AUSCRIPT PTY LTD
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TRANSCRIPT OF PROCEEDINGS
O/N VT03276
AUSTRALIAN INDUSTRIAL
RELATIONS COMMISSION
JUSTICE GIUDICE, President
VICE PRESIDENT ROSS
VICE PRESIDENT McINTYRE
SENIOR DEPUTY PRESIDENT WATSON
SENIOR DEPUTY PRESIDENT HARRISON
COMMISSIONER LEWIN
COMMISSIONER HOFFMAN
C2001/4617, 5719, 5720, 5721, 5722,
5803, 5810, 5830, 5833, 5834, 5843,
5844, 5845, 5846, 5847, 5849, 5929,
5933, 5934, 5935 and 6130
TIMBER AND ALLIED INDUSTRIES AWARD 1999
THE HOSPITALITY INDUSTRY - ACCOMMODATION,
HOTELS, RESORTS AND GAMING AWARD 1998
BUILDING SERVICES (VICTORIA) AWARD 1994
LAUNDRY INDUSTRY (VICTORIA) AWARD 1998
CHILD CARE INDUSTRY (AUSTRALIAN CAPITAL
TERRITORY) AWARD 1989
THE VEHICLE INDUSTRY - REPAIR SERVICES
AND RETAIL - AWARD 1983
TRANSPORT WORKERS AWARD 1998
RETAIL AND WHOLESALE INDUSTRY - SHOP
EMPLOYEES (ACT) AWARD 2000
HORSE TRAINING INDUSTRY AWARD 1998
CLERICAL AND ADMINISTRATIVE EMPLOYEES
(VICTORIAN) AWARD 1995
VICTORIAN LOCAL AUTHORITIES AWARD 2001
STORAGE SERVICES (GENERAL) AWARD 1999
GROCERY PRODUCTS MANUFACTURE -
MANUFACTURING GROCERS AWARD 1996
COMMERCIAL SALES (VICTORIA) AWARD 1999
RUBBER, PLASTIC AND CABLE MAKING
INDUSTRY AWARD 1999
THE VEHICLE INDUSTRY AWARD 1992
CLOTHING TRADES AWARD 1999
GRAPHIC ARTS (GENERAL) AWARD 2000
METAL, ENGINEERING AND ASSOCIATED
INDUSTRIES AWARD 1998 - PART I
METAL, ENGINEERING AND ASSOCIATED
INDUSTRIES AWARD 1998 - PART III
Applications under section 113 of the Act
to vary the above awards re living wage
case matters (s.108 References)
MELBOURNE
10.01 AM, WEDNESDAY, 3 APRIL 2002
Continued from 20.12.01
PN243
MR A. WATSON: In each of those matters I appear for the ACTU with MR G. COMBET, MR C. ROBINSON and MS M. GAYNOR, and in the ALHMU matters, if I can so describe them, I appear with MR VEENENDAAL, and in the AMWU matters I appear with MR SACHINIDIS.
PN244
MR S. BARKLAMB: I appear for the ACCI with DR S. KATES. These are amended appearances, your Honours, Commissioners. On the previous occasion Mr Harris appeared for our organisation. In addition to the list of appearances tendered as ACCI1 on the first occasion we also now appear on behalf of the National Farmers Federation previously represented by Mr Calver. We also understand, your Honour, there has been correspondence from - on behalf of the AHA from whom we now carry an instruction to appear until, as we understand it, there will be an appearance of AHA by Ms Zeitz. And I do understand just in closing of our appearance that intervention was sought for ACCI in relation to all matters on the previous occasion. Thank you.
PN245
MR M. MOIR: I appear in respect of all matters on behalf of the Australian Industry Group and the Engineering Employers Association of South Australia with MR R. HERBERT.
PN246
MR J. MURDOCH: I seek leave to appear as counsel for the Minister for Employment, Workplace and Workplace Relations on behalf of the Commonwealth with MS L. LIPP.
PN247
MR G. MARTIN: I seek leave to appear for the States of New South Wales, Victoria, Queensland, Western Australia, South Australia and Tasmania and the Australian Capital Territory and the Northern Territory seeking leave to intervene in each matter.
PN248
MR C. HARNATH: I appear for the Master Plumbers and Mechanical Services Association of Australia and I continue my appearance as an intervener in the matters.
PN249
JUSTICE GIUDICE: Any other appearances? Yes, Mr Watson.
PN250
MR WATSON: Your Honour, can I perhaps attend to some housekeeping matters. The Bench will have been aware that there has been some correspondence between ourselves and the Commonwealth regarding a witness or witnesses.
PN251
JUSTICE GIUDICE: Yes.
PN252
MR WATSON: As I understand it from Mr Murdoch there are two witnesses available for us to cross examine in relation to the matters which we have raised. If the Commission were so minded I intended to give a very brief opening of the matters this morning and then proceed to allow Mr Murdoch to examine the witness and then proceed to cross examine. So if there is no objection from the Commission to that course that is how I would intend to proceed. The other thing perhaps I should do is just to formally tender the material on which the ACTU relies and I would seek now to tender the ACTU's original written submissions, the original composite exhibit, the witness statements, the reply submissions and the reply composite exhibit.
EXHIBIT #ACTU2 WRITTEN SUBMISSIONS DATED 08/02/2002
PN253
JUSTICE GIUDICE: Is there another document?
PN254
PN255
JUSTICE GIUDICE: Yes, the procedure you have outlined is quite acceptable.
PN256
MR WATSON: It is, your Honour?
PN257
JUSTICE GIUDICE: Thank you, Mr Watson.
PN258
MR WATSON: The Australian economy is growing strongly. Inflation is moderate, wage cost increases have been modest, productivity is at record highs and the outlook for the labour market is positive. The international factors which had until recently been a looming dark spot on the horizon now seem likely to be much more benign than had been anticipate. Australia can look forward to a period of economic prosperity. This is the living wage case which gives the Commission an opportunity to allow low paid Australians to share in that prosperity. This is the living wage case which gives the Commission a chance to move beyond dollar increases in the mid to low terms and to award with caution and confidence an increase which will provide genuine assistance. This is the living wage case to bring home the bacon.
[10.08am]
PN259
There is more than a thousand pages of material for the Commission to consider in this case, but our claim boils down to three things. Demonstrated need for low paid workers, buoyant economic conditions, and minimal economic effect. Those three things, demonstrated need, buoyant economic conditions, negligible economic effect, are the only things which the Full Bench needs in order to award our claims. Being a low paid worker is tough. It means struggling to make ends meet, and as our witness evidence shows, sometimes not winning that struggle.
PN260
It means going without things which the rest of the community take for granted, new clothes, basic appliances like fridges, ovens, washing machines, going out and socialising, taking holidays. It means juggling bills, borrowing from friends and family. It means serious levels of financial stress, and in some instances serious levels of debt. ABS data shows that 1.2 million working households, that is households where the principal source of income is wages and salary, have financial stress. 320,000 of them reporting higher levels of stress.
PN261
None of this is really news to the Commission. Every year since 1997 the Commission has found that life for the low paid is difficult. But in previous years the Commission has felt constrained by economic circumstances and the potential economic impact of our claim to award dollar amounts in the low to mid teens. In this case those constraints are simply not there to the same degree. We are not saying throw caution to the wind. But we are saying buoyant economic conditions and negligible economic effect should put an end to over-cautiousness.
PN262
The national accounts show the economy grew 4.1 per cent in the year to December 2001. In fact the annualised growth rate for the December quarter was more than 5 per cent. Inflation is at 3.1 per cent just above the Reserve Bank's target range but expected to return within that range through the year. Wage costs movements are moderate, the wage cost index having risen by only 3.4 per cent in the year to December 2001. Productivity growth has returned to high levels after dropping off during the GST induced slump.
PN263
The six year average productivity growth of 2.4 per cent is the highest for any comparable period in its recorded history. The labour market looks to have turned the corner. Employment grew 1.8 per cent in the year to February 2002 and unemployment has dropped to 6.6 per cent. Forward indicators on the labour market are all positive. The US economy is bouncing back more strongly than expected. Growth in the US economy has been revised upwards for the December quarter on two occasions now.
PN264
The OECD composite leading indicator shows good results for the US, the OECD, the Euro area, and even some improvement in Japan. Recently the Treasurer said his view was that the negative factors associated with external influences have gone. Buoyant economic circumstances is a fair description of where the Australian economy is. The ACTU has a claim which adds a net figure of less than .2 per cent to economy wide earnings. We make that claim in our material but when properly analysed precisely the same figure emerges from the Commonwealth material.
PN265
At this level the net addition to wages growth from our claim falls within measurement error for wages growth, and when this case started the wage cost index was 3.6 per cent now it is 3.4 per cent. That sort of thing gives you an illustration of the sort of movement we are talking about. When the index dropped from 3.6 to 3.4 no one said massive fall in wage costs, but the Commonwealth and employers will have the Commission believe in this case that if our claim makes the index go from 3.4 back up to 3.6 that there will be headlines saying "massive wage increase disaster for economy." It just doesn't wash.
PN266
The net addition to wages growth from our claim implies a net impact on inflation of less than .1 per cent and no impact on employment or interest rates. Truly a minimal or negligible economic effect. Demonstrated need, buoyant economic circumstances and negligible economic effect. The evidence in this case will establish all three critical elements for the award of our claim. Last year's case saw award workers get a lower wage increase than any other sector of the workforce. Exacerbating a trend toward inequality.
PN267
This year's case allows the Commission to award a meaningful increase which helps ameliorate that trend. Last year's case saw 80 per cent of award workers have an increase that failed to keep pace with inflation. This year's case affords a real opportunity for an improvement in living standards. Last year's case was conducted against a backdrop of economic uncertainty. A minus .6 per cent December quarter national growth figure.
PN268
This year's case is conducted in circumstances of foreshadowed economic prosperity. Demonstrated need, buoyant economic circumstances and negligible economic effect for Australia's low paid, it is time to bring home the bacon. If the Commission pleases.
PN269
JUSTICE GIUDICE: Thank you, Mr Watson.
PN270
MR MURDOCH: If the Commission pleases, we are aware that your Honour has been copied in certain correspondence that has been exchanged between the Commonwealth and the ACTU.
PN271
JUSTICE GIUDICE: Yes.
PN272
MR MURDOCH: Regarding the requests on the one hand for information and our attempts to satisfy those requests. In order to ensure that the Commission has a full set of the correspondence might I tender a bundle of documents of correspondence.
[10.16am]
PN273
JUSTICE GIUDICE: Yes, well, do you want to give that bundle some general description, Mr Murdoch?
PN274
PN275
MR MURDOCH: The Commonwealth endeavoured to furnish information to satisfy the request of the ACTU. We also offered to meet the ACTU to assist in the provision of explanation or further information. In the event, those efforts were not satisfactory to the ACTU. To avoid the matter distracting the attention of the bench with disputation between the parties as to the means of providing such information, we have organised the attendance of two witnesses. The witnesses are Dehne Taylor who currently works within the economic group of the Commonwealth Treasury.
PN276
He is the manager of the labour market unit within the macro's economic policy division. His responsibilities include advising the Minister on labour demand ..... issues, such as workplace relations, immigration and welfare reform. His responsibilities also include forecasting aggregate wages growth. Mr Taylor holds post-graduate qualifications in economics, and has been a policy adviser in Treasury for over 20 years.
PN277
Ruth Grabbitas is the manager of the micro economic modelling unit within Treasury. She has held that position since August last year. She is responsible for Treasury's macro economic modelling, including the operation and maintenance of the Treasury macro economic or TRYM model. Her academic qualifications include a Master of Economics degree from the ANU. The witnesses have been provided with the correspondence which is included in ACTU - sorry, in COMMONWEALTH1.
PN278
JUSTICE GIUDICE: Yes.
PN279
MR MURDOCH: I note that my friend Mr Watson anticipates that his cross-examination will take some hours. The note of caution that I sound is that if the questions stray beyond the issues raised in the ACTU letter of 5 March 2002, it may be that because of the complexity and the technical nature of some of the issues, that the witnesses are not able to assist or not able to fully assist with their responses. However, the witnesses are called in the spirit of providing information to the Commission and the ACTU; we will do our best.
PN280
JUSTICE GIUDICE: Yes, thank you, Mr Murdoch.
PN281
PN282
MR MURDOCH: If the Commission pleases, I propose to ask Mr Taylor a short number of questions by way of background and then to make him available for cross-examination by my friend.
PN283
Mr Taylor, you and the Commission - when I gave an outline of your current position, your academic qualifications and your role in the Commonwealth Treasury?---Yes.
PN284
Was that outline correct?---It was.
PN285
Mr Taylor, so far as the forecasting that you are involved in in Treasury is concerned, can you explain in short why that forecasting is undertaken?---Well, essentially we are forecasting aggregate economic activity which is set out in the budget papers and MYEFO to make - to inform us on the appropriateness of current macro economic policies, and whether they - and then to judge them against that and to see whether those policies need changing.
PN286
The process of forecasting as involves forecasting within your section of Treasury, is that a mechanical type process involving feeding information into a formula and getting an outcome, or is it something else?---No, it is far from a mechanical process. It is essentially about the application of judgment based on weighing up risks. It is an individual action in some ways, but all forecasters tend to use a very similar framework. But they may give different weights to different things in that framework.
PN287
In the context of the forecasting exercises that you are involved in in Treasury, is it possible to pinpoint the starting point for each forecasting exercise?---Yes, you tend to start either with your current forecast or the current outcome, if you know the numbers. You then - once you are doing that, you would be looking at all sort of partial indicators that are coming in, such as housing, you know, motor vehicle things, depending on what you are forecasting obviously. You would also be informed by business surveys. Treasury is particularly informed also by our business liaison activities. We go out and talk to major businesses in Australia
**** DEHNE TAYLOR XN MR MURDOCH
and find that information extremely useful. Probably our major input into forecasting obviously would be the national accounts which sort of, instead of being partial indicators, takes the economy as a whole and puts it within that framework. And also, we would also then be informed on existing economic or wider economic conditions such as what is happening with the exchange rate, what the current stance of monetary and fiscal policy is, and how the world economy may be going.
PN288
Again in the context of your involvement within the Treasury, how many sets of forecasts are released in each year?---I am not precisely sure of the correct -the total number, but it is obviously in our publications or in the Treasury's publications. But essentially we are forecasting GDP on an expenditure basis, on an income basis and a production basis. We are also looking at forecasting such things as the current account, the capital account, inflation, wages and labour markets. Overall you could say we try to mirror the national accounts. We try to forecast it, because of the usefulness of how that feeds into our policy prescriptions.
PN289
And so far as the timing is concerned of those forecasts?---Forecasts - the official government forecasts are released twice a year, at budget time and what is called MYEFO, the Mid-year Economic and Fiscal Outlook. That is usually round about six months after the budget, somewhere between November and January each year. Also under the charter of budget honesty, we have to do a pre-election economic and fiscal outlook within two weeks of an election being called. So every three years we would put that forecast out as well.
PN290
Are you able to outline the way in which the forecasts have been developed in a procedural sense?---Yes, it is a sort of an iterative process in the sense that once, as I alluded to earlier, we feed all these things in and then, as we get closer to the forecasting time, we would then sit down and try and make sure they are internally consistent, as certainly a significantly large group of significant investment Treasury resources. And in doing that, we would be - the internal consistency is also helped by such things as the modelling; such things as the TRYM model. But it certainly is just an adjunct to that consistency.
PN291
Are there any particular assumptions that are made when forecasting exercises are undertaken?---Yes, all forecasting is done on the basis of no change to current policies. That, while it sounds peculiar to some people, allows us to properly evaluate our current macro economic policies.
**** DEHNE TAYLOR XN MR MURDOCH
PN292
I take you back to one of your earlier answers where you refer to the role that Econometric models play in forecasting the Treasury, are you able to more precisely outline the extent to which there is reliance on any Econometric model or models?---Econometric models have two principal functions in my view. First of all, they allow you to state your assumptions explicitly. They allow your assumptions to be challenged. And in the case of the TRYM model, we have documentation out in the public arena and I think it has been presented to this court before, which allows them to determine how the internal workings of the model work. And if you are not - that also allows people to challenge the underlying assumptions. The other big plus of a model is that it does give what I have referred to as an internal consistency, and by that I mean that you cannot say that some - that stops you claiming that some variable will move enormously whereas it will have no other impact on other variables. That quite often can be claimed, but the model allows you to give that sort of inconsistency - that sort of consistency. That said, I think the model's bigger values are for policy and sensitivity analysis rather than in terms of forecasting budget outcomes, and forecasting MYEFO stuff - numbers, sorry.
