CBA: Tax cuts to offset weak wages in 2021

By Gareth Aird, head of Australian economics at CBA:

  • The Wage Price Index (WPI) rose by just 0.1% in Q3 20 and the annual rate stepped down to 1.4%.
  • Private sector wages grew by 0.1% while public sector wages rose by 0.2% over the quarter.
  • Wages growth will be weak over the next two years, but tax cuts will see the take home pay of most workers rise in 2020/21.

The 0.1% increase in the WPI over Q320 was less than the consensus looking for 0.2%,but it’s not a material miss. Put simply, wages growth has effectively ground to a halt because of the COVID-19 pandemic. Wages growth in the private sector has been just 0.1% over both the June and September quarters. It has been a bit stronger in the public sector (0.5% in Q2 and 0.2% in Q3). It should be noted that wage subsidies (i.e. JobKeeper) falls outside of the collection scope of the WPI.

The sharp slowdown in wages growth highlights just how flexible wages are in Australia. On the surface weaker wages growth looks like a negative development over the past two quarters. But with such a large economic shock and drop in production the sudden slowdown in wages growth is more likely to have resulted in less people losing their jobs than would otherwise be the case. History shows that if wages are too rigid there can be greater job losses in an economic downturn as businesses are faced with the prospect of continuing to pay workers higher wages as sales drop. Lower wages growth only becomes problematic if it becomes entrenched. That is the clear risk if the economic recovery takes too long.

The wages data by industry is only published in original terms so it won’t be until Q2 21 that we will can make a proper comparison of wage changes across industries due to the pandemic. Notwithstanding it looks like the sharpest slowdown in wages growth has occurred in the industries of accommodation, administration, rental and retail (see chart below).

Wages growth will be weak over the next few years because spare capacity in the labour market will make it hard for workers to negotiate a pay rise. But wages growth is not the same thing as growth in the take home pay packets of workers. Changes in tax rates influence what an employee keeps out of their salary. The Stage 2 tax cuts, which were pulled forward in the October 2020 Budget, will see the take home pay of a fulltime worker on the average salary of $A89k keep an extra $A1080 a year. That is a 1.6% increase in take home pay in 2020/21 based on no change in wage.

It is after tax income that matters most for households and the economy more broadly. Indeed it is changes in household disposable income that influence the capacity of the household sector to spend. As we have regularly noted household disposable income has stepped up significantly over the COVID-19 period because of the huge fiscal stimulus injected into the household sector. The disparity between less spending due to restrictions and health-related concerns and more income due to Government stimulus has seen a massive war chest of savings accrued. On our calculations it looks like when we start2021 the Australian household sector is likely to have around $A100bn (5% of GDP) in additional savings that have been built up since COVID-19 arrived in Australia(this excludes the early withdrawal of superannuation). The expected drawdown of those savings will provide a significant tailwind to consumption next year despite weak wages growth.

Unconventional Economist
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  1. lol. In this strange world we have companies that don’t want to pay wages and governments handing out cash for sitting at home and banks saying we don’t have to pay our mortgages.

    • Display NameMEMBER

      Companies can trade insolvent, and appear to underpay employees with impunity. Loans are endlessly deferred and if not are IO. Welcome to extend and pretend.

  2. How is tax cut going to solve anything? The people who have a job will save the tax cuts, and the people who don’t have a job don’t get anything. Australia needs more jobs, not tax cuts.

    • Jumping jack flash

      Improves debt eligibility ever so slightly?
      Savings is dead money and debt is essential.
      Wages that aren’t supplemented with debt (ie, leveraged as much as possible) are inadequate to provide the standard of living that is expected.

  3. Jumping jack flash

    If the debt engine restarts as planned then wages will rise. So will everything else too of course, but the important part will be that the rise in wages caused by the current debt injection from the last can-kick will hopefully be enough for people to take on even larger piles of debt than they can right now at the same price of debt.

    And thats pretty much how the debt economy should work. However, for the past 10 years the debt hasn’t grown fast enough for enough debt to spill out of houses and into wages to allow general price increases, to allow wages to rise, which would allow people to take on the new, higher, amounts of debt that are always necessary, at the same price. So for 10 years the RBA had to lower interest rates with little effect, and we had to make do with wage theft to try and increase wages for the lucky few who could benefit. It wasnt good enough, as we should have all realised, especially the RBA.

    But dont worry it should be all fixed now. ZIRP QE should do it. Look at the debt rocket up!

    And if not, then there’s NIRP QE, but Phil would rather not.

      • Jumping jack flash

        A ton of new debt washing through the economy like a tidal wave?
        Well, that’s what everyone hopes will happen. I expect it to happen.

        In my opinion mortgages and debt growth rate are a leading indicator of the entire economy