Wages are growing at their lowest pace in 16 years, and they're growing far more slowly than they were during the global financial crisis. At just 2.6 per cent a year, the pace is way down on the 4 per cent-plus enjoyed during the crisis and the mining boom that preceded it, and is neck and neck with the consumer price index. That's right, real wages are stagnant. They are barely increasing and the consumer price index is barely increasing. For the first time since the late 1990s, the buying power of the Australian pay packet is holding steady. For the budget it means less income than expected from taxing wages ($2.3 billion less this year, the Mid-Year Economic and Fiscal Outlook said) and bigger-than-expected government payouts. "Payments related to Family Tax Benefits are expected to increase by $3.2 billion over the forward estimates, largely reflecting the impact of lower-than-expected wage growth, which is driving up average payment rates," is how MYEFO put it. And it pointed out they were eating into economic growth. "Lower wage growth and employment growth are expected to impact on consumption," it said. The May budget forecast growth in consumer spending of 3 per cent. MYEFO revised it down to 2.5 per cent.

Employment Minister Eric Abetz has been railing against high wage increases all year. In January he told the Sydney Institute that weak-kneed employers were too ready to give in to unreasonable demands. Australia risked something akin to a wages explosion unless employers showed some spine, he said. Abetz led the way. On July 1 he abolished the Commonwealth guidelines for cleaners employed on government contracts. When their existing contracts expire they will be employed on the minimum wage of $17.49 an hour, rather than the $22.02 they had previously been guaranteed. That's a pay cut of 20 per cent. To bear down on public service wages, Abetz offered Defence Force staff a rise of just 1.5 per cent a year, much less than inflation and the lowest increase in living memory. Unable to take industrial action, soldiers, sailors and air force personnel had to cop it. Even independent Senator Jacqui Lambie wasn't able to lift the offer above 1.5 per cent, although she was able to claw back some benefits Abetz also wanted to take away.

Staff in his department were offered just 0.5 per cent a year, along with cuts to conditions. In this week's ballot only 77 voted in favour, with 1419 against. Abetz said the vote would achieve nothing, apart from potentially ensuring they got no pay increase at all. "The government has made it clear that voting no will not mean that departments will have any capacity to make more generous offers," he said. Prime Minister Tony Abbott backed him, saying he would be surprised if anyone in the Commonwealth public sector received more than was received by the Defence Force. Several agencies are offering nothing. The Australian Crime Commission and the Australian Research Council are proposing a 0 per cent pay rise. And others are offering an effective 0 per cent rise. The Australian Tax Office and the civilian arm of the Defence Department aren't getting offers, even though their last pay increases were in June last year. By the time they do get offers two years will have elapsed. Documents uncovered by Fairfax Media show the Defence Department is considering offering its civilian workers just 0.9 per cent a year, in return for concessions including two extra days of work. The Public Service Commission, which oversees these things, is unlikely to become more generous. Abbott has just appointed as its new head John Lloyd, an industrial relations warrior who headed the work reform unit at the Institute of Public Affairs and before that the Australian Building and Construction Commission, where he used extrajudicial powers to take on building unions.

"It's as if they don't join the dots," said Bill Mitchell, director of the Centre of Full Employment and Equity at the University of Newcastle. "They've got a range of little narratives that they pull out at different times to suit different needs. "One is wage restraint. That's to placate business. Another is the health of the economy. Another is fiscal deficits. They don't seem to realise that they are connected." "Of course, if you have a 10-year war on trade unions wages are going to be constrained, of course consumer spending will be restrained and of course that'll hit government revenue. The Treasury would have been telling them this. But it's only now that they are starting to listen." As the G20 met in Brisbane last month the International Labor Organisation (ILO) warned that low wage increases were becoming near-universal. Across the entire Group of 20, average real wages were growing only 1 to 2 per cent a year, with almost of the increase taking place in rapidly industrialising nations such as China. Taking out those nations, real wage increases were fluctuating around zero, as they are in Australia. In Britain real wages are lower than in 2007, and in Germany they are lower than in 2002.