PN293
Can you put that in perspective? Does the forecasting exercise predominantly rely on Econometric models or is it otherwise?---No, as I said at the outset, it is a - it is basically applying judgments and balancing risks and uncertainties. It is not - it is an unenviable task, I might say, but it is, you know, realistically it is not an easy task, and errors are made and that is not a defence; that is just a fact of life.
[10.31am]
PN294
Nothing further.
PN295
JUSTICE GIUDICE: Yes, Mr Watson. Can I just ascertain, is there any other cross-examination likely?
PN296
**** DEHNE TAYLOR XXN MR WATSON
PN297
MR WATSON: Yes. Mr Taylor, prior to the production of the mid-year economic and fiscal outlook, you do have though, don't you, in relation to each of you, the economic variables a TRYM forecast as an input to the process of your overall forecasting?---As I just said, that input is very late in the process. It is helping that consistency check. We have a consistency check amongst ourselves as a group and that that also gives us another degree of consistency.
PN298
Just to take, for example, wages growth?---Mm.
PN299
Before you release the published MYEFO forecasts, you are in receipt of a number which has been generated by TRYM for wages growth for the following year?---That is not correct, no.
PN300
Are you in receipt of a number for wages growth for the current year?---No. That is not how we undertake forecasting, as I went through it before.
PN301
So you don't - just so I understand this?---Mm.
PN302
You don't rely on a TRYM number for wages growth at all in generating your MYEFO forecast?---That is correct.
PN303
And do I take it that that implies also that you do not rely on a TRYM number at all in the preparation of your forecast for GDP?---No, that is not correct.
PN304
I see. Well, are you aware of the indicators which the Commonwealth have dealt with in table 4.4 of their submissions. Do you have the Commonwealth's submissions there?---I do.
PN305
Can I take you to table 4.2?---Yes.
**** DEHNE TAYLOR XXN MR WATSON
PN306
Can I perhaps just ask you to go through each of those variables and indicate to me in the preparation of the MYEFO forecasts whether or not you had a TRYM number for each of those variables. So GDP you say you do?---Yes, but as I said, I must explain, it is not - it may not necessarily be the number that is used. It is one that comes out of the model.
PN307
No, no, I understand that?---Yes.
PN308
You do have a number, inflation?---The other thing I should explain, I am not the TRYM modeller.
PN309
No, no, I understand that, but I am interested in the preparation of your forecasts for MYEFO?---Yes.
PN310
Do you have numbers generated by this model, inflation?---I just said, I am not sure about that.
PN311
You are not sure?---Yes.
PN312
Employment growth?---Again, I assume it does but not being the modeller I am not sure whether that does come out.
PN313
But do you prepare - can I just clarify, do you prepare the Treasury forecast which is published in MYEFO for employment growth?---No, I do not.
PN314
I see?---But I do prepare the Treasury forecast for wages.
PN315
You do for wages?---Mm.
**** DEHNE TAYLOR XXN MR WATSON
PN316
I see. And so I take it you are not in a position to inform us about unemployment, the unemployment rate?---Sorry, I am - - -
PN317
Well, going down table 4.4?---Oh, you are referring to the table, sorry.
PN318
Yes, did you have a TRYM input - do you know whether Treasury has a TRYM input for the generation of its employment rate figure?---I believe it does, but again I would have to confirm that with the modeller.
PN319
You do not know. And similar the 90 day Bill rate?---Yes.
PN320
You do not know. But you do know that on wages growth you do not use a number generated by TRYM at all, in the preparation of your forecast for MYEFO?---That is correct, yes. Maybe I should add here that table 4.4 is nothing to do with MYEFO forecasts.
PN321
I understand that?---Yes, I was just wondering why the reference to it.
PN322
I just want to go through those particular variables?---Yes.
PN323
So I take in the preparation of your forecasts for MYEFO and the budget, it is your aim to publish the best forecast and prediction that you possibly can?---Absolutely.
PN324
And that means, I take it, that it is your assessment that the forecasts which you generate in the way in which you generate them are better than the outcomes of the TRYM model?---As I - as I said to earlier questioning, the TRYM model is not primarily designed for forecasting. It is designed to look at policy analysis. It is primarily its design.
**** DEHNE TAYLOR XXN MR WATSON
PN325
But I take it then you do accept that the forecasts which you produce are better than the forecasts which would be generated by the TRYM model?---No, I don't think - you are comparing chalk and cheese, like I just said.
PN326
Well, you publish the best forecast you can?---Mm.
PN327
Let us just stick to wages growth. You publish the best forecast you can?---Yes.
PN328
You do not even use the TRYM model as an input?---On that particular measure, that is correct.
PN329
Doesn't that imply that you do not place any faith in the outcomes of TRYM on wages growth?---No, it does not. It implies that we do not consider that wage equations, as is quite common throughout the economic profession, can give a good enough estimation of what is happening with wages. That is not to say we don't use wage equations, of course.
PN330
But you do not believe they give a good enough estimate?---I think the evidence is there, that they don't. No one uses them.
PN331
Could I hand you a document. Now, can I take you to that document. You will see that the first six pages of that document are, if I can describe them as such, current year forecasts from MYEFO?---May I ask the source of this document? I mean - - -
PN332
MYEFO?---Yes, so there has been no alteration. They have just been copied.
PN333
No, there have been no alterations. They have just been photocopied?---It is just there is no page numbers on them, I am just concerned that - it didn't seem to correspond.
**** DEHNE TAYLOR XXN MR WATSON
PN334
We have taken the liberty of cutting and pasting in the sense that we have extracted them from the document, yes. But there has been no alteration to the text of the tables?---I wasn't implying that.
PN335
No?---I was just - I just didn't know what the source was.
PN336
Yes?---You didn't mention it.
PN337
Well, can I just focus on - - -
PN338
PN339
MR WATSON: Mr Taylor, can I just direct your attention to that document. The first six pages are the current year forecast from MYEFO?---Yes.
PN340
In the particular year, and on the next two pages you will see tables which are forecast and projections for further out years, do you see those?---Yes, I do.
PN341
Okay. Now, can we just focus initially on the first year projections - - -?---Sorry, are you talking forecasts or projections here. There is a significant difference.
PN342
Forecasts, I am sorry. Yes, I am sorry, the published forecasts. Indeed, all of the published forecasts express things in amounts of a quarter of a percentage point?---That is correct.
**** DEHNE TAYLOR XXN MR WATSON
PN343
Yes?---Well, they are rounded to that, yes.
PN344
Rounded to that?---Yes.
PN345
And is that because in the forecasting process there is very little weight placed on movements of less than a quarter of a percentage point?---No, that is not correct.
PN346
JUSTICE GIUDICE: I am sorry, what does that answer mean?---Well, it is like any number. How precise do you want to make it.
PN347
But were you agreeing with Mr Watson or were you disagreeing with him?---Sorry, well, his question was does that mean we don't - we don't - - -
PN348
Yes?---Sorry, well, the way I understood the question is, we don't regard anything under a quarter of a per cent as significant. Now, I find that - sort of if you take that argument to absurdity you don't any number is significant because you keep doing it in quarter per cents.
PN349
MR WATSON: Well, can I put it this way. A number that was less than .125 would get rounded down to zero under this process?---Well, it would get rounded to the nearest quarter per cent, yes.
PN350
So if it was less than .125 it would get rounded to zero?---Well, it would all depend what the underlying number was that had been rounded, of course. If the underlying number was .62 and you added .12 to it, you would get .75.
PN351
Yes?---But your .62 would have been rounded to a half. So therefore I don't accept that .12 would be rounded down to zero. That is obviously not correct.
**** DEHNE TAYLOR XXN MR WATSON
PN352
Well, let me just - can you just listen carefully to the question?---I did, sorry.
PN353
Well, just listen carefully again. A number which was less than .125 would be rounded down to zero?---No, not necessarily. Because that means your starting point is zero that has been rounded. Now that zero could be anywhere between minus .8 and plus .12. Now, your add .12 to that and you could get zero or a quarter.
PN354
Is what you are saying that the zero itself might have an error margin?---No, the zero is rounded. It just depends of where you pick your rounding factor. If you rounded to the nearest 100 then every number would be zero in this case.
PN355
Yes. If the prediction that came out for economic growth in a particular year the forecast for economic growth was .12, what would happen to that forecast?---Sorry?
PN356
JUSTICE GIUDICE: After the rounding process, do you mean?
PN357
MR WATSON: Yes. If the forecast for economic growth in a given year was .12 what would happen to that forecast?---Well, it is a very hypothetical question.
PN358
Yes, I understand that?---And I think if we have economic growth of .12 we would be in deep trouble.
PN359
Well, I understand that it is a hypothetical question, Mr Taylor, but we will go a lot quicker if you answer the question. If the forecast for economic growth in a given year was .12 was would happen to it?---Yes, it would be zero, sir.
[10.45am]
**** DEHNE TAYLOR XXN MR WATSON
PN360
Now, can I take you to the last two pages of the document, which is ACTU7, the forecasts document. Now, for the purposes of these questions, can we refer to the projection years at year 3 and year 4, because I want to refer to the projection years in a series of years.?---If that is what you want to do, fine.
PN361
You are happy with that?---Yes, yes.
PN362
You understand?---Yes.
PN363
I just don't want there to be a confusion about what we are - - -?---So, I take it the two on the left are 1 and 2?
PN364
Yes. I did think of giving them more exotic numbers, but I did not think that would be of much assistance. Now, you would agree, would you not, that in each year the projection for real GDP in years 3 and 4 is 3 1/2 per cent?---Yes.
PN365
And you would also agree, would you not, that in each year the projection for wages growth in years 3 and 4 is 3 1/2 per cent?---That is correct.
PN366
And you would agree, would you not, that in each year the projection for CPI in years 3 and 4 is 2 1/2 per cent?---That is correct.
PN367
And you would agree, would you not, that in each year the projection for employment in years 3 and 4 is either 2 or 2 1/4 per cent?---Yes, I am a bit puzzled why it is not 2 1/4 in the first year.
PN368
Yes, it changes to 2 in later years, you will see?---I see.
**** DEHNE TAYLOR XXN MR WATSON
PN369
Now, that is because, isn't it, that in each year the projection figures are based on long term averages for each of those variables?---Yes, that is probably correct. Sorry, I should - it is not a long term average per se. It is just we think where the long term path, growth path, is. I mean, you may call that an average, but it is probably not the technical term.
PN370
So the view, therefore, can I put to you, that Treasury takes is that for those outer years of projections, TRYM is not even an input into the process?---That is correct, but not because TRYM isn't useless, or anything: it is because, as I said before in my earlier questions, our forecasts are based on no policy change. And as you notice, there is a difference between things called forecasts and projections. Projections are where we think a long term path of the economy is, so by definition if we have no policy change, the economy is going to get back to your long term path. That is why they are called projections. So you are not doing any modelling; you are just saying what is our long term path.
PN371
Well, TRYM is not part of that process?---Well, it is in a sense, because TRYM also has - and, again, you would have to speak to the TRYM expert -but they have a long run path.
PN372
But you cannot say whether the long run path for TRYM reflects the projection figures?---No, you would have to talk to the modeller about that.
PN373
And you cannot say that the figures for years 3 and 4 in any of the given years would have borne any resemblance to the projection figures which are published?---The figures - sorry? - bore any resemblance?
PN374
The figures which TRYM would produce for years 3 and 4 would bear any resemblance to the projection figures which are published?---As I just said, I can't comment on the modelling, but I would be surprised if they didn't bear some resemblance.
**** DEHNE TAYLOR XXN MR WATSON
PN375
In terms of the generation of the wages forecast, you agree, don't you, that MYEFO was published last year in October?---My recollection is it was. And also PEFO was published at the same time as well.
PN376
Yes. And that time was the result of the last safety net decision from this Commission was known?---In October last year, yes. I mean, it came out in May, didn't it?
PN377
And is that a matter that you took into account in the preparation of your wages forecast?---It is certainly taken into account in part of our judgment. Yes, it certainly is.
PN378
Does the 2001/2 forecast for wages growth published in MYEFO, incorporate any assumption regarding award wages growth for that year?---No explicit assumption, no.
PN379
Implicitly, do you assume that award wages growth will follow a pattern of similarity to previous years?---In terms of it being part of an aggregate number, then I think that would probably be a correct assumption, yes. But it is not an implicit/explicit assumption, if I might say so - if that makes any - - -
PN380
And in your forecast of wages growth for 2002/3, is there any explicit assumption made regarding award wages growth?---Only in the sense of where we look at the balance of risks.
PN381
And could you explain what you mean by that?---Well, we would be looking at what sort of an amount particularly what is being claimed, say, by the ACTU, what effect that might have on wages, if that was to be awarded.
PN382
So that is a risk that you factor into your assessment of what wages growth - - -?---It is one of many risks, yes, that is correct.
**** DEHNE TAYLOR XXN MR WATSON
PN383
And so to that extent you take account of the amount which the ACTU claims?---It is a general number that we would be looking at, as to what might be an approximate limit as to how wages would grow. But, of course, we wouldn't assume that that is an absolute. But you have a sort of balance of probabilities.
PN384
And can I put to you that in that mix you would consider our claim, you would consider previous Commission decisions, and you would consider, if you like, the history of award wages growth generally?---Not to that extent. That would be in the back of your mind, but essentially you are looking at aggregate wages. Don't forget that we are forecasting here average earnings on a national accounts basis, which is far wider than just the award system, and also includes a lot of non-wage stuff. So it is not the way - we don't go down to a bottom - it is not a bottoms up approach; it is more a tops down.
PN385
Yes, I understand that. So you come up with an aggregate figure, and then do I take it from your previous answer, that what you do is you might analyse other factors, in order to check for the consistency of that figure, that aggregate figure?---Well, in coming up with that aggregate figure, we have been weighing up risks and uncertainties, and that is how we arrive at that figure.
PN386
And included in that weighing up is the ACTU claim and the Commission's decision?---As I said, not explicitly. It is a bit of information that you have got: but you don't sit down and say, well, how much would the ACTU claim add to wages - because we are forecasting AENA.
PN387
But it is something that you, broadly speaking, take into account?---Absolutely, along with a thousand other things.
PN388
So, I take it from your answer, then, that in terms of the forecast of AENA for 2002/3, that figure, it is impossible to dis-aggregate any part of it, and say that much of it is award wages growth?---That would be correct, yes. That is in terms of how we arrived at it, but you could probably come up with some formula about how many people are on award wages, and then discount it for -I mean, if you spent a couple of weeks, you could probably end up dis-aggregating the number. Whether it was right or not, I don't know, but you could actually do a dis-aggregation.
**** DEHNE TAYLOR XXN MR WATSON
PN389
Certainly from your end, there is no dis-aggregation?---Not in that way, no.
PN390
So it wouldn't be possible to say to the Commission the aggregate wages figure which was published in MYEFO for 2002/3 incorporates .1 per cent for award wages growth, .3 per cent for award wages growth, or .6 per cent for award wages growth?---That is what I just said, yes.
PN391
So, indeed, the MYEFO figure published for 2002/3 for wages growth might include a figure for award wages growth of .6 per cent?---No, not if we haven't given it a particular value, I don't see it.
PN392
But you - - -?---I am sorry, I just don't follow. I have just said we don't have a particular value, and then you said you could attribute a particular value to it. I just don't follow that.
PN393
I am saying that you can't rule out - perhaps if I put it that way - you can't rule out that that number incorporates - which is 4 1/4 - incorporates .6?---Well, as I said, if someone wanted to spend a couple of weeks trying to dis-aggregate that number, and attribute certain factors of the economy to certain parts, then maybe they could come up with .6. They might come up with 223, for all I know. I mean, it doesn't make any sense to me, why you would do that.
PN394
Yes, I see. In terms of taking into account Commission decisions - and I understand what you say about the very limited role they play in this process - but in terms of taking them into account, if the Commission were this year to award the ACTU claim - just go with me - if the Commission were this year to award the ACTU claim, in your analysis is one of the factors which you would look at, the net difference, if you like, between what you expected the impact on wages growth from the Commission decision this year was with the net impact - or the impact on wages growth from the previous year's decision?---No. As I explained before, the forecasting round, they are rounds, so you go back and you build up each round. You don't say, what did we say last time, and let us discount it, let us add something on, let us do something. You start from scratch again. And it also would be internally consistent. An award of that amount would obviously have employment effects, as we have said in our submission. And so therefore there would be changes to a whole lot of variables, not just wages.
**** DEHNE TAYLOR XXN MR WATSON
PN395
Yes, I understand - - -?---And that would also impact on wages.
