THE PRESS WEDNESDAY, JANUARY 4, 1978. Wages, taxes, and inflation

Press, 4 January 1978, Page 16

THE PRESS WEDNESDAY, JANUARY 4, 1978. Wages, taxes, and inflation

Few things would suit the Government better at the start of this year than a decision by the country’s income earners that they are satisfied with the tax cut due in February and will be willing to forgo a general wage order. Such restraint appears unlikely. The Public Service Association has already put up an argument in favour of a general wage order of 26 per cent; however extravagant this figure may seem it must be taken as indicative of the feelings of at least some wage-earners. The P S A. has asserted that wageearners have lost ground in recent years and its case that the basic incomes of wage-earners have declined in relation to other incomes and in relation to the consumers price index, must be admitted. But so long as productivity and exports are static, and even declining, it is inappropriate to attempt to make up this lost ground through a large general wage order. The imminent tax cut will go nowhere near making up this lost ground. But even though it will leave the real incomes of most wage-earners behind, the need is still for restraint in wage claims. Wage and salary earners will not be the only people who will be worse off this year. Net incomes of farmers will almost certainly be down. Company incomes, after some poor years, are expected to improve in many sectors, though not necessarily to match inflation The dangers of wage-earners continuing to expect increases in real incomes, at least until productivity revives and the country's terms of trade improve, have become acute. While productivity is more or less stationary, individual firms could only pay higher wages by passing on the increases in their prices or by laying off workers. In practice, a combination of both could be expected since the Government would probably accommodate some of the wage increase through its

monetary policy to keep unemployment in check. The prospect of continuing inflation and more unemployment stemming from substantial wage increases must not be discounted.

Although many individual firms and businessmen fear having to pay higher wages, they would welcome extra purchasing power in the community. They appear to believe that further tax cuts would put more money in the pockets of consumers without the risk of inflation. But substantial tax cuts will be inflationary unless the Government reduces its own expenditure to avoid a large, inflationary, deficit. If tax cuts were to be large enough to stimulate the economy to the degree many employers would like, they would have to be accompanied by cuts in Government services much more substantial than the community is likely to accept.

The Government could consider higher taxes on consumption; but these might have a more dampening effect on business than anyone desires at present It might also consider a measure of devaluation to assist exporters; but it cannot neglect the effect of the increased prices for imported goods that would result. On all fronts the Government has very little room to manoeuvre.

Mr Muldoon would be unwise to think that the 5 per cent tax cut due in February will satisfy either employers who want the economy stimulated or employees who have seen their real incomes decline. But if he foresees further tax cuts later in the year, and some reform of the tax structure to ease the burden on lower incomes, he may be able to hold off the pressures for wage increases for a vital few months. This calls for a major public relations effort rather than a ridiculing of wage claims, however extravagant, and more than the mere assertion that a 5 per cent tax cut is all that is needed.