Rates going nowhere … but another year of wages going backwards?

The outcome of the RBA’s final board meeting of the year on Tuesday is taken for granted – nothing happens. However Michael Pascoe The real story, he admits, is nothing beyond the cash rate.

A confession: in my penguin-focused news I missed the main story at last month’s RBA meeting, but so did everyone else.

No, not really everyone. Glenn Dyer and Bernard Keane Writing on Crikey ($$) saw the real story: real wages are going backwards again this financial year, the RBA predicts.

AFR It caught up with the story on Friday, adding the extra sauce of the first official monthly CPI update, which gave annual inflation of 3.8 per cent, beating the RBA’s headline CPI forecast of 3.7 per cent for the year to June, while the wage price index forecast fell to 3 per cent from the 3.4 per cent actually recorded in the year to the end of September.

This is all about predictions, with the usual caveat that predictions are a cup game. If the economy continues to recover slightly, as the latest national accounts suggest, you might think wages could continue to rise by just over 3 per cent, and the RBA Governor has said new monthly CPI updates will be treated with caution for some time.

Ultimately, none of this matters for this week’s RBA board meeting. Interest rates aren’t going anywhere, the penguins are just standing around, and the various heated headlines that jump in one direction or another with every statistical release don’t add to the argument for a change.

Back to the real world

In the real world, falling real wages again is making the pain felt for many Australians who have less left in their wallets after paying their bills.

And here I am, a lone voice declaring once again that everyone is ignoring the reality of how our income taxes work out. This fiscal year, a person whose average full-time salary is $90,000 pre-tax and receives a 3 percent pre-tax raise will receive only a 2.6 percent increase in their after-tax pay packet.

RBA cuts interest rate as real wages fall again

(If it doesn’t make sense to you that a 3 percent increase before tax is only 2.6 percent after tax while the marginal tax rate remains unchanged at 30 percent, feel free to check the numbers yourself. ATO’s calculator. What the usual superficial reporting on wage increases ignores is the impact of the tax-free threshold on an individual’s overall tax bill.)

So the real world is a tougher place than the RBA forecasts or the AFR admit. Living standards of everyone who cannot afford wage increases are declining again.

There is some relief on the horizon. Labor’s $268 tax cut in each of the next two years effectively offset the after-tax change. The 3 percent increase before tax in the next fiscal year will be rounded down to 3 percent after the tax increase.

During these two years, the wage price index and CPI give a clear verdict on whether real wages are rising or not.

The bad news is that the outlook for 2026-27 will not make up for the downturn this year.

And without ongoing progressive tax rate relief, the difference between pre-tax and post-tax increases will revert from June 2028 unless there is a government with a vision of real tax reform, not just a fixer-upper, in the 2028 election year, and that’s a big “all out”.

Good luck with this.