PN396
So, can I just clarify that. If the Commission were to award the ACTUs claim, you do not say that you would at all take into account any comparison between the amount awarded this year and the amount which was awarded last year?---I am having difficulty following that question. I thought I said we would re-forecast, you know, and people can compare the two forecasts, if they like. But I'm not sure - I really - I'm honestly, I'm confused as to what you are driving at there.
PN397
Okay. Last year the Commission awarded $13 for a certain category of award employees, $15 for another, and $17 for another?---Mm.
PN398
I can tell you the cut-offs if you need them, but let us just say - - - ?---I vaguely - I think I can get them within an order of magnitude.
PN399
Say, this year the Commission awarded $25 for all award employees. Is a factor which you would consider the likelihood net aggregate impact of this year's decision over last year's decision?---Aggregate net impact on what?
PN400
On wages growth?---Well, as I said, these things are not done in isolation. That would have an effect on all the other economic aggregates which in turn feed back into your wages forecasts. So it is not a simple taking one and the other, there are feed back groups.
PN401
No, I'm not asking you if it would be determinative. I am simply asking you whether it would be a factor in the consideration of arriving at your wages forecast?---The $25?
PN402
Yes?---It would be.
**** DEHNE TAYLOR XXN MR WATSON
PN403
The net - the difference in the net aggregate impact between $25 and the previous year's decision?---No, it would be the $25 itself. Which again I said would feed into our other major macro variables.
[11.02am]
PN404
Do you have, in your own mind, a figure for the aggregate wages impact of last year's Commission decision?---No, I don't. When I say about that, I just haven't got it in my mind now. We certainly - it may have been done. Some of my analysts may have done such a thing, but I certainly haven't got it. But again, as I say, it is a matter of dis-aggregate - it is how the individual determines that it's aggregation.
PN405
Right. So there may have been some analysis but you are not aware of it?---That is correct.
PN406
Can I hand you another document? Now, that document compares MYEFO forecasts for the year ahead with actual as derived from MYEFO in the following year. And MYEFO forecasts some predictions two years out, with the actual - from the two years out, and then on the third page, MYEFO predictions three years out, with the actual from three years out, and similarly for four. Now, I can assure you that we have extracted the data from this from the document which is ACTU6. I don't know whether the Commission would like that document marked?
PN407
PN408
JUSTICE GIUDICE: Which is derived from ACTU7, I take it?
**** DEHNE TAYLOR XXN MR WATSON
PN409
MR WATSON: Yes.
PN410
Now, can we start on the first page, you would agree, wouldn't you, that in terms of the difference between MYEFO forecasts and actual outcome, that the difference has never been closer than minus .85 in 1997/98?---Well, yes and no. Again, we are rounding here, so you are not - I take the point, yes.
PN411
Yes. And on employment growth, the - on three occasions the figure has been out by more than .3?---Yes, yes, we choose .3, yes.
PN412
And unemployment on three occasions out by .2 or more?---How many occasions, I think - oh, yes, sorry, I thought it was a - - -
PN413
Yes. On wages, four times out of five, out by more than .3?---Mm.
PN414
And on inflation, one correct answer last year, but on three occasions out by more than - by .7 or more?---Yes.
PN415
Can we turn to the year 2 and 3 forecasts. Firstly, to the year 2 forecast. You would agree that on GDP in year 2, you have never got closer than a per cent?---No, that is not - no, sorry, that is on a second year forecast, which I said was based non a no policy change. Obviously after a policy change, then the following year's forecast is more accurate for the second year than the year before
PN416
But the year 2 forecasts have never been closer for GDP two years out, have never been closer than 1 per cent?---They're based on a no policy change. Now to think that there is not going to be a policy change in the two years' time would explain a lot of that variation.
PN417
So you say that that variation is corrected, do you, when you get to year 1?---No, it's just about the way you undertake forecasting. As I explained earlier, you undertake it on a no policy change, because it gives you a basis to examine your macro economic policies, whether they are appropriate or not.
**** DEHNE TAYLOR XXN MR WATSON
PN418
Yes?---And that is the whole purpose of forecasting.
PN419
Why are the second year forecasts published?---Because they also feed into the budget revenue and estimates.
PN420
And are they used then to guide macro economic policy for the Commonwealth?---The second year forecasts?
PN421
Yes?---They tell us where we are heading without a no policy change basis, yes.
PN422
So they tell you where you are going on a no policy change basis. Are they used as an aid in decision making on macro economic policy?---Certainly, yes.
PN423
Can we go back to the table? Employment growth, again three numbers there - sorry two numbers that are a long way out, .7 and the 1.5?---It depends on definition of a long way out. I mean - - -
PN424
So you don't think .7 or 1.5 is necessarily a long way out for a two year forecast?---No, all right, well can we just - I will accept that whatever you say for the next three pages you are correct. I think we are wasting a lot of time, we are just going through each number, and you are saying three out of four is out, and four out of five, and picking a number at random.
PN425
Well - - -?---I am happy to take these numbers as read.
PN426
Yes, okay. Well, is it your evidence then that being one per cent out on GDP two years out is not a long way out?---No, it is not.
PN427
Is it your evidence that being .7 out on employment growth two years out is not a long way out?---No, it's not.
**** DEHNE TAYLOR XXN MR WATSON
PN428
Is it your evidence that being .3 per cent out on wages growth two years out is not a long way out?---No, it's not.
PN429
And is it your evidence that being 1.3 per cent out on prices two years out is not a long way out?---No.
PN430
And can I take it then that your position in relation to years 3 and 4 would be even more generous in terms of - - -?---I don't know how many times I have to explain the difference between forecast and projections. I know I shouldn't be getting annoyed at this, but they are taking the economy back to the long run. There is a substantial difference, your Honour, between forecast and projections, and to try and say that they are a similar thing is just nonsensical.
PN431
Yes. And so - can I take it then that in terms of projections, you are saying that we shouldn't - it's a completely inappropriate exercise to expect them to be anywhere near actual results?---No, it is not. It is just to give you a guide as to what happens on a no policy change and the economy comes back to the long run in years 3 and 4.
PN432
But I take it from your previous answers that we should expect that the difference between actual and projected, should be anywhere in the order of plus or minus 1 per cent?---No, that is not correct. In a perfect world, if we got the forecast right, and we had the long run projections right about where the economy is, where it is in a sustainable thing, then they would be zero.
PN433
We are not in a perfect world - - -?---Exactly, as I made the point.
PN434
In a real world, do you say to the Commission that you would be happy to stand on a record of projections in years 3 and 4 being plus or minus 1 per cent from actuals?---I'm not - the projections are a long run economy wide thing. If policy changes take you away from that, then you'll get significant variations.
**** DEHNE TAYLOR XXN MR WATSON
PN435
Is there any basis on which the Commission could place any faith in the projections for years 3 and 4, other than that they might be within plus or minus 1 per cent?---The Commission can place faith in the projections in that they are where we anticipate the economy will be in the long run.
PN436
But you don't necessarily anticipate that that is where it will be in year 3 and 4, given the exigencies of policy change and the like, which you have already referred to?---That can happen, yes.
PN437
So you publish a number for years 3 and 4, which it is not your expectation will actually be the number obtained?---That is not correct. It is an expectation if the economy gets back to its long run position, that will be the number.
PN438
Yes, but that is, as I understood your evidence, on the basis of no policy change?---That is if - no, the no policy change is after year 2.
PN439
Yes?---But if your policies were to get you back to the long run of projections in year 3, then that - 3 and 4 would be correct.
PN440
But your projections in year - so year 3 and 4 are not on the basis of no policy change?---No, they are on the basis of the long run, where the economy will be in the long run.
PN441
I have nothing further.
PN442
JUSTICE GIUDICE: Any re-examination? Mr murdoch?
PN443
MR MURDOCH: No, your Honour.
**** DEHNE TAYLOR XXN MR WATSON
PN444
PN445
PN446
MR MURDOCH: Ms Gabbitas, before you left during the previous witness's evidence, you have been here when I opened on your qualifications?---Yes.
PN447
Are you able to confirm that you occupy the position that I opened, and that your qualifications are as outlined?---The only technical amendment, it is macro economic modelling unit, and not micro economic, as you earlier alluded to.
PN448
Thank you.
PN449
PN450
MR WATSON: Yes.
PN451
Ms Gabbitas, can we start with some basics? The Treasury macro economic model of the Australian economy is called, TRYM, T-R-Y-M; that is right?---Yes, that is correct.
PN452
And TRYM consists over 100 inter-linked equations which can be used to forecast a number of economic variables?---Yes, it does contain the equations and identities, yes.
PN453
And broadly speaking, what happens is that data is entered into the model, as if you like, initial conditions. That data is manipulated in the series of equations, and solutions to those equations become the forecast outcome for the particular variables. Is that right?---The model uses historical data from a range of sources, and a couple of assumptions to then make a projection forward about the likely direction of the economy and certain economic variables.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN454
Yes. And as I understand it, the equations generally project one quarter in advance and then there is an iterative process of the results from the quarter in advance being fed back into the model to get two-quarters out and so on. Is that right?---That is correct, in most equations.
PN455
Now prior to the production of the economic and fiscal outlook last year did you run the TRYM model to produce estimates for key economic variables such as GDP growth, employment growth, unemployment, wages and inflation?---On some of those variables, yes. TRYM was used as an input with a range of other inputs but on wages we don't run a separate - that is an imposed assumption in the model.
[11.17am]
PN456
JUSTICE GIUDICE: Ms Gabbitas, you may have to keep your voice up a little?---Sorry.
PN457
MR WATSON: Are you aware of the actual MYEFO forecasts for last year?---Yes.
PN458
Are you able to tell the Commission whether on GDP growth the outcome which TRYM predicted for 2001/2 is the same as or different to the number which was published in the forecasts?---I can't recollect the answer to that. There is a high chance they are different numbers because the actual MYEFO process is a lot more complicated than just relying on the numbers from TRYM.
PN459
And I take it then that that answer would apply to each of the other variables which I have referred to - inflation and employment and unemployment?---Yes.
PN460
In the last six years would there be instances in which the published forecasts in MYEFO for its current year have deviated from the figures generated by TRYM by more than .5 percentage points?---For certain variables undoubtedly that has been the case.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN461
And in the last six years there will also have been instances, won't there, where the year to forecasts in MYEFO have deviated from the figures generated by TRYM by more than .5 per cent?---Yes, highly likely.
PN462
Now, can I take you to - I take it you conducted the modelling process which is referred to in the Commonwealth submissions in relation to the ACTU wages claim versus the joint governments position?---For this last year my area did, yes.
PN463
And you are able to answer questions in relation to that modelling process?---I will endeavour to answer them to the best of my capacity.
PN464
Now, is the instance of this kind of sensitivity analysis that you feed in the change in the relevant variable and for initial conditions at least you leave everything else the same as it was?---Can you please clarify which particular case because we did two modelling exercises and they are slightly different so the counter factual versus the forward looking impact of this year's case.
PN465
Yes, I see. I am just at the moment focusing on the modelling exercise of the ACTU claim versus the Commonwealth Government's proposal?---In that case we feed in a set of historical data and the MYEFO forecast and then we impose a shock on the model which is the difference between the ACTU's position and the Commonwealth's position as we have outlined in our submission.
PN466
Okay. So if you like, all of the initial conditions in the model are kept the same except for wages, is that right?---Yes.
PN467
And in relation to wages you feed in - for the purposes of the sensitivity analysis you feed in the amount of change in that variable?---Yes.
PN468
The initial conditions - apart from wages the initial data or historical data which is fed into the model is that derived from the MYEFO forecasts?---There's a range of things in the model. To look forward the forward estimates come from MYEFO.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN469
Yes?---The historical data comes from a range of sources including the ABS data, other factual interest rate levels from the Reserve Bank.
PN470
When you apply the wages shock as I understand the process you applied the wages shock in May 2002, is that right?---Yes, we work on the assumption that the Commission last year made its decision in May so we start on that premise.
PN471
Yes. The wages figure immediately prior to May 2002 if you like, immediately prior to the shock, how was that derived?---It runs of historical data and the numbers in MYEFO.
PN472
So you don't have historical data for where your wages are in May 2002 do you?---No, because we are not at May 2002.
PN473
That is right. So you use some forecast. Is that forecast generated by TRYM itself or by MYEFO?---In this particular case it is generated by MYEFO.
PN474
I see. So if we ran TRYM using the historical data to May 2002 we might actually get a different wages figure to the figure in MYEFO?---That is possibly the case although as I earlier alluded to we often impose the wage profile so - which is imposed from outside so in that case it would not be likely.
PN475
Is the point there that really the wages equations in TRYM are not something on which a great deal of reliance is placed generally in Treasury?---Because with a model you can turn equations on or off depending upon whether the results - sort of whether you put a high lot of wage on the results and on the wages equation because mapping the actual profile if the model runs itself it - we have decided it's preferable normally to impose a wage profile to avoid possible inconsistencies with the wage profiles being used elsewhere in Treasury.
PN476
I see. So can I take it that what that answer means is that if you had run TRYM through to May 2002 there may have been an inconsistency between that result and the forecast in MYEFO?---Yes. Had we done that, yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN477
Yes. And so you used the MYEFO NUMBER?---Yes.
PN478
Now do you have the Commonwealth submissions with you in the witness box?---Yes, I do.
PN479
Can I take you to table 4.4 please?---Is this of the initial Commonwealth submission?
PN480
Yes, sorry. Table 4.4 is on page 79. In relation to the variables - the other variables there - GDP, inflation, employment and unemployment and the 90 day bill rate for the initial conditions in May 2002 again was the figure used the outcome of TRYM modelling or was it an externally imposed number from MYEFO?---It was an imposed number.
PN481
In each instance?---In each of those it would have been the numbers consistent with MYEFO for most of those variables as a starting point which then led to the numbers in that table.
PN482
I see. And that is again because if you had actually run the model through May 2002 there may have been inconsistencies between GDP, inflation, employment, unemployment and the 90 day bill rate but as an outcome from the modelling compared with the forecasts in MYEFO?---That is correct because modelling can't reflect a range of factors.
PN483
Yes. Now, the numbers which are presented in table 4.4 they are the actual outcomes from the TRYM process, the TRYM simulation, there has been no judgment applied in relation to these?---There has been some judgment but it is the same judgment that was applied at the MYEFO process. That reflects the fact that the model has slight areas which it over or under estimates results but no additional judgment than that which is usually applied when running the model. And in most of the cases it wouldn't really have a significant impact on those numbers.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN484
Well, can I ask has judgment been applied to alter any of the numbers which are reported in table 4.4?---No.
PN485
Now, as I understand it the Commonwealth has run two simulations in the claim versus the Commonwealth's proposal?---Can you please clarify. I am not sure I understand the question.
PN486
Yes, I am sorry. As I understand it in preparation for this case the Commonwealth or Treasury ran two simulations of our claim compared to the Commonwealth Government proposal, one with the Reserve Bank and financial market response and one without?---Yes, that is correct.
PN487
Now, as I understand it the simulation with Reserve Bank and financial policy response is designed to capture what are described as real world interest rate movements, is that right?---Yes.
PN488
And it is designed, as I understand it, to broadly mimic the way in which interest rates have moved in history, is that right?---Yes.
PN489
Can I take you to paragraph 427 of the Commonwealth submission. I am sorry, 427 of the reply submission. In the second sentence it says there:
PN490
The Reserve Bank would consider not only the implications of the current decision, but also the kind of precedent it sets for future safety net increases and inflationary prospects.
PN491
Do you see that sentence?---Yes, I do.
[11.31am]
**** RUTH LORNA GABBITAS XXN MR WATSON
PN492
Yes, and is it your evidence that that is how the modelling with Reserve Bank and financial market policy simulation works?---Yes.
PN493
So that the assumption is made that the Reserve Bank assumes that there is a likelihood of Commission decisions following a consistent pattern in the history; is that right?---That is a general principle. In looking forward we have only imposed the wage shock that was outlined in our submission in table 4.2 of our original submission, on page 65.
PN494
Yes?---So because we only have one output, we only have one shock. In this case it won't actually feed through with significant effects from future years as it could perhaps in a counterfactual case. It would only - it would feed through, for instance, if an increase then leads to higher prices which then may lead to subsequent wage pressures. So to that extent, it feeds through, but no implicit assumption is made about the Commission's decisions in future use.
PN495
So is it right then to say that the Reserve Bank, for the purposes of the simulation of the ACTU claim and the comparison of that with the joint Commonwealth Government's proposal, that the Reserve Bank does not consider the implications of the current decision in terms of the precedent it sets for future safety net increases?---On one interpretation, yes. It was only explicitly - what you have said is correct.
