Policy 'guard rails' for Australian real income?

Would real income 'guard rails' help policy keep our economic train 'on track'?

As broad guidelines for policy outcomes, we've had a few Commonwealth-level 'guard rails'.

For example:

• the Prices and Incomes Accord (ALP/ACTU agreement, 1983);
• the 'Trilogy', capping taxation, spending and Budget deficit as percentages of GDP (1980s+);
• the 'Trilemma' trifecta: 'affordable' power costs, high reliability, reduced emissions (2010s+).

The first maybe worked a bit, but also came with, and was followed by, really big economic reforms.

The second and third were/are 'virtue signalling' – for the third, for the more distant future.

'Guard rails' seem superseded now. It's all about Budget (incl beyond the Forward Estimates) and other policy 'promises' for the (often post-election) future.

In theory, we still have national inflation 'guard rails'. Agreements between Commonwealth governments and the RBA set 2-3% CPI 'guard rails'. Off that track, our economic train is derailed.

Can we afford a real income 'accord'? What about national real income 'guard rails'? These could centre on real net national disposable income per capita, as published quarterly by the ABS.

What drives that? Lots of things:

• Australian productivity gains (a plus);
• Australian population growth (plus or minus?);
• Australian terms of trade (rising TOT a plus);
• Australian net export volumes growth (ditto);
• Australian net income from overseas investments growth (ditto);
• Australian net liabilities to foreign lenders growth (a negative);
• the value of the Australian dollar (say, TWI basis) – net benefits?;
• and more.

This provides a framework for a micro-reform agenda. Or for more reform inaction frustration.

Using national accounts, noting GDP deficiencies, this measure could set real income 'guard rails'.

We could add satellite national accounts measures. For example:

• an environmental satellite account, SNA/SEEA-based, measures emissions reduction efforts;
• these would subtract (net) costs from the net income mix;
• how do we measure our net emissions reduction benefits against our net abatement costs?;
• incorporating net costs/benefits for Australia likely is a necessary 'guard rail' headache?

'Comparative wage justice' and similar broad wage-setting rules rob the economy of needed micro-flexibility. Australian IR history is testament to this. National income 'guard rails' wouldn't help, either.

Must we re-learn that lesson?

The Hawke-Keating governments, supported by the Coalition, moved to more flexible enterprise-based alternatives. We need all the economic flexibility we can get.

Flexibility says national income 'guard rails' should be the sum of enterprise-level components. That is:

• enterprise-specific net disposable income should define that enterprise's income 'guard rails';
• industry-level net disposable income is a much less flexible alternative;
• nationalaverage income 'guard rails' should not apply to all enterprises/industries.

Can policy aim for sustainable real per capita incomes?

Enterprise-level real income 'guard rails', combined with the national inflation 'guard rails', deliver sustainable real income growth per capita, and more economic flexibility:

• only low general inflation, on average, feeds into nominal wages and incomes;
• real net enterprise disposable income per capita also feeds into nominal wages and incomes;
• in total, these generate sustainable national nominal wages and incomes growth;
• deviations from these (inflation + real income) 'guard rails' show how much we're off-track.

How wide should be the per capita real income 'guard rail' gauge be between upper and lower limits?

Tricky. In practice:

• the inflation railway line 'gauge' is between 2-3% over the cycle (whatever that is);
• this works as a broad price constraint, giving us an inflation target for policy to aim at;
• per capita real income railway lines could follow actual real economic outcomes (up or down);
• following these means affordable real incomes as enterprise/industry performance varies;
• a wide 'guard rail' gauge around this 'track' allows outcomes to bounce around even more;
• using the railway analogy, it results in 'hunting' of the economy between track gauge limits;
• this extra volatility makes policy control difficult (as now) and widens the track gauge itself;
• it might damage the railway rolling stock and wheels (the economy).

Will a transition path be needed? As the Irish person said to the traveller asking directions to Dublin:

If you want to get to Dublin, I wouldn't start from here.

Of course not. But we have to. As a known starting point, it's all we've got.

We also need to know – and head towards – an agreed sustainable real national income Dublin.

Can we agree on real income 'guard rails'? Just more 'virtue signalling' on the never-never?

Too many hands in too many cookie jars? Especially government budget cookie jars? In short:

Bugger the cake, what about my slice?

Can you persuade politicians to accept direct constraints on their pork-barrel profligacy? I doubt it. In the detail of vote-trawling, forget it. As an overall constraint, less improbable? Still a long shot.

Continue making big policy mistakes, ultimately forcing (more painful) adjustment, anyway? Likely.

There are plenty of overseas lessons from which we can learn vicariously. If we want to.

(Again) allow inflation to debauch fiat currencies? Inflation, 'bracket creep', etc, work to erode the real value of nominal net incomes and debt stock principal (public and private). This hits lower/middle income groups and those on fixed incomes most and encourages commodity price speculation.

If choosing the inflation policy 'solution', don't call it a policy solution. Governments won't.

Instead, they'll claim fiscal 'automatic stabilisers', such as inflation fattening budget surpluses, as their 'good economic management'.

They want it both ways.

They'll also shed crocodile tears about 'cost of living crises', and open their cookie jars a bit.

As now.