Rates hold a partial release of the pressure valve for small business

Rates hold a partial release of the pressure valve for small business

Small and family businesses have received a welcome reprieve from the Reserve Bank’s aggressive monetary tightening campaign following today’s decision to hold the cash rate at 4.1 per cent.

Despite the decision to hold steady, the bank has signalled that it may continue to squeeze Australia’s economy further as it works to bring persistently high inflation under control.

“The RBA’s decision to leave the cash rate on hold will act as a partial release of the pressure valve for Australia’s 2.4 million small businesses,” ACCI chief executive Andrew McKellar said.

“The Reserve Bank has rightly kept the cash rate steady, giving it more time to assess the impact of its efforts to dampen economic activity.

“After experiencing 12 interest rate increases, declining consumer spending, and a surge in input costs, small and family businesses are being brought to their knees.

“To add to the pain, many struggling small businesses have seen their wages bill soar from July 1 as the annual wage review and increase to the superannuation guarantee have taken effect.

“While wages growth across the board remains within the central bank’s target range, the risk is that the Fair Work Commission’s determination becomes a floor for wage negotiations across the economy, thus unlocking the floodgates to deep and prolonged economic pain.”

The latest consumer price index data, released last week, revealed a significant deceleration in annual inflation despite the continuation of persistent price pressures in many sectors. Similarly, while the labour market has lost some momentum, it remains incredibly tight.

“Inflation is clearly easing, but much more progress will be needed to bring core inflation to levels that align with the Reserve Bank’s broader target range,” Mr McKellar added.

“To help curb inflation, continued discipline on public spending and tax policy from federal and state governments is required.

Inflation retreat will bring some comfort to small business

Inflation retreat will bring some comfort to small business

Fresh inflation numbers released today will offer some consolation to Australia’s 2.4 million small business owners, many of whom are nearing breaking point as price pressures and elevated interest rates increase the risk of further economic pain.

“After experiencing 12 interest rate increases, declining consumer spending, and a surge in input costs, it’s good news for small businesses that inflation is returning to its downward trend,” ACCI chief of policy and advocacy David Alexander said.

“As supply chain bottlenecks ease, small businesses have experienced a decline in petrol prices while material costs have also steadily decreased from previously high levels.

“Despite this welcome progress, the expected inflation-chasing wages hike from July 1 will heap even more pressure on small businesses when they can least afford it.

“Many small businesses are seeing their costs rise to the point where they have no choice but to increase their prices to maintain operations.

“With further disruption on the horizon as the federal government pursues retrograde changes to the industrial relations system, small businesses across the country are questioning why laws that will make it harder to create new jobs and grow the economy are needed.

“At its meeting next week, the Reserve Bank should take stock of whether rates are sufficiently restrictive to bring inflation back to target.

$12.6 billion wages bill to slug small business

Today’s decision by the Fair Work Commission to increase award wages by 5.75 per cent and minimum wages by 8.6 per cent will slug small and family businesses, already encumbered by soaring costs, with a $12.6 billion wages bill.

Taking account of the 0.5 per cent increase in the superannuation guarantee from July 1, this represents a significant burden for small business, and risks unlocking the floodgates for deep and prolonged economic pain.

“Today’s decision will come as a hammer blow for the 260,000 small and family-owned businesses who pay minimum and award wages,” ACCI chief executive Andrew McKellar said.

“The Fair Work Commission has made a dangerous choice to chase after the supply-side inflation shock that we are experiencing. An arbitrary increase of this magnitude consigns Australia to high inflation, mounting interest rates and fewer jobs.

“Businesses in the accommodation, food, construction, manufacturing, and retail sectors have experienced falling profits over the past two years. The reality is many of the small and family firms in these industries will be unable to absorb this extra cost without raising prices.

“The commission has disregarded the message it conveys to the wider labour market and the influence it holds over entrenching high inflation as the Australian economy faces a worsening outlook in the years ahead.

“A 5.75 per cent increase will make the job of the Reserve Bank more difficult to control ongoing inflationary pressures, inflicting pain on families and small business when they are already down to the wire.

“In our submissions to the annual wage review, ACCI proposed a fair and responsible increase of 4 per cent that aligned with efforts to contain inflation and return it to the Reserve Bank’s target range.

*An earlier version of this release incorrectly referred to the increase in minimum wages as 5.75 per cent.

Opening statement to the Fair Work Commission annual wage review hearing

Event: Opening statement to the Fair Work Commission annual wage review hearing.
Speaker: Peter Grist, principal economist, Australian Chamber of Commerce and Industry.
Date: 17 May 2023.
Topics: Award and minimum wages, inflation, wages growth, interest rates, business profits, productivity.