PN496
Under the simulation of the ACTUs claim versus the joint Commonwealth Government's proposal, with policy response turned on, if I can use that, how much and when are the Reserve Bank assumed to have listed interest rates?---I can't be explicit and give you an exact moment of time, but the way the model is set out is the Reserve Bank responds quickly so that the impact is likely to occur in the first quarter of that particular financial year. There would be a reasonable chance; I could confirm - - -
PN497
And can you say how much?---The numbers in the table show you the 90-day bill rate in that table 4.4 as figures for the amount of the Reserve Bank and financial markets - - -
**** RUTH LORNA GABBITAS XXN MR WATSON
PN498
So half a per cent is the response - sorry - half a per cent is the immediate response in the first quarter?---Well, in 2002 to 2003.
PN499
Yes?---As outlined in that table, yes.
PN500
So you impose a shock in May 2002 and then in the first quarter of the next financial year, the Reserve Bank has chosen to raise interest rates by .5 per cent; is that right?---Yes.
PN501
Can I take you to chart 4.1 on page 77?
PN502
JUSTICE GIUDICE: Just before you do that, Mr Watson, I think we will adjourn for 10 minutes.
SHORT ADJOURNMENT [11.36am]
RESUMED [11.47am]
PN503
JUSTICE GIUDICE: Thank you, Mr Watson.
PN504
MR WATSON: Yes, thank you.
PN505
Before the break, Ms Gabbitas, I asked you to have a look at chart 4.1; it is on page 77 of the Commonwealth's original submissions. You have got that in front of you?---Yes, I do.
PN506
The bold line, that is the inflation outlook from MYEFO?---Yes, it is.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN507
And in 2002/3 and 2003/4 and 2004/5, it is 2.5?---Yes.
PN508
Yes. And that is - and that is an externally imposed assumption?---Yes.
PN509
It is not an outcome of modelling from TRYM itself?---No.
PN510
Can I direct your attention to the line which is the illustrative outlook given no financial market or policy response; do you see that line? It is the top lighter line commencing in 2001/2?---Yes.
PN511
And you would agree, wouldn't you, that that number has inflation in 2002/3 at around about 2.7?---Broadly, on the basis of that diagram.
PN512
Yes. Well, are you able to assist the Commission by providing a more precise figure than the diagram? Do you know what the modelling simulation actually generated?---Not with me here.
PN513
I see. Well, if we could just work with the diagram. So around 2.7, and then by 2003/4, 2.8 per cent?---Broadly.
PN514
And drops down to around about 2.7 again by the end of 2003/4, start of 2004/5; is that right?---Yes.
PN515
Now, that number is within the Reserve Bank's target range?---Yes.
PN516
Or those numbers, I should say. And you know too, don't you, that in December inflation went from 2.5 per cent to 3.1 per cent?---Yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN517
And the Reserve Bank, indeed even today, has not reacted to that jump?---Yes.
PN518
You would agree, wouldn't you, that the Reserve Bank has not once in the last six years attributed a rise in interest rates to wage pressures?---I'm not aware of whether they have or haven't.
PN519
You are not aware whether they have or have not. But you do agree that 2.8 per cent falls squarely in the Reserve Bank target range?---Yes, but that is only one of the factors the Reserve Bank considers.
PN520
Well, I would suggest to you that it is just not credible to say that the Reserve Bank would react by increasing rates by half a percentage point if inflation went from 2.5 to 2.8 per cent?---That is why we provided both scenarios on these charts, to give an illustration of what difference it makes, whether it is assumed the Reserve Bank responds or does not respond.
PN521
But you have not provided a table 4.4 equivalent for no Reserve Bank or financial market response, have you?---No.
PN522
Do you accept that the Reserve Bank would be unlikely to respond to an inflationary impact of around about .1 per cent by raising interest rates?---The Reserve Bank considers a range of factors, so I am not sure it is my position to say exactly whether the Reserve Bank would or would not respond. What we have done in this case is looked at a modelling relationship showing approximately on the basis of that assumption how the Reserve Bank would respond, but it does not have a two to three per cent band such as the Reserve Bank has publicly announced inflation target.
PN523
I see. So the model does not make any assumption about inflation being within the Reserve Bank target range?---No.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN524
I thought that you agreed in evidence that the policy function model was designed to reflect the real world movements in interest rates?---It is designed on that basis and the weights are ascribed on that basis, but the Reserve Bank does not solely focus on inflation, if you look at its past behaviour and when it has set and changed interest rates, have not always corresponded to changes in inflation.
PN525
Yes, I understand that. But are you seriously suggesting that this model can in any way approximate the real Reserve Bank response to interest rates without factoring in the Reserve Bank's target range of two to three per cent?---It's difficult from a modelling perspective to factor in such a range, but a model, like any forecast, should not be used in isolation; you should look at other qualitative factors to determine the extent of judgment to rely on the model.
PN526
Can you just answer my question; do you seriously contend that the Reserve Bank policy function which the model assumes can be said in any way to reflect reality if it does not take into account the fact that the Reserve Bank has a target range from two to three per cent?---Yes, I still think it is valid to look at it despite that difference.
PN527
I see. So for the figures in total 4.4, we have to assume that the Reserve Bank responded to inflation at about 2.7 or 2.8 per cent by hiking rates 50 basis points; is that right?---That - in table 4.4 that you have referred to, the point 2 response is after interest rates have changed, so they have already responded to an increase in inflation in that year. So that is post an interest rate response, if I understand your question correctly.
PN528
Well, I am not sure you do. In total 4.4, the figures in total 4.4, we have to assume, do we, that the Reserve Bank has responded to inflation at 2.7 or 2.8 per cent by raising interest rates 50 basis points?---Yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN529
And I suggest to you that that is not a realistic assumption?---It's based on the assumption that the Reserve Bank, in being forward looking, needs to be pre-emptive and respond sooner. Not just one factor is fed into a decision by the Reserve Bank; it looks at a range of factors. So one particular factor in isolation does not lead to the Reserve Bank decision. But on the way the model works, what the Reserve Bank is trying to do is to lead to the best ongoing economic growth inflation outcome in future.
[11.56am]
PN530
I understand all of that, would you agree that it is not a realistic assumption that the Reserve Bank would raise rates half a per cent in response to an inflationary environment where the inflation rate is 2.7 to 2.8 in the real world?---At the moment you alluded to earlier inflation was 3.1, but I agree on our forecasts it is project to return back within the band. That is an issue. But even without, if you do object to an interest rate increase, there are still results that show that the variables presented in table 4.4, that I do not have with me but we could provide subsequently, would show that there are still impacts on the economy whether you believe or don't believe in the Reserve Bank responding.
PN531
Yes. We will get to that. If you model without the Reserve Bank and financial market policy response, the effect in table 4.4 is that you have a slightly higher inflation number but you have better, if I can describe it in that way, employment, unemployment and GDP outcomes, is that right?---You end up with better or a lower - higher, better employment, unemployment, but GDP, I think, is - no, sorry, you would end up with better GDP.
PN532
Yes. And at least insofar as employment is concerned, that is what table 4.2 shows?---You mean chart 4.2?
PN533
Chart 4.2, I am sorry, on page 78. The bold line there is the trend line from MYEFO, is that right?---Yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN534
And then the line just below there is the illustrative outlook given no financial market or policy response?---Yes.
PN535
The trend line is heading upwards at a relatively rapid rate. I make it round about a per cent every year?---It is consistent with the numbers in MYEFO.
PN536
I see. Does that mean that in outer years at some point the assumption is that the entirety of the population is employed?---No.
PN537
So the trend line at some point in the outer years flattens out?---From modelling purposes we were only focussing on the next couple of years. So what really happens 10 years down the track is not relevant for the purposes of this case.
PN538
I see. Now, can we go to table 4.4. The figures that you publish there include one for GDP level and one for employment level. Do you see those?---Yes.
PN539
In fact there are two figures for each case, I should say. Now, as I understand it, if we were to look at GDP growth and employment growth each of those figures would reduce?---Are you looking at the growth rates.
PN540
If you look at GDP growth and employment growth, instead of minus .6 in 2003/4, I want to put to you that you would end up with something like .4, minus .4, is that right?---Yes.
PN541
And instead of, if you look at employment level, if you looked at the figure for employment growth you would end up with minus .3?---I mean, effectively the level is accumulative of the growth rates in any given year.
PN542
Yes, can you just answer my question?---Yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN543
Would it be minus .3?---Approximately, yes.
PN544
Well, in fact, that is the figure which is contained in the Commonwealth's reply submissions. Do you have any reason to doubt it?---No.
PN545
Now, can I ask you then if we look at the scenario which would pertain in 2003/4 with out Reserve Bank and financial market policy response, can I suggest to you that the inflation figure would be .3?---Can you just clarify which financial year you are talking about.
PN546
I am sorry, I am concentrating on 2003/4 for all of these next few questions. The inflation figure would be .3?---Yes.
PN547
The employment growth number would be minus .1?---I don't have the numbers in front of me, but I see no reason it wouldn't be around that.
PN548
Well, yes, be around that. And the unemployment number would be below .1?---Possibly.
PN549
Yes, and the GDP growth number would be minus .2?---Without the numbers that seems broadly realistic.
PN550
You are able to get those numbers?---I can provide those numbers, but I just don't have them with me.
PN551
And you would be able to get them - would you be able to get them during the course of the lunch break?---I can endeavour to get those. I would need to call back to Canberra and check to get those numbers.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN552
Yes. Last year Mr Downes, for the Commonwealth, said that there was essentially a linear relationship between the size of the shock and the outcomes from the model, unless you were talking about a very big shock, is that right?---Yes, that is correct.
PN553
And I presume that is on the basis of the same initial conditions. If you vary the initial conditions then clearly there will be nominally linear effects?---Yes.
PN554
So if instead of putting a .4 rate in as a wages shock, you put .2 in and kept the financial and policy market response turned off, you agree, do you, that when you see commensurately smaller results in relation to the alleged effect, and those which I have put to you just recently?---Yes.
PN555
Can I hand you this document. Now, - perhaps, I do not know whether your Honour wants this marked.
PN556
PN557
MR WATSON: Now, can I just take you to the first column. You agree, do you, that the figures in that column are the figures from table 4.4 for 2003/4 with the exception that I have put in GDP growth and employment growth, as you indicated in your evidence?---Yes.
PN558
And would you agree that the figures that I have put in the next column without policy response assumption are the figures which you have broadly agreed would be right in the evidence you have just given?---Yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN559
And do you agree, and if you need to you can spend a little time checking the maths, but do you agree that if instead of putting in .48 you put in about two-fifths of that, you get the numbers in the final column with, of course, rounding down in the instance of the employment and unemployment numbers?---Yes, also with the assumption of rounding down on inflation.
PN560
Yes, yes, I am sorry, yes. Now, you have agreed with me that initial conditions have an impact on the TRYM outcomes. In this simulation you used the MYEFO prediction for GDP growth for 2001/2 as 3 per cent?---Yes.
PN561
And you used the employment growth prediction for 2001/2 as 3/4 of a per cent?---Sorry, can you repeat that.
PN562
You used the employment growth figure for 2001/2 of three-quarters of a per cent?---Yes.
PN563
You would accept, would you, the growth for 2001/2 is more likely to be four?---That wasn't the purpose of doing the analysis. It was just to compare against a set of forecasts as those based on MYEFO model.
PN564
Yes, I understand that the analysis was based on MYEFO. I am asking do you agree the growth was, in fact, more likely to be 4 per cent for 2001/2?---I am not sure it is quite my role. I was just involved in the modelling side of it, not in revising the MYEFO forecasts.
PN565
I see, and do you agree that employment growth would be likely to exceed 3/4 of a per cent, or are you not in a position to make any comment in relation to that?---It is not an area I am familiar with, so I don't feel I am in a position to make a comment.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN566
Okay. Do you accept that if you started with an initial condition in 2001/2 of higher GDP growth and higher employment growth, you would end up modelling smaller GDP effects and smaller employment effects?---Because the model is not as sensitive to the MYEFO baseline, it is just assuming that baseline and looking at the difference round that baseline, on the basis that the model is linear it would generate similar numbers. So it is not so sensitive to the point in the economic cycle.
PN567
Last year the Commonwealth provided some modelling of a claim with a .86 per cent wages shock, do you recall or are you aware of that modelling?---Only in broad terms, because it was before I commenced in the area.
PN568
Well, if you can just bear with me. If I can ask you make this assumption. Last year the Commonwealth inputted .86 per cent and it indicated an employment growth effect in the second year out of minus .3 per cent. This year the input figure is .48 per cent and the employment growth impact in the second year out is minus .3 per cent a year?---What is driving that difference is the fact that there is more historical data, the model relies on historical data to project forward so it is sensitive to an additional year of historical data and any subsequent revisions to earlier data released.
[12.11pm]
PN569
Can I take you to 4.25, page 29?---Is this in the supplementary, or the - - -
PN570
Your reply submissions - or when I say yours, the Commonwealth's, I am sorry. You will see at the foot of page 29, a dot point:
PN571
In comparison to last year's simulation which used a .6 percentage point shock to aggregate wages growth, this year's .8 percentage point shock yields a nearly identical minus .3.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN572
Do you see that?---Yes.
PN573
And do you see that there is a reference then to the history, and the base line forecast heading changed between the two years?---Yes.
PN574
And do you see that the example quoted in the first dash point, is that in last year employment growth was 3 per cent, while in this year's simulation employment growth had 3/4 per cent?---Yes, I do see that.
PN575
So I take it that does suggest, doesn't it, that a change in the base line does have an impact on the linearity of the results?---It can have an impact, but the more significant impact is the historical data, and the starting point for the model.
PN576
Would it be possible that change in the base line for GDP growth from 3 to 4, and employment growth from 3/4 to, say, 1 1/4, would have an impact on any of the numbers in Table 4.4 in the order of .1 per cent?---Off the top of my head, I can't give you a good feel for the implications a change of that magnitude would have.
PN577
Do you suggest it would be more likely than not that it would have no change, or no impact?---It would clearly have an impact in this monetary response change, because the way the monetary response function is set up it would have an impact, because it looks at the levels. But, on the other one, whether it is having much or no real impact, without doing the modelling it is hard to give you an answer.
PN578
Well, you would agree, wouldn't you, if you go back to ACTU9, you would agree, wouldn't you that if it has any sort of downward impact on a GDP growth number - when I say downward, I mean closer to zero - that you would be rounding that one down to zero as well, wouldn't you?---On rounding of that number, yes. But that still doesn't refute it still having an impact on the economy.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN579
Well, if I can take you to that last column. Can I suggest to you that outcomes like that are properly described as negligible?---Is this for all variables?
PN580
Yes?---Yes.
PN581
There is no meaningful change to the base line?---For the variables presented in that table?
PN582
Yes?---No.
PN583
I am just going to hand you a document.
PN584
Again, your Honour, I will take the witness through the document, but it might be appropriate to mark it now, and I will give some explanation.
PN585
THE SENIOR DEPUTY PRESIDENT: Is this going to assist us, Mr Watson?
PN586
MR WATSON: I hope so.
PN587
**** RUTH LORNA GABBITAS XXN MR WATSON
PN588
MR WATSON: Now, I was tempted to just rattle off a list of figures and ask you to solve the first equation off the top of your head, but I don't think I will do that. On the first page of that document is the labour demand equation from the TRYM specifications which were tendered in 1999. Can you confirm that the functional form of that equation has not altered since that documentation was tendered? I am not here taking about coefficients, or that kind of thing, but the functional form?---That is correct.
PN589
And on the second page we have reduced, if I can put it that way, that equation to English, and we have indicated what the inputs are. Now, you will see that we have footnoted a couple just for ease of exposition. Could you look carefully, and just indicate to you agree that those accurately describe the inputs? IF it would assist you, I have got the total of mnemonics: do you want that, or are you familiar enough with - - -?---I think - I have got the table of mnemonics myself.
PN590
Right, I thought you might have?---I mean, that captures what the main variables are. There are a couple of minor exceptions, but broadly it is the case.
PN591
Yes, broadly that is it? You are happy with that. Okay. The labour market wage equation, which is the next page of the document, that is number 64 under the heading, Wage Equation. And, again, we have attempted to render it into English. I would ask you to have a look at that, and agree whether in broad terms we have got that right?---In forward terms, yes.
PN592
Now, as I understand it, the TRYM model uses the labour demand equation and - labour demand and the number of unfilled vacancies as the chief determinants of private sector employment: is that right?---Not in isolation, because it uses both the price equations, the investment equations and the employment are solved together, but that comprises the employment demand.
PN593
And the way the labour demand equation works, is that if everything else is held equal, a wage increase, no matter how small, reduces labour demand?---Yes.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN594
So to the extent that we get a consistent direction of effect on employment from your modelling of wage increases, that is an outcome of the model specification?---Yes.
