Interview - The World Today with David Lipson

DAVID LIPSON, HOST: Well, there's been a mixed reaction to the Reserve Bank's inference yesterday that workers may have to cop a real wages cut to help keep a lid on inflation in the medium term. RBA boss Philip Lowe yesterday predicted inflation would rise to 7 per cent by the end of the year, but he also warned wages growth above 3.5 per cent would only prolong the cost of living pain due to inflation. Tony Burke is the Minister for Employment and Workplace Relations. He joined me earlier.

Tony Burke, thanks for your time. Your Government just last week welcomed a 5.2 per cent increase in the minimum wage. The Reserve Bank Governor, Philip Lowe, is now suggesting that anything over about 3.5 per cent will prolong high inflation. Did the Government get it wrong by pushing for such an increase to the minimum wage?

TONY BURKE, MINISTER FOR EMPLOYMENT AND WORKPLACE RELATIONS: Yeah, I think there's a bit of misreading going on of what the Governor of the Reserve Bank said yesterday. Just hear me out here, David. In the first instance, what the Governor said, he made no objection to that decision at all. That decision by the Fair Work Commission took inflationary pressures into account. What the Governor of the Reserve Bank has referred to yesterday is if increases become common in the 4 to 5 per cent range. Now, let's not forget where the wage price index is running across the whole economy. So, not just this decision, but where it's running across the whole economy. It's been running at 2.4 per cent. So the comments yesterday from the Governor of the Reserve Bank still call for wages to get moving beyond where they have been. 3.5 per cent that he's referred to is still a significant improvement on where things have been for the flatlining wages growth over the last decade. And at that point, we’ve lost a lot of commentary…

LIPSON: So is that- would you be satisfied with that in the future, around 3.5 per cent for minimum wage workers? Because the Reserve Bank's also forecasting 7 per cent inflation. Would you repeat the calls that you made in the election for the lowest paid workers not to have to go backwards? Will they have to go backwards in the future?

BURKE: Well, I think there's a significant gap between where inflation might peak and what underlying inflation is likely to be. I don't think anyone would argue that the 7 per cent peak was going to reflect underlying inflation over even the medium term. That's not the nature of what a peak is. The people who are on the lowest rates of pay are the people who- and the reason we made the submission, they simply, after a long period of flatlining wages, had nowhere to go. These are the people who are least likely to have any savings. These are the people who spend all their money on essentials. So what exactly do you cut for those individuals? And so, the Reserve Bank-

LIPSON: No, I don't think there's many people that would disagree with you that they would find it hardest to withstand a real wages cut. But the question is, was that a one-off? I mean, can we expect the Government to be pushing for the lowest paid workers to have their wages set at around the inflation rate in the future?

BURKE: We always said that that particular submission that we made was based- every submission you base on the economic circumstances in front of you, and we have never said or implied that there'd be an ongoing matching at wherever headline inflation was. We've never said that. We've never implied that. That's never been our position. But we will always be mindful of what the impact is for the people who have the least resources, as you'd expect. And I do think there's been a significant, particularly in some of the print today, effectively wanting to recharacterise the words from the Reserve Bank Governor because…

LIPSON: What he said was, if wage increases become common…

BURKE: Common, that’s right.

LIPSON: …in the 4 to 5 per cent range…

BURKE: I’ve got that exact quote in front of me.

LIPSON: …then it's going to be harder to return inflation to 2.5 per cent. Now, just a few days ago, you said inflation is not being driven by high wage growth. Were you wrong there?

BURKE: Well, at the moment, we don't have high wage growth. So nothing can be driven by high wage growth at the moment because we don't have it.

LIPSON: Increasingly, though, that is going to be happening. This is what Philip Lowe said.

BURKE: He's concerned about what might happen into the future, and we'll always take the economic advice that we have as to when we make submissions on future annual wage reviews and when we set different settings. Of course we'll do that. You wouldn't expect the Government to do anything but that.

LIPSON: So you concede then that wages growth above around 3.5 per cent will prolong this period of high inflation and drive up interest rates as well?

BURKE: Well, even with what you've just said there, you've gone further than what the Governor of the Reserve Bank said. The Governor of the Reserve Bank, in the quote you just gave, was if they become common in that 4 to 5 per cent range, he's referring to the medium and long term. He has not made a reference to what might be around in the immediate term. And effectively, it's a warning that everybody needs to be aware of, that we want inflation to get back within the target band of 2 to 3 per cent. And the argument that we have always put is actually an argument that came from both the Secretary of Treasury and the Governor of the Reserve Bank, which is that wages are not inflationary if they run at inflation plus productivity. Now, he's saying inflation to get within that target band of 2.5, and the productivity has been running at about 1 per cent. That gets you to the 3.5 that he's been talking about. But once again, even that is a far cry from what Australian workers have been dealing, with the wage price index running at 2.4 per cent.

LIPSON: Tony Burke, we'll have to leave it there. Thanks for talking to us.

BURKE: Great to talk to you. Thanks, David.

LIPSON: Tony Burke is the Minister for Employment and Workplace Relations.