Assumptions in the Budget are very important

Two minute read.

Much has been written about the recent federal budget.

I am always amazed at how ‘the fiddle’ gets so much attention; whilst the big issues get accepted without much fanfare or grumble.  

Two things really only matter to most when it comes to things fiscal – is there enough work and how much is the pay?

And on this matter, the May Budget has made some brave and rather unsubstantiated assumptions.

In short, the Budget assumes that there will be many more new jobs and wage growth will dramatically improve.

Hmmm?

Let me introduce you to two terms – The Phillips Curve and The Hockey Stick.

For those familiar with these concepts, please bear with me.

The Phillips Curve is a simple concept which shows – as a curve – that the higher the level of unemployment (less work), the lower the level of wage growth.

And vice versa.

It’s supply versus demand.

But the current low level of wage growth – on average, just a touch above the consumer price index – suggests that either the unemployment figures are much higher than the official statistics suggest or something different/new is going on with wages and staff hiring/retention.

Very likely both. 

The Hockey Stick illustrates when things somehow break their current trajectory and shoot upwards (in this case).

A similar image of future wage growth has been assumed in the May Budget.

Somehow, and despite all evidence/trends to the contrary, wage growth will return to levels far above inflation and at heights not seen in over a decade.

A budget – but much better still, a long range fiscal policy – that strives towards more jobs and better paying ones, is what is needed.

If we set the proper agenda, we should be able to eliminate the annual ‘fiddle’ and with that, the entire stop-start BS that stems from the associated uncertainty.

The same could be said about the monthly RBA monetary policy meetings.

Set interest rates annually and leave us alone!

So, to return to the topic, assumptions are very important.  

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