PN595
And, so, for example, if we put the Commonwealth proposal of .1 per cent relative to no increase, we would get job losses?---Yes.
PN596
And if we put the ACCI proposal of an increase of $10 at the minimum wage, we would get job losses?---Yes.
PN597
Even assuming perfect data, each of the critical equations in the model has a standard error?---Yes. It is slightly more complicated because of the fact that model equations are being solved simultaneously, so a single equation error, while they have been presented in past documents and can be calculated, doing a standard error for the whole model operating, sort of in conjunction with each other, isn't a simple matter.
PN598
Yes, I understand. But you agree, don't you, that the wage equation standard error is about plus or minus 1.4?---I would have to look. I could look, if you would like?
PN599
Well, does it sound about right?---It sounds possible.
PN600
Well, could you look, and just check?---1.2 per cent was the figure we tabled last.
PN601
Okay, 1.2. Well, I am relying on older documentation, so that is all right. The labour demand figure, the documentation I have says plus or minus .68?---4.8, approximately.
PN602
Pardon?---4.8 per cent standard error for - - -
**** RUTH LORNA GABBITAS XXN MR WATSON
PN603
For labour demand, or labour supply? I am asking labour demand?---Sorry. You are after labour demand or supply?
PN604
Labour demand?---The 4.8 per cent figure I gave you a moment ago, is the standard error.
PN605
4.8 per cent, okay, the Beberidge Curve, which deals with unemployment vacancies?---Sorry, that was the Beberidge Curve 4.8, sorry.
PN606
You gave me the Beberidge Curve. I thought you did. The labour demand function is, as I understand it, at the front of the thing and you - - -?---It is a standard error of point .66.
PN607
.66, it has gone down from .68?---I mean, this is the last time we had calculated them, so it is broadly consistent.
PN608
And I should have perhaps asked you this on the way through, given - but you would agree that each of these equations only explain about 60 per cent of the variation in past data?---I will check and let you know in a minute.
PN609
Yes, I am sorry?---With the exception of the hours worked and the labour supply equations where it explains a much higher percentage, about 95, 96 per cent.
PN610
But I specifically asked you in relation to the wages one, the labour demand one and the Beberidge Curve. You would agree about 60 per cent?---Yes.
PN611
Now, in addition, the historical data on which you rely itself and which is inputted into the model will have standard errors, will it not?---I assume in most cases, yes, because it is a sample, not a whole population.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN612
And in relation to, for example, employment data, do you use labour force survey material as an input?---Yes.
PN613
And are you aware of the standard error upon the employment number, for example - or the employment level, for example, as a result of the labour force survey?---I understand that was covered in our supplementary submission in response to your earlier comment in the supplementary submission at R4.24 on page 29.
PN614
Can I hand you a document which comes from the relevant ABS labour force publication. Do you see at the bottom it says:
PN615
ABS labour force 6202 February 2002
PN616
?---Yes.
PN617
You see it is headed: Standard Errors?---Yes.
PN618
And you see that at the foot of the written text section, if I may describe it that way, just above the tables:
PN619
The following tables show the standard errors for this month's level estimates -
PN620
?---Yes.
PN621
And you would agree that the figure for the level estimate for employed persons is 37,400?---I am not quite sure where you are on the page.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN622
If you go under employed persons, employed?---Yes.
PN623
And you go down to persons, which is the bottom line in the table, and you go out to the far corner, which is total?---Yes.
PN624
37.4 thousand. 37,400; you would agree?---Yes, from that employed table.
PN625
Yes. Now, in terms of a sensitivity process, would it be sensible to model the likely impact of the ACTU claim versus the Commission's decision in the previous year?---You mean - - -
PN626
I know that is not what you have done, but would it be a sensible form of analysis, sensitivity analysis, to model the impact of the ACTUs claim on aggregate wages growth compared with the decision of - last year's Commission decision?---Well, it depends on whether it is appropriate to assume that the Commission will always give at minimum the increase they gave last year, or not. But if you believe the Commission would at minimum give - or give the same increase as last year, then you could do that if you want the additional - - -
PN627
Well, you do not have to assume that they would at minimum do that, do you? You could simply make the assumption that it was likely that they might look at a number around the previous year?---Well, if you wanted to do that, then you could model it on that basis.
PN628
Yes. How long would it take to model the impact of a .2 per cent wages shock without a policy reaction response?---A little while, but probably not an unbelievable amount of time.
PN629
When you say a little while?---Probably be a couple of hours, subject to the model not having a problem when it runs it.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN630
And would you be able to do that and provide the results to the Commission?---What we would need is a profile similar to that we have in the current table, bearing in the mind that the way the model works, it needs a quarterly wages profile to run a wages shock, because it is based on quarterly data. So the actual timing of the .2 difference, which particular quarters the difference is - - -
PN631
Would you be able to model it using precisely the same profile as you used in your existing sensitivity analysis?---It would be possible.
PN632
It would be possible to do that.
PN633
MR MURDOCH: Might I just clarify, we have got to the stage of establishing that something would be possible. Is there a request that it be done? I do not want any confusion.
PN634
MR WATSON: Yes. Well, there is now.
PN635
MR MURDOCH: Well, if the Commission pleases, this was exactly the sort of issue we were trying to avoid with our requests to the ACTU to tell us what they won't. Might I request that if the witness is being asked to go and do some modelling that we, at the very least, have from my friend a written set of parameters, because what I do not want is for the witness to come back with the modelling done and then it to be said, oh no, I really wanted you to do something different. If she is to go and do it, she should only have to go it once, and she should be given the benefit of a tight and explicit list of the assumptions and the parameters that are sought to be taken into account.
PN636
JUSTICE GIUDICE: That sounds reasonable, Mr Watson.
**** RUTH LORNA GABBITAS XXN MR WATSON
PN637
MR WATSON: Well, except for this. I am happy to do it in writing, but except for this: I mean, I think I can make absolutely clear what those assumptions would be now, and they are a .2 per cent shock instead of .40. The same profile in terms of quarterly adjustment as was used in the initial simulation. And with the Reserve Bank and financial market policy response turned off and all figures rounded to the nearest percentage point, as was done in the original table - .1 of a percentage point, as was done in the original table.
PN638
If the witness has any problem with that level of specification, she could indicate it to me now?---I don't think that will be a problem.
PN639
Your Honour, subject to t he provision of that further material, I have no further questions of this witness.
PN640
MR MURDOCH: Your Honour, so there is no confusion, is the further material that is sought that the witness do that modelling exercise that we have discussed in the last few minutes?
PN641
MR WATSON: Yes.
PN642
MR MURDOCH: And nothing more than that?
PN643
MR WATSON: Nothing more.
PN644
PN645
JUSTICE GIUDICE: Yes, what is next, Mr Watson?
PN646
MR WATSON: Well, your Honour, I can commence my submissions now.
PN647
JUSTICE GIUDICE: Well, perhaps we will hear you at 2.15.
PN648
MR WATSON: Yes.
PN649
JUSTICE GIUDICE: Yes.
LUNCHEON ADJOURNMENT [12.37pm]
RESUMED [2.13pm]
PN650
JUSTICE GIUDICE: Thank you. Mr Murdoch.
PN651
MR MURDOCH: If the Commission pleases. Ms Gabbitas has reported too, that her estimate for the time that she needs to run that modelling exercise, was overly ambitious. It is unlikely that she will have the result this afternoon.
PN652
JUSTICE GIUDICE: Yes.
PN653
MR MURDOCH: There is one logistical difficulty, and that is that she has an important commitment in Canberra tomorrow. However, I have discussed this with my friend, Mr Watson. He is agreeable to her being available to re-enter the witness box on Friday morning, and assuming that we have some documentation on the re-modelled exercise available tomorrow, naturally we will give him the benefit of that when it becomes available.
PN654
JUSTICE GIUDICE: Yes, I didn't understand that she was to be re-called.
PN655
MR MURDOCH: Well, if it be that she is not required, all the better, but we will have her here lest there be any issue arising out of the re-worked model.
PN656
JUSTICE GIUDICE: Yes, thanks, Mr Watson.
PN657
MR WATSON: I should indicate to the Bench that I don't anticipate there will be a need to re-call - - -
PN658
JUSTICE GIUDICE: Yes.
PN659
MR WATSON: In any event, we will see what the document produces. If the Commission pleases, in our opening we said that there were three fundamental propositions; demonstrated need, buoyant economic circumstances, and negligible economic effect. I am going to deal with them in turn in that order, and can I start with demonstrated need.
PN660
Elizabeth Neville is in desperate straits. Her witness statement is at tag 3 of the witness statements exhibit. A shop assistant who takes home $380 per week, Elizabeth Neville just isn't making ends meet. She is trapped in a vicious circle of low funds, late payment, debt, late payment fees and she is spiralling towards a financial abyss. At the time of her witness statement, Elizabeth Neville was behind in her rent and faced eviction unless the whole of her next week's wages were spent on her rental arrears.
PN661
She had had her telephone cut off. She had her gas cut off. And because her gas was cut off, she had no hot water. She hadn't paid her car registration and as a result she had been fined $500. Elizabeth Neville has a full-time job. She has no dependents and she has no extravagances. She can't afford clothing, hobbies or social outings. She spends just $25 per week on food and she relies on her adult daughter to supplement the household food budget. Elizabeth Neville's award wage is meant to be a safety net, but it just isn't. There is nothing safe or secure about her financial circumstances.
PN662
Elizabeth Neville has had some bad luck. She is separated from her de facto partner, and whether or not that was bad luck, I'm not sure, but it did mean borrowing money for things like crockery, cutlery and bed linen, and that meant a personal loan. And she had a meningococcal infection, which meant some medical bills and time off work. But the fact that those events have occurred, don't detract from our point. On the contrary, they reinforce it.
PN663
People get sick. People separate from their partners. And a safety net wage surely is one that is more than just looking after the healthy or looking after expected expenses. When you look at the nature of the unexpected expenses and the circumstances of Ms Neville, you get a sense of just how finely balanced this whole exercise is. The personal loan for furniture and the like - for crockery and the like - that is $20 per week. The time off work as a result of the meningococcal infection results in medical bills of some hundreds of dollars, but she is not out of pocket in terms of her wage, because she has used her annual leave and her sick leave.
PN664
I mean, prospectively, she has now run out of sick leave and annual leave, and so any further time off will probably mean a financial impact. But the financial impact that we are talking about form those two events, the separation from the partner and the meningococcal infection, that is not a very big financial impact. $20 a week on one and a few hundred dollars is a one-off on the other. Those things are enough to send her spiralling downwards in her financial circumstances.
PN665
Now, the ACCI's response to Elizabeth Neville's position is to give her nothing. And the Commonwealth and the AIG's response in these proceedings, is to give Elizabeth Neville an increase which is less than inflationary. So her living standard drops even further.
[2.20pm]
PN666
Now, in this case, both the Commonwealth and the AIG, in our submission, dress up the stark reality of their positions in the clothing of the language of the Tax Transfer System. But what stands out like an absolute beacon is that in terms of concrete proposals from either the Commonwealth or the AIG on the Tax Transfer System, there is nothing, absolutely nothing. And the Commonwealth give the game away in their reply submissions, where they actually take the AIG to task for saying that the AIG think that $10 in the pocket would be an appropriate amount. The Commonwealth say no, no, no, we're not saying that; we're saying $10 gross together with the existing Tax Transfer System, and that is good enough.
PN667
For Elizabeth Neville, the existing Tax Transfer System is barely there. She received no welfare payments and she tries to survive on her after-tax wage alone. Michael Howells is another witness in this case. His witness statement is at tag 10. When you look at that witness statement, Michael Howells and his family went about two years without an oven because they couldn't afford a new one. For six months, Mrs Howells prepared her meals on a single hot-plate. Buying food for the Howells family is, as Mr Howells describes it, a planned activity. Mrs Howells goes to the supermarket on Saturday afternoons and waits for perishables to be reduced in price so that she can buy them.
PN668
Now, Mr Howells takes home $480 per week. The family also receive $222 a week in Social Security benefits. In this case, the ACCI and the Commonwealth say that Mr Howells should get no pay increase, nothing. The AIG offers him an increase less than inflation, and again, in our submission, a further decline in his living standards. There is a nice contrast between the position of Ms Neville and the position of Mr Howells, because Mr Howells and his family are helped by the Tax Transfer System. There is $222 there that comes by way of Social Security benefit.
PN669
VICE PRESIDENT McINTYRE: Excuse me, Mr Watson, is Mr Howells employed under an award or a certified agreement?
PN670
MR WATSON: He is employed under an award, I am told, your Honour.
PN671
VICE PRESIDENT McINTYRE: Who is Metro Tasmania, his employer?
PN672
MR WATSON: It is a bus company, your Honour.
PN673
VICE PRESIDENT McINTYRE: Is it a government bus service?
PN674
MR WATSON: We have checked it out. He is definitely employed under an award. I can ascertain for you whether it is a government or a private service.
PN675
VICE PRESIDENT McINTYRE: One might have thought if it was a government service, it would be subject to a certified agreement.
PN676
MR WATSON: Well, not necessarily. But we have - - -
PN677
VICE PRESIDENT McINTYRE: In Tasmania?
PN678
MR WATSON: Yes. But we have - I can assure the Commission that we have definitely checked and it is an award.
PN679
VICE PRESIDENT McINTYRE: I do not think it is stated anywhere in the statement.
PN680
MR WATSON: No. But we did - because it was raised by the ACCI, we did check it and it is in our reply submission, and I will hope I will be able to give you the reference in our reply submission. It is at paragraph R6.14 and it is the Metro Tasmania Award that is referred to there, and the code is AW788686.
PN681
VICE PRESIDENT McINTYRE: Could you check whether it is a government authority?
PN682
MR WATSON: Yes.
PN683
VICE PRESIDENT McINTYRE: Like State Transit in New South Wales, or a private one?
PN684
MR WATSON: Yes, we will do that.
PN685
COMMISSIONER LEWIN: What was the paragraph number, Mr Watson?
PN686
MR WATSON: 6.R6.14, I am sorry, Commissioner. Mr Howells and his family are helped by the Tax Transfer System, but the AIG and the Commonwealth in these proceedings are not offering any concrete improvement in that system. If Mr Howells and his family are not to fall further behind, then this year they need a meaningful increase in Mr Howells' wage, because the only area where their income can improve in a substantial way is in the wage area, even assuming that Social Security payments are adjusted or indexed for inflation.
PN687
Elizabeth Neville and Michael Howells are two of 11 witnesses. Their stories differ but a few common themes emerge. Life for the low-paid is a struggle. There is an intensity of work effort, expenditure is overwhelmingly focussed on necessities, and the low-paid go without things which the rest of the community take for granted. There is going into debt and financial stress. Now, against us it is said by the Commonwealth that the witness evidence is unrepresentative and it is said by the ACCI that there are variations between the circumstances of the witnesses.
PN688
And there is also an attempt to suggest that the budgets of the witnesses suggest that necessities are covered. I say in passing the AIG do not really address this issue although they do address the broader proposition of the Tax Transfer System. The critical point about the witness evidence is that it is buttressed and reinforced by the ABS data on which we rely. Expenditure being focussed on necessities is entirely consistent with the household expenditure survey data for low-income households, and witnesses going without, going into debt and suffering financial stress is entirely consistent with the household expenditure survey financial stress data.
[2.28pm]
PN689
Now, there is some criticisms that the Commonwealth in particular makes about the linkage of low income households with low paid workers, and I will come to those. But can I draw out the buttressing of the witness evidence with the household expenditure survey data. Can I take the Commission firstly to Table 6.2, which the Commission will find on page 125 of our original submissions.
PN690
The first thing to note about this table is how conservatively we have defined necessities. We have referred to housing costs, fuel and power, food and non alcoholic beverages, clothing and footwear. We have not included other categories of expenditure which, on any view, might be considered necessities. Transport, particularly if one needs to travel to and from work. Health costs, particularly if one happens to fall sick.]
PN691
So this is a conservative definition of what constitute necessities. But what does the table show? Table 6.2 shows an overwhelming focus of expenditure on necessities. It ranges, it is true, from 38 per cent in the case of Mr Howells, up to 77 per cent in the case of Ms Brett. But contrary to the submission of the ACCI, to focus on that difference is to miss the wood for the trees. Because what it shows, that table, is that our witnesses are spending very significant proportions of their income on a very tightly defined list of necessities.
PN692
The second thing that it is well to observe at this point, is that the ACCIs suggestion is that what that table shows is that witnesses are able to afford 100 per cent of necessities, is, in our respectful submission, completely fallacious. One only has to go to the actual witness statements to see that Elizabeth Neville, for example, says in her statement she cannot afford clothing. Now, that means that in this table Elizabeth Neville has a zero figure for clothing and footwear.
