more restrained – $10.26 ($700 and below) and $5.32 (above $700) a week.

This time around the unions will want the FPC to be far more generous – and will want a strong submission from Canberra to support their arguments. In essence, those arguments will be along two lines – equity (why should the lowest paid bear a disproportionate burden of any wage restraint?) and economic, in that healthy pay rises in the minimum wage by the former Industrial Relations Commission and the FPC’s $27.36 handout in 2006 had no discernible impact on employment growth.

Indeed, the ACTU, which will begin drafting its submission next week, will say higher inflation demands a more generous wage rise to the low pay, arguing that today’s decentralised wage fixing system militates against a flow-on effect to all wage and salary earners.

It’s an argument unlikely to attract much sympathy from Treasury or Finance circles, or, one suspects, from Rudd and Swan, to say nothing of employers who will be arguing strongly for a single digit increase – if that.

What will be interesting is how Rudd and Swan handle the obvious political tensions with the party’s industrial wing. Although there is no Accord as in the Hawke-Keating years, the links are still close. In union ranks in particular, there’s a sense that Labor “owes them”, especially for their role in making WorkChoices electoral death for the Howard government.

No doubt Rudd and Swan will go through the motions with the unions. But in very uncertain economic times the Government wouldn’t want to be saddled with a high minimum wage outcome that the Opposition could easily exploit as being economically irresponsible if unemployment starts to rise.

In the first two wage cases, the Howard government did not stipulate a figure in its submission to the FPC; it was a shrewd political move that meant that government could stand above any decision the FPC handed down. So it wouldn’t surprise if Rudd and Swan adopted the same approach, confident that the FPC’s decision will do their unstated bidding – a moderate outcome – for them.

This first appeared in BusinessSpectator