Reserve Bank governor Philip Lowe (Image: AAP/Joel Carrett)

Federal and NSW government decisions to curb public sector wage growth will frustrate the Reserve Bank of Australia’s (RBA) attempts to support the economy through the worst recession in 90 years. The move will leave over 600,000 people and their families worse off over time and impact income tax and GST inflows.

The Morrison government has effectively cut wage rises for over 240,000 Commonwealth public servants to just above zero (at the moment) by linking them to private sector wage growth. The Coalition government in NSW is doing something similar by cutting the wage increase cap from 2.5% to 1.5% for its almost 400,000 public servants.

Between the two governments the move covers around 5% of the Australian labour force.

The problems the RBA (and governments for that matter) is having dragging the economy out of recession were again outlined in a speech on Monday night in Sydney by governor Philip Lowe.

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He told a business dinner that “in particular, the challenge facing Australia over the next few years is much more likely to be the creation of jobs, rather than controlling inflation pressures. So that is our focus too. The board wants to do what it can, with the tools that it has, to support the national effort to reduce unemployment.

“One consequence of this higher unemployment is that wage and price pressures are likely to remain subdued. In each of the next two years, we are expecting annual wages growth of less than 2%. And inflation, in underlying terms, is expected to be just 1% next year and 1.5% in 2022.”

That means Commonwealth public servants will probably be lucky to see a pay rise of 0.2% over the next two years because private sector wage growth is slowed and is falling in some sectors.

A further question: does the Morrison government really propose to cut actual wages if the private sector wage price index (WPI) goes negative for a long period of time?

Lowe described the “heavy toll on our labour market” caused by the recession. “Hours worked in Australia fell 10% between March and May and the unemployment rate has risen to 6.9%, with underemployment even higher.

“We are expecting the unemployment rate to rise further over coming months to a little below 8%. In our central scenario, we expect it then to start gradually declining, but still be a little above 6% at the end of 2022.”

Cutting wages or growth in wages will not boost employment; higher demand, especially by households will. So how can the federal and NSW governments justify squeezing wages even further at a time when more spending by consumers is needed and will need to be sustained for a year or more around current levels?

The prime minister gave us all tax cuts so we could spend more. Now he and the NSW government are making that extra spending harder to achieve. Talk about a fiscal own goal.

Despite his claims that we’re all in the recovery together, we’ve gotten another clear sign that there’s one rule for the PM and his government and another for public servants.