PN693
It is simply not right to say that the table shows that everybody can afford necessities What the table shows is that expenditure is focused on necessities: there are no extravagances. What does the ABS data show? Well, over the page the ABS data shows that for the lowest 20 per cent of working households, that is, households where the predominant source of income is wages and salary, the average figure for necessities expenditure, as we have defined it there, is 54 per cent.
PN694
So the table shows expenditure focused on necessities: the ABS data supports it. Our witnesses, as I have indicated, report all sorts of deprivation and financial stress. They report going into debt. What does the HES data show about that? Well, the analysis of the HES data commences at page 136 of our submissions. And it is at 137 I want to take the Commission to in the first instance.
PN695
The household expenditure survey asked respondents a number of questions, 6 deprivation indicators and 9 financial stress indicators. Members of the Commission who were involved in last year's proceedings will recall perhaps some of those things, but they include basic things like affording a holiday, affording a night out, affording to have family and friends over, etcetera. And you will see things like, couldn't pay car registration or insurance in time. So they are the very sorts of things that our witnesses are talking about in their witness statements.
PN696
Now, last year we conducted an analysis in which we looked at the responses to each of those questions. And so, for example, 30,000 working households responded that they could not afford to heat their home, or they went without meals due to a lack of money. This year we have conducted, picking up on an ABS paper, a different analysis. We have looked at the multiple reporting of those indicators. The ABS analysis, the ABS paper on which this is based is found at tab 12 of the composite exhibit.
PN697
In that paper they classified the financial stress indicators in terms of multiple responses 2 to 4 as modelled, and greater than 5 as higher stress. Now, the ACTU commissioned data on a variety of bases for working households. So the ABS article looked at it for the general population. We looked at it for working households. And we did it on four alternative bases. Gross income, disposable income, equivalised gross income, and equivalised disposable income.
PN698
We did that to narrow the range of the debate, because in previous proceedings we have looked at gross income, and the Commonwealth have said, no, you should look at disposable. We have not looked at equivalised income, and the Commonwealth have said, no, you should look at equivalised.
PN699
So we presented each of those four bases, and they all tell exactly the same story. They all say that there is substantial levels of financial stress in first quintile households. That that level of stress is greater than the average for all households, and it is comparable to the levels in the first quintile of the whole population. Those are the three things which are established on whatever bases you look at it.
PN700
Can I take the Commission to figure 6.4, which is, if you like, the Commonwealth's preferred measure, as we apprehend it. It is disposable equivalised income. I do not know whether it is necessary to elaborate, but equivalised income, in effect, adjusts income on the basis of the number of people in a household. I won't go into the mathematics of the particular equivalent scales, and the like, but it is a way of adjusting income to take account of how many dependants people have, and the like. Now what figure 6.4 shows is that when you look at disposable income advised more than 50 per cent in the first quintile have financial stress as measured, ie they report on a multiple basis to those deprivation and stress indicators?
[2.36pm]
PN701
JUSTICE GIUDICE: Which page are you on, Mr Watson?
PN702
MR WATSON: I am sorry, your Honour, 147 figure 6.4. Does your Honour have it yet. You are looking pensive I must say.
PN703
JUSTICE GIUDICE: Yes. I must say adobe is not my favourite form of manipulation of data but anyway.
PN704
VICE PRESIDENT McINTYRE: Is that in table 6.4 of chart 6.4 and everything else 6.4?
PN705
MR WATSON: No, it is not.
PN706
VICE PRESIDENT McINTYRE: It adds to the confusion.
PN707
MR WATSON: It is figure 6.4 on 147.
PN708
JUSTICE GIUDICE: Yes.
PN709
MR WATSON: And the Commission will see in terms of the three propositions substantial stress in the first quintile. Well, more than 50 per cent of households in the first quintile. Now it varies a bit depending on which measure you use but as I say for illustrative purposes substantial stress, yes. And particularly note that bottom line which is the higher stress line. You don't get into that category unless you report five or more of those indicators. The second proposition we make is greater than average and we will come to that and the third proposition is that it is comparable to the first quintile.
PN710
But before we move from figure 6.4 note the decline down the quintiles. In many respects it confirms something which is intuitive but it is very much the nature of these proceedings where we are discussing this sort of stuff with the Commonwealth that we have to prove the intuition. Now, the Commonwealth in criticising the financial stress data makes broad criticisms about the incidence of stress in higher quintiles and so that this indicates in effect that the data is not particularly reliable, that people are responding to these questions in circumstances where things are really more a matter of choice than of hardship.
PN711
Now, the first point we make is that so far as the deprivation indicators are concerned it is clear that choices were provided by the ABS to say things such as don't want it or don't need it. The second thing to say about that criticism is that when you look at the equivalised disposable income for the higher stress figures in particular the responses there are barely there. And even if one goes to the non-equivalised tables the figures are very minuscule. So when you are talking about the higher stress category you are talking about something where the Commonwealth's criticism of responses in the higher quintiles applies with much less force.
PN712
The final thing, of course, about that criticism is that if there is some over reporting at the higher levels that would only accentuate the degree to which stress is concentrated in the lower levels. So that if there is some higher reporting through problems with survey methodology or design in the fourth and the fifth quintiles the net result of extracting that from the survey is that stress - the stress that exists at the lower quintiles - will be even more concentrated when one looks at those sorts of graphs.
PN713
Now, over the page at table 6.8 we list the numbers of households involved and then at 6.9 we compare stress levels for each of the measures with the average for all the households. So this is our second point. Our first point substantial stress in first quintile households, our second point greater than the average for all households and the Commission will see that whichever measure one uses it is greater than the average for all households. The third point we made is that it is comparable to levels for the first quintile of the population as a whole and if the Commission goes to table 6.10 at page 150 the Commission will see there - now again this uses the equivalised disposable income measure which, as we say, in previous cases has been the Commonwealth's preferred measure.
PN714
And the stress levels for employee income in first quintile households are comparable to those for all households in the first quintile, less higher stress, greater moderate stress, overall the same degree of stress. So the very things which the witnesses describe are confirmed by the ABS data. Now the Commonwealth says well, you can't rely on the ABS data, the household expenditure survey data, because being low paid doesn't necessarily mean you are in a low income household. Well, there are three things to say about that. Firstly, the Commonwealth's evidence for that proposition essentially is the Harding and Richardson analysis which they refer to in their submissions.
PN715
And as we say in our reply submissions at paragraph 6.4 - R6.4 - that analysis relies on 1995/96 data and when it is uprated for an equivalent in 2002 terms as we say in R6.7 the full time adult equivalent figure is $444 per week. Now we simply don't accept that low pay cuts off at $440 per week. We think that is an unreasonably restrictive definition and we think in that context Harding and Richardson's results about the distribution of low paid workers in low income households are simply not to be accepted. The next proposition we make about that is that the Commonwealth themselves accept that there is a link between low pay and low income in their capping proposal.
PN716
All of their capping argument is about how you target things better if you limit an increase to the low paid. They accept the link between low pay and low income in that proposal. And the third thing we say in that regard is there is an inherent contradiction between trying to break out that link and the notion of a safety net. In essence that argument amounts to saying that Elizabeth Neville's circumstances are not relevant because there might be someone on her rate of pay who shares a household with someone who has got a high income. So they are the three things we say about the suggestion that you can't link.
PN717
Can we also deal with this suggestion that our witness evidence is unrepresentative. I have already referred to our critique of Harding and Richardson. Can I make this one other point in that regard and that is no other party brings a witness to these proceedings, no other party brings a witness to these proceedings. Last year Uniting Care in their submissions included case studies of a number of individuals and those case studies entirely confirmed the witness evidence which the ACTU brought to those proceedings. But in these proceedings no one else is here with a witness. They might say they are unrepresentative but they don't produce anyone who can contradict the representative nature of our witnesses. They rely merely on an out of date very conservative academic study of what constitutes low pay.
PN718
The Commonwealth's critique of our financial stress data analysis I have dealt with in part but they make some other criticisms. Their first response was to say that unemployment was the main cause of financial stress - not working. Well that is false and we demonstrate that at R6.21 and 22 and table 6.3 of our reply submission. What we are talking about is the difference between incidence of stress and absolute numbers. On incidence yes, you are more likely to be stressed if you are unemployed than if you are working but on absolute numbers, as R6.21 shows, in absolute terms financial stress is greater amongst those in work. And if I can take the Commission to that table, table 6.3 at the top of page 84.
PN719
The Commission will see that in terms of combined - in terms of higher stress the Commission will see wages and salaries in absolute terms bigger than any other category. In terms of moderate stress the Commission will see wages and salaries bigger than any other category. Now, the Commonwealth's response to that is to say well, yes, that is because you are working with a bigger population, of course. But in a sense that is our point. We absolutely accept their argument if they are talking about incidence. If you are unemployed you have got a much greater chance of being stressed than if - financially stressed - than if you are working. No argument.
PN720
But in terms of the absolute magnitude of the problem if you are talking about the absolute magnitude of the problem then more working people, more working households, have high stress or moderate stress than any other of the categories. Now, the Commonwealth then says that in effect things have got better since 1998-9 when the household expenditure survey data was collected and they rely for that proposition on the suggestion that the new tax system provided people with a tax cut. Well, I don't want to rehash old ground but in relation to that the tax cut which was provided under the new tax system was specifically provided as compensation for an increase in price rise as a result of the GST. And evidence which we presented in previous cases demonstrated that it did not compensate for the combined effects of prices and bracket creep.
[2.51pm]
PN721
Now, in just about every case, the Commonwealth has claimed a real increase - or an increase in real wages as part of its broad discussion of living standards and the needs of the low-paid. Can I take the bench to their claim in this case, in their original submission, at paragraph 6.3A, page 137, and it is under the heading: Growth in Real Wages. And the Commission will see at 6.38 they make this claim, and it is a claim, as I say, that they have made virtually every year in these proceedings:
PN722
Additionally, real wages have risen for all parts of the earning distribution including the low-paid, as chart 6.1 shows.
PN723
And then they produce the chart and the Commission will see that if you look at the hundred line everybody according to that chart has had real wages growth, albeit it that at the bottom end of the spectrum there has been less, and in fact it is almost negligible when you look at the tenth percentile, but everyone according to that table has had real wages growth. And they use for that proposition the EEH Survey, the Employee Earnings and Hours Survey.
PN724
They made that claim again this year. They have made it in virtually every year of proceedings. It is completely misleading. If I can take the Commission to our reply submissions, table R2.2 and R2.3 on page 13. See, what the Commonwealth's table does is concentrate on full-time non-managerial adults. What we have actually done is commissioned data for non-managerial adults including part-time and casual. And so that there is a comparison of, if you like, apples with apples, we have adjusted the casual data for an average 20 per cent loading. So you get a real idea of what the base rate of pay is rather than someone on casual wages appearing to be higher up the wage distribution because they get a loading.
PN725
So if you do not adjust to casuals - and we got this idea from the Commonwealth last year, I might say - if you do not adjust to casuals, someone on a base rate of pay of $500 appears in all of this data as earning 600. And so they go up because of the loading. We adjust them back; so we adjust casuals and we include full-time. And what does it do to the claim of real wage growth? Well, it blows it out of the water. When you look at table R2.2 there is real wage growth of the smallest kind at the tenth percentile. There is a cut at the twentieth, a cut at the twenty-fifth, a cut at the thirtieth.
PN726
There is nominal wages growth at the 40th percentile, and then it is not until you get to the fiftieth percentile that anything realistic comes through. And if you look at table 2.3, contrary to the picture in the Commonwealth's table of all of the real wages growth occurring in the last half of the decade, what table 2.3 shows is that the real change in income - in wage growth, rather, for the bottom half of the distribution, all occurred in the first bit of the decade and not in the second. Now, I should emphasise, they are slightly different periods. One is a four-year period and one is a five-year period.
PN727
But when you adjust for that, it makes no difference. So once you take account of part-timers and casual employees, the claim that there has been real growth in earnings for everyone on the distribution is just exploded. In fact 21 per cent of the population, 21 of the percentiles that you analyse, have experienced a real wage cut in the period '96 to 2000. Now, in their reply submission, the Commonwealth concede that we are right. That is at paragraph 6.35 and it is at page 55, and they say:
PN728
In its submission, the ACTU criticises the Commonwealth for its evidence that real wages have increased for all part of the earnings distribution for full-time adult non-managerial employees.
PN729
That is not what they said and that is not what we are criticising them for. We criticise them for making an assertion that at all parts of the wage spectrum there were real increases. Their table was always limited to full-time adult non-managerial employees, but they made a broader claim. The Commonwealth accepts this criticism but justifies its focus on full-time adult non-managerial employees on the fact that part-time and some casual employees receive less assistance from safety net adjustments in dollar terms than their full-time counterparts.
PN730
I invite the Commission to go back to 6.38 at their leisure. That is simply not what the Commonwealth said in the first instance; simply not even close. They were suggesting everyone in the world was better off. Well, at least everyone employed in Australia. And it is simply not right. Now, the other thing that our submissions establish is that around about 80 per cent of award workers have had a cut, a real cut, in wages in the last two years. And we make that assessment based on the average hourly ordinary time earnings data adjusted in the way I described before, with casuals adjusted down by 20 per cent; adjusted for that from the Employee Earnings and Hours Survey.
PN731
And that is in our original submissions and it is at chapter 2 - I am sorry, I am in the wrong chapter. We make that claim at 2.51. And the Commission should note in relation to this that we deflated - that for the purposes of calculating the real increase, or rather decrease, we deflated using the Commonwealth preferred deflator of 3 per cent for all groups CPI to June 2001. So extracted for the GST as they insist should be done, and we used the Commonwealth preferred deflator of 3.2 per cent for all groups CPI to June 2000.
PN732
So there is real wage cuts broadly in the wages spectrum. We have demonstrated that. And for award workers, award only workers, 82 per cent of the percentiles of award wages, when you work out what the increase meant last year, 82 per cent received a real wage cut. Now, anticipating a little, of course the bulk of that occurs over $500. The bulk of that occurs over 500. Last year, the increase for C10 and above was $15. Once you got over $500, that dropped down below 3 per cent, which is what the Commonwealth say we should use as the inflationary figure.
PN733
So anyone above $500 got a real wage cut. But significantly, anyone between 433 and 490 also got a real wage cut. So there were a significant number of low-paid - on any analysis, low-paid people, in our submission, who received a real wage cut. And that is deflated using 3 per cent, $13 is 3 per cent up to $433, and then from 433 to 490 it is less than 3 per cent. And then at 490 the wage rates kicks back up to 15. So you have got witness evidence which shows real need, you have got financial stress data which shows real need, you have got the history of wage movements which show broadly in the population of employees as a whole significant pockets of real wage cuts in the last five years in the lower half of the wage distribution, and particularly amongst award workers in the last two years, significant numbers of award workers have received real wage cuts.
PN734
Now, the answer to all of that, according to the Commonwealth and the AIG, is the Tax Transfer System. It has become their mantra. The first proposition and the proposition we stated in opening the Tax Transfer System is that there is simply no proposal, no concrete proposal, before this Commission for any enhancement of the Tax Transfer System in the forthcoming year. So to talk about how things can be better targeted through that system and you can assist low-income households in a more targeted way than you can through a wage increase, all of those things - all of those things are fine sounding sentiments, but they are not backed up by anything concrete.
PN735
And the Commonwealth give the game away in that respect in their reply submissions at 6.38. They make is absolutely clear that they are not contending for any improvement to the existing Tax Transfer System. At 6.38 they say:
PN736
The Commonwealth is not asking the Commission to award a $10 per week increase rather than the ACTUs $25 claim on the basis that a shortfall exists and needs to be topped up through the social wage.
PN737
We are happy with the way things are they say in effect. To the contrary, the internationally recognised strength of the Australian Social Security system is that it effectively targets assistance those most in need. Furthermore, the adequacy of the Social Security system is maintained by regular indexation of allowance and pension rates. There is simply no proposal to improve things at that end of the spectrum. So for someone like Mr Howells, there will be indexation of whatever allowances his family receives, but there is not going to be anything other than indexation on that $222.
[3.06pm]
PN738
So if he is not to fall further behind, then he needs, and his family needs, a genuine pay increase. And then the Commonwealth go on to say, at 6.3.9:
PN739
The Commonwealth therefore does not agree with an implication that might be drawn from the AIG submission where it says employers would like to see the full $10 going into the pay packets of the low paid, that social security rates are inadequate and need to be increased as part of a trade-off in this year's safety net review.
