Lower wages for public servants are a false economy

Poor pay can lead to high household debt and less spending, says

WAGES, according to the Reserve Bank and almost every economist, are too low. In Tasmania, they are lower than in any other state — and particularly among the State Government’s 32,000 employees.

Those low wages have two main economic effects.

It’s the main reason for astronomically high household debt. And it’s why people aren’t consuming as much as they were a few years ago. If they don’t buy things, the whole economy suffers.

This state’s economy has improved markedly in the past six years, though from a very low base. But that improvement isn’t being shared equally.

Nationally, the share of economic output paid as wages is the lowest it’s been for 50 years. The share going to the owners of capital has soared.

For us, that’s mainly big companies based interstate or overseas. An outsized share of our economic output is leaving the state, never to return.

There is no longer any reason for Tasmanians to be paid so much less than other Australians.

Low pay in Tasmania has always been justified because of our allegedly lower cost of living as a result of cheaper accommodation. But that’s no longer the case.

Hobart is now the least affordable capital for renters and average house prices are now about the same as in Adelaide. And people now have much less money to spend on other things.

So it makes little sense for the State Government to suppress so relentlessly the pay of its own employees. And when you look at how the GST system punishes all Tasmanians for those low wage costs, it makes less sense still.

The Commonwealth Grants Commission redistributes GST between the states to give all governments an equal capacity to provide services. If one state pays its employees less than another, it gets its services more cheaply — so money is redirected away from that state and given to another where wages are higher.

Because Tasmania’s nurses, teachers, paramedics, police and other state employees are generally the lowest-paid in the country, this state loses the most GST. In the current financial year, Tasmania will lose $188 million. And most of that will go to Western Australia, where they pay much more.

If there’s a simple way of doing something and a complicated way, you can trust the Grants Commission to choose the difficult one. Rather than just measuring the salaries people actually get, they use a complex proxy derived from the private sector. The idea is to measure the broad labour markets in which state governments must operate.

But the result is the same in the end. State government is the dominant employer in the areas it’s involved in — health and social support, police and public safety, education. So

any variation in those salaries flows through very quickly to the private sector.

That $188 million represents a loss not only to the workers concerned but also to the whole state economy.

If that money was paid here as wages it would mostly be spent here, boosting local businesses and creating jobs. If Tasmanian government employees were paid at national average rates, it would be worth an extra $157 a week or $8200 a year for a full-time worker.

Over the past decade, the amount lost in this way adds up to $1.1 billion. That’s a big hit to a small place like Tasmania.

Much of that money would have been spent in small, local businesses — cafes and restaurants, clothing stores. And those businesses would be able to employ more people, who in turn would spend their wages locally.

Because that money leaves the state instead, that boost to the private sector is lost. Using a highly cautious multiplier, that money would create an extra $400 million in extra economic activity in this year alone. Over 10 years, at least $2.5 billion has been lost in this way.

Over the six years since the Giddings government introduced the wage cap, the state’s economy would have grown at least a third faster each year than it actually did.

The State Government claims it cannot afford to increase salaries by more than 2 per cent a year, which is now below the rate of inflation. According to the Government’s own figures, that would add 93c to every $100 of wage costs.

Lifting the cap would allow our wages, public and private, to slowly catch up with the rest of the nation without any major hit to government finances. And any hit would be temporary. As the complex GST system caught up, the money would start to flow back into our GST share.

Right now, 16.8 per cent of the workforce is either unemployed or needing more work than they have. That needs to change. The State Government — if it chose — could start that process.