E&OE 

As with recent reviews, the panel is again in an unenviable situation – facing a number of complex challenges, from slowing economic activity, high inflation, and continuing labour and skill shortages.

Now is not the time to be making bold decisions. ACCI stresses that genuine caution and moderation is warranted in setting the minimum and award minimum wages in this review.

I would like the opportunity to focus on three factors pertinent to the panel’s deliberation for this year’s annual wage review: inflation, business profits and productivity.

Inflation

There is an urgent need to get on top of inflation and quickly return it to the Reserve Bank’s target range of 2 to 3 per cent, so as not to extend the pain on Australian households and businesses any longer than is absolutely necessary.

The threat of inflation remaining elevated due to significant increases in wages has been highlighted by the Reserve Bank governor. In voicing his concerns about inflationary impacts of substantial wages growth, Dr Lowe noted a 3.5 per cent increase in wages was a good anchoring point. And: “… if wage increases become common in the 4 and 5 per cent range, it’s going to be harder to return inflation to 2.5 per cent”.

Therefore, it is important that a coordinated, whole-economy effort is made in returning inflation to the target band of 2 to 3 per cent.

Business profits

There has been much debate over corporate profits in recent months, but it is important to place this in context.

High global commodity prices stemming from the war in Ukraine have driven prices of iron ore, gas and coal to extraordinary highs, delivering the mining sector substantial profits in 2022.

Yet, it must be remembered that in the mining sector, only 1.1 per cent of the workforce is award-reliant. For this review, it is important to focus on the profits of industry sectors with a high share of award-reliant employees such as accommodation and food services, administrative and support services, and retail trade. In contrast to the mining sector, profits in these service industries have been low in recent years, severely impacted by the COVID-19 disruptions.

Businesses in these sectors have little capacity to absorb a significant wage increase without being forced to raise prices.

Further, many stakeholders have claimed that businesses are increasing their margins to achieve extraordinarily high profits, and this has been a core driver of the recent surge in inflation.

Yet, this is not consistent with the data. Analysis by the Reserve Bank, in the May 2023 Statement on Monetary Policy, includes a section that explicitly addresses the question: “Have Business Profits Contributed to Inflation?”

This shows that, outside the mining sector, profit growth – particularly in service industries which have a high share of award-reliant employees – has been weak over the past two years and remains below pre-COVID levels. There is little evidence of a broad-based increase in domestic non-mining profit margins in Australia. The Reserve Bank analysis concludes that business profits are not contributing to inflation.

Productivity

Increases in real wages can only be sustained if they are linked to gains in labour productivity.

The recent Productivity Commission 5-year Productivity Inquiry Report highlights that labour productivity has slowed considerably in recent decades. In the decade to 2020, average annual labour productivity growth in Australia was the slowest in 60 years, falling to just 1.1 per cent. This compares to an average of 1.8 per cent per year over the 60 years to 2020.

Labour productivity has slowed even further due to the COVID-19 disruptions over the past three years, to average less than 1 per cent per year.

While ACCI agrees that labour productivity growth should be shared between the business owner and the employee, current labour productivity growth, averaging less than 1 per cent per year, does not support strong growth in wages.

In this annual wage review, the panel must take note of the weak productivity growth and avoid decoupling wages growth from genuine productivity improvements. Given the weakness in labour productivity, an oversized increase in minimum and modern award wages cannot be justified.

ACCI’s position

ACCI supports a fair, reasonable and responsible increase in minimum and award minimum wages in 2023. We recognise that households are experiencing increasing pressures from high inflation. But it is impacting just as heavily on businesses by raising operating costs.

In making its decision, the expert panel needs to be aware of what is affordable and what is not. If the wage increase exceeds the moderate levels that balance what businesses can afford and community expectations, jobs and businesses will be lost.

ACCI supports an increase in minimum and modern award wages of up to 4 per cent (3.5 per cent plus the legislated 0.5 per cent increase in the Superannuation Guarantee) in 2023-24. We consider this to be both fair, reasonable and responsible in the current economic circumstances.

Our position is focused on containing inflation and returning it to the middle of Reserve Bank’s target range of 2 to 3 per cent as quickly as possible, as well as providing a reasonable allowance for workers to share the benefits of productivity growth, which as noted earlier is averaging less than 1 per cent per year.

We caution that any increase above 3.5 per cent plus the legislated 0.5 per cent superannuation guarantee increase would be irresponsible in the current economic environment.

 

Media contact:

Jack Quail | Media adviser
P | 02 6270 8020
E | media@acci.com.au

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