PN740
So whatever comes in the future, let it come if it comes. But for these proceedings we can, if you like, switch off the tax transfer system, because there is simply no suggestion that it is going to be changed. The Commonwealth - whatever the AIG might hope for, the Commonwealth are saying, we're happy with things the way they are.
PN741
Now, there is a few other points to make about the tax transfer system. The first is that the ACTU in the ACTU's submission, tax transfer system and minimum wage rates are complementary, not exclusive, mechanisms for improving the lot of the low paid. so we accept that you can improve things in the tax transfer system, but we do not accept that somehow or other that means that wages should be stuck where they are for all time. They are complementary mechanisms and the Commission should reject the suggestion that they somehow or other are only alternatives.
PN742
The second thing is that, and this descends to more detail, the AIG in its original submissions dealt with the suggestion that for some families social welfare benefits will be reduced if they get a pay rise. Now, in relation to that, we make the following points. At 6.4.1 of our reply submission, we go through analysis of various kinds of benefit and the impact. And I won't trouble the Commission with the specifics of it, because amongst all of the things that I am sure the Commission does not want to do, it has become experts on the intricacies of how the social welfare system works.
PN743
But suffice to say for these purposes, that we allege that the AIG over-state the impact of, if you like, claw back arrangements. That is they over-state the impact of the extent to which if a pay rise is granted, money is lost because of reduction in benefits. And we do that, as the Commission will see, by reference to singles without children, couples without children and so on.
PN744
Now in response to that, the Commonwealth at 6.4.6 and 6.5.1 have come up with their own series of little sub-sets of each of our examples, where there might be circumstances in which benefits would be reduced. So, for example, where we talk about couples without children, and they make the point that a couple without children might have one spouse on the unemployment benefit, and therefore it is possible that there will be some reduction as a result of a large increase.
PN745
Can we summarise the effect of all of that to-ing and fro-ing in this way? Properly read, we think the evidence establishes this. When people receive a pay increase some - some - will be in a situation where as a result some benefits of the household are reduced. But many, we would say, most, will not. We think that is where the picture really lies. You can engage in a degree of nitpicking about which benefits are reduced by which amounts and at what time, but it is not, as the AIG attempt to paint it, a situation where basically every dollar the Commission awards vanishes in lost benefits.
PN746
Nor is it, as the Commonwealth attempts to suggest, a situation where, you know, we've listed a range of categories and they've knocked on the head each category. They have picked sub-sets of each category and said, well within a particular category there might be some people who lose an unemployment benefit or a family tax benefit or whatever.
PN747
Now, the final thing we would draw to the Commission's attention in this context is the reduction - we would say, the reduction in non-cash benefits, which the Commonwealth's own material establishes. So all this discussion about the tax transfer system, but in our submission, their own material establishes there has been a significant reduction in non-cash benefits.
PN748
To demonstrate that, can we start with the Commonwealth's original submissions at 6.1 and 6.2 and I think their tables. I am sorry, they are indeed, they are at pages 134 and 135. Now, this is a table, I should make clear, that has a population that is broader than the population we usually use. It is one of the on-going disagreements between ourselves and the Commonwealth, but we use households where wages and salaries is the main source of income. They use income units or household where there is at least one adult employed full-time or part-time. So they include people for whom social security benefits might predominant.
PN749
So that is, I suppose, the first point about the difference in methodology. But if you look at the Commonwealth's introduction of that material, at 133 in paragraph 632, starting with the second sentence there, they say:
PN750
The tables presented below are the most recent estimates of the way these cash and non-cash incomes are distributed amongst wage and salary earners for December 2001 based on the STINMOD micro simulation model from NATSEM.
PN751
and then there is a footnote:
PN752
See for example tables 4.1 and 4.2 of the previous submission. The version of STINMOD utilised for the generation of tables in the current submission incorporates the changes made to the Government programs of marginal tax rates as a result of the new tax system.
PN753
Now, we checked, and the version which was used for last year's submissions also said that it incorporated changes to those programs. So there is not a difference there. Now, in table - I am sorry, I have to take you first to paragraph 6.34, because it is quite critical when we come to the Government's reply that the Commission see how the Government used this in its opening submissions.
PN754
At 6.34 about midway through the paragraph, a sentence commences, in other words:
PN755
In other words all income groups have shared in improvements in the economy during the '90s, but through different means. Some have benefited through increased real wages, while others have benefited through increased government assistance and some have benefited through a combination of these sources.
PN756
They are talking about a trend, a time trend. Through the '90s, they say, some have benefited through increased wages, some have benefited through increased government assistance. They make the claim that there is a time trend towards improvement in their discussion of these tables.
PN757
In our submission, at R6.45, that is our reply submission, I should say. We compare table 6.1 and 6.2 with their counterpart tables 4.1 and 4.2 on the previous year. And we look at the non-cash benefits. And what jumps out is a stark decline in non-cash benefits for the bottom half of the wage distribution. In fact, the bottom 60 per cent. In the first quintile, $46 worse off this year as opposed to last. In the second, 35 off, in the third, 25. It is only the top 40 per cent who get benefit.
PN758
For the first quintile, as we say in R6.46, for the first quintile, the value of non-cash benefits has declined by 15.6 per cent. Now, can we also emphasise the comments of Ann Harding, who is the director of NATSEM, the National Centre for Social and Economic Modelling, in The Australian Newspaper on 25 February 2002, where she says:
PN759
Every five years the ABS publishes new estimates on receipt of these non-cash benefits by Australian households. their latest study indicates the distribution of these indirect benefits as being skewed towards higher income households, while the value of indirect benefits received by the bottom one-fifth of households increased by 37 per cent between 1989 and 1999...
PN760
So she is talking about an entirely different time period:
PN761
The value of benefits received by the top one-fifth rose by 47 per cent.
PN762
But the critical thing about that quote, for the purposes of this part of the submission, the critical thing about that quote is that she is talking about a time series. She is talking about a trend from '89 to '99 based on the published ABS data. So the Commonwealth talked about a trend. Ann Harding, from NATSEM, talks about a trend. Now, we mention in R6.48, and R6.4 - we mention in 6.48, but the obvious point of 6.1 and 6.2 are averages.
PN763
But it is then significant to look at how the Commonwealth deal with all of this in their reply submissions. And at 6.52, rather - I am sorry - 6.55. They start with our criticism and then at 6.56, they say this:
PN764
The ACTU criticism is not valid since it presumes the tables presented this year and in the joint government submission last year, form part of a time series.
PN765
So when they started out, they said, oh these are up-dated tables, look at last year's submissions to see the previous versions. They make a conclusion about how things have gone over the '90s, which is about how things have changed over time, but now they say, oh well, you can't compare the two tables. And for that, they rely on NATSEM, the same entity for which Ann Harding is the spokesperson. And they say at 6.60:
[3.21pm]
PN766
In summary, each total was NATSEMs best estimate of current incomes at the time. However, due to data limitations and the delay that always occur in receiving the most current kept data, ...(reads)... NATSEM advise it would be best not to compare the two tables.
PN767
And there is an extraordinary inconsistency, in our submission, between approach. On the one hand, when we point out that there are trends which are negative over time, you simply cannot compare. But if you want to talk about positive trends, the Commonwealth or NATSEM will go right ahead.
PN768
In relation to needs of the low paid, can I finally deal with the capping proposal from the Commonwealth and, if you like, from the ACCI. I am not going to trouble the Commission very much in these submissions. I simply say that the arguments which are advanced by the Commonwealth in support of their capping proposal, and those of the ACCI< are a rehash of arguments which have been run endlessly in these proceedings. We simply see no basis for the Commission to change its previously held view that capping is inappropriate.
PN769
We simply do not accept, as is implicit in the Commonwealth's proposal, that someone who earns $26,500 per annum is not low paid. We simply do not accept that the only definition of low pay which is appropriate under the Act is the Federal minimum wage, implicit in the ACCIs proposal.
PN770
In our submission, therefore, when all of that evidence is looked at, the witness evidence, the ABS household expenditure survey data, the picture of real wages declines in both the broader employer calculation and the award calculation. And then dealing with some of the other stuff, if you like, if I could describe it that way, which the Commonwealth has put, in our submission there is simply no basis to depart from the conclusion which the Commission has reached in previous safety net decisions in different way, which we stated at paragraph 1.6: and that is paragraph 1.6 of our original submissions on page 2:
PN771
Employees on low wages experience difficulties making ends meet, and affording what are generally considered by the broader communities as necessities.
PN772
And that was in the safety net review last year at page 39, paragraph 126. Similar conclusions have been expressed in different cases. There is no basis on the evidence for a departure from that. At (iv) we say:
PN773
While safety net adjustments are not perfectly targeted to meeting the needs of the low paid, they assist in meeting those needs.
PN774
Again, that was dealt with specifically in last year's safety net review, at page 39, paragraph 127. And on the basis of the evidence in this case, there is simply no reason to depart from that conclusion. We have characterised it as demonstrated need, and we think the evidence demonstrates it in spades.
PN775
Can I, while I am in this portion of the submissions, focus just briefly, because it perhaps most naturally fits in this part of the submissions, on that portion of our submissions which deal with inequality issues. Our submission in this respect is that broadly speaking - and I will come to the particular elements of it - broadly speaking inequality is on the increase. And the Commission's decision can either ameliorate or exacerbate that trend. We do not say that it is determinative of the trend: it cannot be: but it can either ameliorate or exacerbate.
PN776
When the Commission looks at the material on this issue, the Commission will find very little which is ultimately contested between the parties. I might say in this regard that with one exception, basically the only party that addresses this issue is the Commonwealth. When one wades through the to-ing and fro-ing, and the things thrown back and forth, there is actually very little that is between the parties in their assessment on this.
PN777
The first is earnings inequality has increased. We make that claim. It was in the paper by Saunders. They don't dispute it. They don't dispute it. Don't criticise it at all. Secondly - - -
PN778
JUSTICE GIUDICE: Mr Watson, there was some material, I think last year, but it may have been the year before, which was a comparison of - an international comparison of minimum wages to average wages; some comparison like that. I am not sure that I have seen that comparison resurface in any of the material since.
PN779
MR WATSON: No. Your Honour, there is a discussion in the Commonwealth's submissions about the Australian minimum wage, and in that context there is a comparison with at least one other country, the UK, but I actually think it - - -
PN780
JUSTICE GIUDICE: Yes. Well, if it is there somewhere, they will draw it to my attention.
PN781
MR WATSON: It is, I am sure, there in some form, your Honour. And I can probably assist your Honour overnight. I will look at it overnight. I am not going to trouble your Honour - - -
PN782
JUSTICE GIUDICE: Yes. No, by all means.
PN783
MR WATSON: So, earnings inequality has increased. Income inequality has increased over the decade of the nineties. Now, there is a dispute between ourselves - well, when I say a dispute, there is an issue, if you like, that is raised by the Commonwealth about whether there has been a statistically significant change in inequality since 1995 and 1996. And there is an assessment made by most researchers that the movements in that latter half of the decade are not statistically significant. But, importantly, there is no suggestion either of a reversal in the trend, and when one looks at the broader time period, income inequality has also increased. So if you focus on the decade, it has increased.
PN784
So earnings inequality has increased; income inequality has increased. And wealth inequality has increased once you take out compulsory superannuation. Now, in relation to that, the Commonwealth say that you cannot - that it is inappropriate to exclude superannuation. That it is a bit like a cake without flour and eggs, and still trying to call it a cake.
PN785
Well, in our submission, this is perhaps the most reprehensible of the Commonwealth's claims, because they have clearly not been to any inner city cafes recently, where you can get flourless and eggless cakes. They have missed the point entirely. But more seriously, superannuation is in a different category, we say to other forms of wealth. You cannot access it until you are over the relevant preservation age.
PN786
Other forms of wealth are a store which you can go to, if you need to, when you need to. Now, obviously there will be issues about the length of investment and the like, but no other form of wealth has the long time horizon that for most of us superannuation does. But in any event, the Commonwealth do not contest the proposition that if you exclude the superannuation, wealth inequality is on the increase.
PN787
Now, in our original submissions we made the point that we think the most logical aspect of this debate for the Commission to look at is earnings inequality, because this is a case about earnings. But in any event, we draw to the Commission's attention the situation in relation to the other three. So that is the third proposition.
PN788
The fourth proposition we make in this regard is that award workers are concentrated at the bottom end of the wages spectrum, and that is where we have in our submissions looked at the unpublished ABS data from the employee earnings in our survey. And we have looked at the category of award only employees, adjusted casual rates in the way I described earlier, and we have looked at where people sit in the wages spectrum.
PN789
The position in Chapter 7 of our submissions, we think is quite stark. At 7.28 we set out some key statistics - 7.28 on page 161. 44 per cent - this is the private sector award only, there are similar figures for all award only - 44 per cent earn less than C10. The same percentage are in the bottom 20 per cent of all non-managerial adults, and thus constitute nearly half of the employees in this quintile. 29 per cent earn less than the equivalent of $25,000 per annum in current dollar terms, and 80 per cent earn less than median earnings.
PN790
The corresponding figures are dealt with in the next paragraph for all award only employees: in other words, not just private sector. 40 per cent less than C10, all of them in the private sector - or all but presumably a negligible number. 26 per cent earn less than the equivalent of $25,000, and 75 per cent less than the median.
PN791
So there is an overwhelming concentration of award workers in the bottom half of the earnings spectrum. And so logically, therefore, it flows, in our submission, that if award workers get another increase which is less than the community, then that will only exacerbate the trend to inequality. We emphasise again, it is not determinative by any means, but it either exacerbates or ameliorates the trend. A good increase will ameliorate the trend; an increase of the order of our claim. An increase which is lower than community wage movements this year will exacerbate the trend. That is the proposition we make.
PN792
JUSTICE GIUDICE: Mr Watson, to some extent it must be a consequence in the current system that there will be a tendency for a disparity to develop between earnings at different levels. Systems that operated prior to the start of the 1990s, for example, and adjusted through Commission decisions all incomes derived from awards, had quite different effect to decisions which we make in the context of a system which is based on a safety net of awards and an enterprise level bargaining system in conjunction with it.
PN793
MR WATSON: Yes.
PN794
JUSTICE GIUDICE: That does not really undermine the submission you are putting, which is that whatever we do, we are going to have an effect one way or the other. But nevertheless it is an element of the current environment which might make it difficult for the sort of world you envisage to be created by the Commission.
PN795
MR WATSON: Well, your Honour, in relation to that submission, the Commission is in a situation today where there is a considerable disparity between award rates and those in the rest of the community. And that is because, as we demonstrate in our submissions, there has been a trend over time - and your Honour is right, some of this is inherent in the system - but there has been a trend over time for other wage movements to outpace award movements. and there was a decision to shift to a safety net basis. All of that is so. But the issue for the Commission in this case is, there is a gap now already. Does that gap get wider, or does it narrow, or does it stay about the same?
[3.36pm]
PN796
A low increase leaves the gap as it is now, or it widens it. A higher increase has the opportunity to narrow that gap. Will it mean that awards cease to function as safety nets. No, it won't. Because the gap is still a very large gap. The sort of increase we are talking about in this case will not bring award rates up to anything like where other wage rates in the community are. It will be still be a safety net. But if it goes down further, in our submission, then there will be real issues - there will be a gap, but there will be real issues about whether or not it functions properly as a safety net.
PN797
The issue in this case is, is the position as the Commonwealth, the AIG and the ACCI contend, that things should get worse for the low paid so that there can be a bigger gap. Or is the position, as we contend, that there can be an improvement in the lot of the low paid and a reduced gap but still a safety net system.
PN798
COMMISSIONER LEWIN: The two things are not always linked though, are they? In essence, the statutory requires we take into account living standards. The principle object of the Act requires that we try and achieve improved living standards through a fair labour market. It does not follow that if there is actually increased wages dispersion that living standards need not improve for the low paid.
PN799
MR WATSON: No, Commissioner, that is right. It does not follow that just because there is increased dispersion that living standards have declined. That is why we made the submission we earlier did about what has actually happened to all the rates and what has actually happened when you look at the wages distribution for employees generally. There have been declines.
PN800
COMMISSIONER LEWIN: It just seems to me that perhaps you take on an unnecessary burden with your submission about earnings inequality and wealth inequality.
PN801
MR WATSON: Well, I am not one for taking on unnecessary burdens as it happens, but Commissioner, we make these submissions in the context of saying there has been a trend in the last few decisions, last two decisions, that we discerned, and we are saying up front and squarely to the Commission that we want that trend reversed in this case. And to the extent that we deal with issues of inequality, we do not put them at the forefront. The Bench will be aware of how I opened the case. We do not put them at the forefront. But we do say that it is a factor to take into consideration that there is this overall trend towards earnings inequality.
PN802
And the Commission, albeit not in a capacity to determine those issues, does have, we say, an influence on the outcome. That is as high as we put it. And we say in that regard that it can either ameliorate or exacerbate a trend, and we would be submitting that it should ameliorate that trend.
PN803
COMMISSIONER LEWIN: But wouldn't our focus be on living standards, and in particular the needs of the low paid rather than on relative issues of income earning, wages, or wealth dispersion.
PN804
MR WATSON: Well, I think relative issues are relevant in terms of generally prevailing living standards. The Commission is required to establish a fair system of minimum wages and conditions by reference to generally prevailing living standards. What an analysis of earnings dispersion and the like indicates, income dispersion and so on, is where living standards are moving in the community. And what it says is, well, people at the top end have done very well. People in the middle have done less well. And people at the bottom end have done not quite so well at all.
PN805
So it is, in our submission, relevant for a consideration of generally prevailing living standards. It is not the only relevant issue in relation to generally prevailing living standards but it is a relevant consideration in our submission. In any event, can I - - -
PN806
JUSTICE GIUDICE: I take it, Mr Watson, that in focussing on the low paid you are not including in that expression all persons employed under awards.
PN807
MR WATSON: No, your Honour.
PN808
JUSTICE GIUDICE: You are looking at they would term particular dollar level.
PN809
MR WATSON: We do not think there is a particular dollar level, and we do not say that the Commission does not have a range of considerations. The need to locate are one consideration for the Commission, amongst a range. Now, we are dealing with them extensively and they are dealt with extensively by all of the parties. But the needs of the low paid are not the only consideration, and for that reason we think other considerations warrant the increase that we submit is appropriate at the higher ends of the award rates spectrum. Those who are on C1, C2 and above in some instances.
PN810
Now, we do not rest our case for that rate adjustment on the needs of the low paid. That rests on other issues that are with the - - -
PN811
JUSTICE GIUDICE: Presumably the choice of the form of the increase you seek does rest on that sort of rationale.
PN812
MR WATSON: Absolutely, absolutely, your Honour. And in this case, and this is a shift from previous cases, but in this case we have determined that it is appropriate to emphasise the needs of the low paid to a slightly higher degree than we have in previous cases. It is also, I might say, a bit of a recognition of our singular lack of success in persuading the Commission to adopt a percentage based increase for rates above a certain level.
PN813
JUSTICE GIUDICE: You will be dealing with that, I take it?
PN814
MR WATSON: Yes.
PN815
JUSTICE GIUDICE: Yes.
PN816
MR WATSON: Now, we also make a claim in our submissions that award workers last year received less than the rest of the community, and before I go to the tables and the criticisms of our analysis, can I just start by dealing with this in the broad. Last year the increase at C14 was 3.2 per cent, 3.24 I think, in fact. Everyone else who was on an award rate as a result of the safety net adjustment received an increase which was less than that subject to the exception which we might say proves the rule, to which the AIG referred in their submission where they drew an example from the Victorian Shops Award of two trainee or student rate classifications where, for whatever reasons, trainees or students received the full adult rate. And because those - the base rate was actually below the federal minimum wage in percentage terms, the $13 came out at more 3.2. But broadly speaking, everyone on an award as a result of the safety net got less than 3.24 per cent.
[3.45pm]
PN817
Now even on the most conservative of the wage working calculations using the wage cost index which for various reasons we say is not the appropriate measure but even on the most appropriate - most conservative of those measures award workers got less than the broad community average worker. And - so that is the broad picture. The Commission doesn't even have to go to our analysis of the average increase to establish that picture. But in our reply submissions we revised estimates of the average increase for award workers as a result of last year's decision and there was, as we indicate in our reply submissions, some problems with the data that the ABS provided us and we have updated tables for more recent wages figures. But at table R2.4 the Commission will see - - -
PN818
VICE PRESIDENT McINTYRE: On page?
PN819
MR WATSON: What page, I am sorry. Page 16, your Honour, of our reply submissions. The Commission will see that we have calculated the average percentage increase for the 2001 decision and consistent with the broad proposition which I put the average percentage increase based on the award only data from the employee earnings in our survey is of the order of 2.8 per cent. It depends which cohort of employee you take but 2.8 is a fair description. The Commission will see that we have provided a range of wage movements and these are the updated most recent ones. AWE full time adults all significantly higher.
PN820
Average earnings on a national accounts basis significantly higher. Wage cost index, which the lowest, is still significantly higher. The enterprise bargaining measures both significantly higher and the senior management figure obviously - perhaps not so obviously - the highest of all. Now, there is a discussion in our submissions about the use to which various wages measures should be put and can I sum up our position on that in this way. Everybody accepts - it is accepted across the bar table I think although perhaps the ACCI are a little less accepting of it than the rest of us - everybody accepts that the AWE series is affected by compositional change. Everybody accepts that.
PN821
And so if you are looking for a measure which controls for a constant quality of wage output if you like, a constant occupation, then the wage cost index is the figure you use. And as its name suggests it is a wage cost index. It looks at it from the point of view of if an employer wants to buy a particular quantity of labour of a particular quality what will they pay. That is essentially what it is about. The AWE series and the average earnings on a national accounts basis also give the name away in the titles. They are about measuring wages as earnings. The average weekly earnings series and average earnings on a national accounts basis.
PN822
They are, in our submission, appropriate measures when one looks at living standards because even though they are affected by compositional change that is kind of part of the point. Because if you are talking about earnings then the fact is that if more people are in higher paid jobs that is a relevant consideration in comparing where award workers sit to the rest of the community. So in our submission the earnings measures are appropriate for a consideration of living standards and the cost index is appropriate for a consideration of cost. Now, as we highlight in our submissions in many instances it doesn't make a difference which measure you use.
PN823
And in fact in this instance, the instance of the level of the increase last year, it is a difference of degree depending on which measure you use but the basic story is the same whichever is used, that is, award workers last year on average received a lesser increase than any other measure. The point also that we make in table R2.6 is that movements in wages which are calculated on an economy wide basis include award employees in them.
PN824
So the AWE series and the national accounts series and the wage cost index series, which are all economy wide measures, 23 odd per cent of the people who are covered in the surveys are award only employees, assuming that is that the EEH survey got it right about the proportion of award only employees. So when you recalculate the figures excluding award only employees you get obviously higher numbers for the rest of the community. Average earnings on a national accounts basis of 4.0, wage cost index 3.6. They are the two most moderate and in the AWE series all very much higher ranging from 4.9 through to 6.5.
[3.52pm]
PN825
Now, as we apprehend it, the Commonwealth do not critique our methodology for calculating the average award only increase. They do say, in relation to this issue, that really all the Commission need look at is that C14 has moved broadly consistently with the wage cost index. That is the essence of their proposition. And in relation to that, we say that a focus on C14 is simply too limited a focus in this regard. The AIGs criticism of his portion of our submissions does go to methodology, and it is a slightly more technical issue.
PN826
In their submissions, they said that under the EEH Survey persons in the award-only category might have some element of non-award pay in their - recorded in the data, and that that would impact on things. Well, the first point about that is that that does not change the broad position that we painted at the outset about the level of the increase at C14 being 3.2 per cent, which is less than the wage cost index and therefore everything else that award workers received being less than that on safety net basis. But the second proposition -point about that submission is that the survey which the ABS conducted had questions which were actually designed to weed out any non-award pay for the purposes of determining the award-only classification.
PN827
So the question actually puts to people in effect is the only part of this person remuneration the award, absent any agreement of a certified nature or of an over-award nature? So that is the nature of the question. Now, the AIG in their reply submission at 3.6 deal with our response in that regard. It is 3.6 at page 8 of their reply submission. Now, they say despite the fact that the ABS adopts some filter questions, these are mainly designed to separate out enterprise agreement employees. Well, in fact that rather understates the degree to which over-award payments are also dealt with in the question. But then they go on and say this:
PN828
The ABS has verbally advised us that the base pay of employees under an award can include more than the award pay -
PN829
but here it the reason -
PN830
This is because respondents may be unclear in filling out the relevant question.
PN831
So in essence what they are saying is if a respondent simply just gets the question wrong, there is a response error, then you might have some non-award pay in the award-only category. But it is not an issue which arises out of the design of the survey; it is a response error omission. In any event, even if the AIG is right about that, whilst that might slightly increase the average percentage which we have calculated, on no analysis can it increase it beyond 3.2. So even if they are right and there is some small level of response error, on no analysis can the increase for award workers be more than 3.2 because only one category of award worker, those on C14, got 3.2.
PN832
So in essence, if the Commission pleases, we have demonstrated need on the basis of the struggle for the low-paid, and we have referred to the increase in inequality and the position of award workers in relation to that increase. The Commission in this regard has to do nothing more than reaffirm the conclusion which it has reached in virtually every one of these proceedings for the last six years. And it might seem, having had to sit and listen to me now for two hours or so on the subject, it might seem like we have gone to an extraordinary length to establish a proposition or re-establish a proposition which has been established in so many cases previously.
PN833
But we do that because in each of these proceedings those at this end of the bar table come along and attempt to disparage and diminish the needs of the low-paid. They attempt to obfuscate the issue and, in our submission, there is nothing in the evidence in this case which can possibly lead to a change from the established principle which the Commission has adopted, demonstrated need for the low-paid, absolutely and clearly established. That leaves me buoyant economic circumstances and negligible economic effect.
PN834
I will start on buoyant economic circumstances. We say Australia's economic circumstances are properly described as buoyant and robust. Growth has rebounded strongly from the slump in the latter half of 2000. The recently released national accounts data shows three consecutive quarters of growth 1 per cent or higher. Seasonally adjusted growth in GDP was 4.1 per cent in the year to December 2001, and in trend terms the growth was 3.7 per cent.
[4.00pm]
PN835
Can I take the Commission to the paragraph in the ACCI reply submissions, 1.2. This is kind of the opening gambit dealing with the circumstances of the Australian economy since the release of the national accounts data. And they say:
PN836
In relation to the written submission tendered at the start of March, we note that the December quarter growth rate was at the top of the range of ...(reads)... only a single quarter.
PN837
That is just wrong. It is just wrong. There have been three quarters of growth, 1 per cent or higher, three consequence quarters 1 per cent or higher, in the lead up to this case. The March quarter was below 1 per cent but if the Commission turns to tag 3 of the ACCI's own submission the Commission will see they have set out the trend figures for GDP growth in their table 1. And what do they show? June 1 per cent, September 1.2, December 1.2. These are trend figures. Now, paragraph 1.6 of the ACCI submission, page 3, they say:
PN838
Yet it is the data the ACTU itself presents that more than establishes the fact that all of the statements made by ACCI in that earlier submission are correct and remain correct.
PN839
On page 40 of the reply submission we see a figure R4.2, which is the annual GDP growth over the current economic cycle. What will be seen is that the last four quarters are well behind the kinds of growth rate that had become the norm over the previous period shown in the chart. What that paragraph means is that if you look at the annual rate of growth for quarters prior to this most recent one, because they had a negative figure in them from December of 2000 they are below the average.
PN840
Well, that might be so. But that is because there was a quarter of negative growth in December 2000 in seasonally adjusted terms, and in trend terms a very low growth. When you look at the three quarters, and you look at quarterly data, the last three quarters have all been at or above the longer term trend. They have all been at or above 1 per cent.
PN841
COMMISSIONER LEWIN: Mr Watson, from the point of view of last year's decision, I am looking at table 1, tag 3 of the ACCI reply submission, as I recall it the Commission did not have the March 2001 figures.
PN842
MR WATSON: No.
PN843
COMMISSIONER LEWIN: So that if those figures in the bottom righthand corner of the table, they are the cumulative results in terms of gross domestic product since the last decision, is that correct?
PN844
MR WATSON: Yes. Yes, Commissioner, that is precisely right. And, of course, what is clear is that because they are the addition of the four previous quarters, the lower figures for annual growth are a result of the inclusion of low figures in September and December and March. But we have had three quarters of robust strong growth. Now, similarly the AIG in their submission at paragraph 3.3 - I am sorry, it is the reply submission.
[4.07pm]
PN845
They say at 3.3, which is on page 7:
PN846
Further, as we predicted on page 18 of our original submission, the actual level of growth recorded by the December Quarter 2001 National Accounts is still well below past experience and our optimal growth potential. Lower growth means that we cannot sustain the wage increases proposed by the ACTU.
PN847
The growth recorded in the December quarter national accounts is 1.2 per cent in trend terms, and 1.3 per cent seasonally adjusted. Annualised, it is 4.8 or 5.2. It is a high growth figure. The suggestion that it is well below past experience is not a sustainable one, unless one goes to the very highest quarterly growth figures in the most recent expansion.
PN848
Now, in this regard the approach of the Commonwealth in reply, we would say is interesting. Given the relatively triumphal nature of the public statements made by the Treasurer in relation to GDP growth, the Commonwealth could hardly, in its reply submissions, devote much space to it. So they devote precisely one paragraph to GDP growth in their reply, slightly more if you count the introductory sentences.
PN849
In essence, in these proceedings, the AIG, the ACCI and the Commonwealth all are saying, don't focus on the immediate past, where you have had a good number, because there's uncertainty for future. What a contrast to last year's case, where when the December national accounts came out just before the case, and at that stage showed a minus 0.6 per cent contraction, all that those three parties talked about was the disparate nature of the immediate past circumstances, and how any decision which the Commission would award would only exacerbate.
PN850
Now, in our submission last year, we said the Commonwealth should look through the transitory effects of the GST and the housing slump, and consider a fiscal and monetary stimulus, which was in place at that time, and look at the time which the decision of the Commission was likely to take effect, and recognise that that was likely to be in a growing economy. Now, as the last three quarters of growth figures show, we were right and they were wrong.
PN851
But in that context, although they are all desperate now to say, don't take the last quarter into account, focus only on future uncertainty, it is appropriate to analyse more than just the good results that we have had in the past, but look at what they say are the risks. And at Commonwealth reply 2.1, and I don't need to take the Commission to it, the Commonwealth asserts that the risks to the economy and employment growth are the international outlook, and the extent of any moderation of housing ..... they specify a number of factors which we would paraphrase as this.
PN852
The international outlook, and they refer specifically to Japan. They refer to a possible moderation of housing and consumer spending, and they assert that underlying productivity trends are uncertain. So that is their three risk factors. And the ACCI at paragraph 2.46 of its reply, assert that the Commission should focus on the international outlook. So a common theme amongst all three submissions in that regard. And on the risk to interest rates, and of future interest rate rises.
PN853
In our submission, when properly analysed, the December quarter national accounts show that the emphasis on uncertainty is little more than a beat up. Further, the emphasis on uncertainty is completely at odds with the public positions which each of those parties are taking outside the Commission. Can I take - - -
PN854
JUSTICE GIUDICE: If that is a convenient time for you, Mr Watson?
PN855
MR WATSON: Yes, it might be, your Honour.
PN856
JUSTICE GIUDICE: We will adjourn to 10 o'clock tomorrow morning.
ADJOURNED UNTIL THURSDAY, 4 APRIL 2002 [4.12pm]
INDEX
LIST OF WITNESSES, EXHIBITS AND MFIs |
EXHIBIT #ACTU2 WRITTEN SUBMISSIONS DATED 08/02/2002 PN253
EXHIBIT #ACTU3 COMPOSITE EXHIBIT DATED 08/02/2002 PN253
EXHIBIT #ACTU4 WITNESS STATEMENTS DATED 08/12/2002 PN253
EXHIBIT #ACTU5 REPLY SUBMISSION DATED 19/03/2002 PN255
EXHIBIT #ACTU6 REPLY COMPOSITE EXHIBIT DATED 19/03/2002 PN255
EXHIBIT #COMMONWEALTH1 CORRESPONDENCE BETWEEN CTU AND COMMONWEALTH INSERTING PROVISION OF FURTHER INFORMATION ON MYEFO FORECASTING AND MODEL PN275
DEHNE TAYLOR, SWORN PN282
EXAMINATION-IN-CHIEF BY MR MURDOCH PN282
CROSS-EXAMINATION BY MR WATSON PN297
EXHIBIT #ACTU7 COLLECTION OF FORECASTS FROM 1996/97 TO 2001/02 PN339
EXHIBIT #ACTU8 DATA FROM DOCUMENT PN408
WITNESS WITHDREW PN445
RUTH LORNA GABBITAS, SWORN PN446
EXAMINATION-IN-CHIEF BY MR MURDOCH PN446
CROSS-EXAMINATION BY MR WATSON PN450
EXHIBIT #ACTU9 TABLE DOCUMENT PN557
EXHIBIT #ACTU10 DOCUMENT PN588
WITNESS WITHDREW PN645