A joint report prepared for the G20 by the ILO, the Organisation for Economic Co-operation and Development, the International Monetary Fund and the World Bank found that the stagnation in wages could not be explained solely by weak economic growth. Real wages were also falling relative to what was produced, as they are in Australia. Real wages have hardly increased at all over the past 12 months, yet gross domestic product per hour worked has climbed 2.1 per cent. Workers have been more productive but have been capturing next to none of the benefits. The report also found that for many of the advanced economies, the moderation in wage growth was greater than "that which would have been predicted by the relationship between rising unemployment and changes in wage growth". ILO deputy director-general of policy Sandra Polaski said her organisation's research rejected the conventional view that low increases in the minimum wage helped boost employment. "It shows that minimum wage increases either have no effect on employment levels or have very small effects, which can be either positive or negative depending on the specific circumstances," she said.

"Further, low-wage workers and households have a high propensity to spend their increased earnings because of unsatisfied needs, so the wages feed back into aggregate demand, thus benefiting firms and the overall economy." Labour market specialist Mark Wooden, of the Melbourne Institute of Applied Economic and Social Research, is prepared to believe that low increases in the minimum wage will boost employment, but he says that's not where wages are being restrained. "The people who would get jobs are mostly at the bottom. They are not the people whose wages are determined by the bosses who have have found their spines. They are going to be part of the 18 per cent whose wages are determined by the Fair Work Commission. It almost always gives the consumer price index, plus a bit. The workers that are getting low wage increases are getting them as a result of enterprise bargaining. They are not in entry-level jobs." Wooden said it wasn't clear why wages were increasing so slowly. "Part of it is the government. It's a big employer in its own right, but it also sets the parameters for other employers. Most of the education sector, most of the health sector is dependent on the public sector one way of the other. Whether you work in a private school, whether you work in a private hospital, your wage is heavily influenced by the approach of the government."

But there's something else. Wooden believes Australia's near-zero rate of real wage growth could be a canary in the coal mine - an early sign that Australians are feeling insecure. "We can't be certain we are seeing it in the official figures for voluntary job departures, so called 'quits'. Normally when we are feeling anxious about [our] jobs we hang on to them - we don't quit. The most recent figures are for the year to February 2013. They show the quit rate slid from around 12 per cent of workers to around 10 per cent. I have been prepared to believe that is just statistical noise, but it could have been about to fall off a cliff. The figures are dated." The wage-growth figures are much more recent. They show annual wage growth slid to 2.3 per cent in September, from 3.7 per cent two years earlier. If workers are worried about keeping their jobs it'll show up first in the wage rises they are prepared to demand. The latest consumer confidence figures are woeful. They show confidence surged after the arrival of the Coalition government, dived in the lead-up to the May budget and then stayed low all year, before heading down to a new post-financial-crisis low of 91.1 per cent. The reading means pessimists outnumber optimists by 8.9 percentage points. In the lead-up to Christmas last year optimists outnumbered pessimists by 5 percentage points. Considered this way, it's possible that low wage increases are a symptom of the insecurity that's pushing down spending growth rather than a cause of it of it, as MYEFO suggested.

There are good reasons to be insecure. New jobs in the public sector, and associated sectors, are hard to come by. Over the past year the national unemployment rate has climbed from 5.8 per cent to 6.3 per cent, a 12-year high. And the so-called underemployment rate, which measures the proportion of people working fewer hours than they want, has soared to 8.6 per cent, the highest reading since records began in the late 1970s. David Jones and Myer are so worried about Christmas trading that each is discounting now, rather than waiting, and is on standby to launch its Boxing Day sale early. "I went to a shopping centre open for late-night Christmas trading the other night and it was empty," Mitchell said. "I spoke to someone I knew at David Jones and he said they've got all the pre-Christmas sale posters out the back waiting. "The product market is extremely subdued. Lower wages aren't going to help it, but they do hit confidence." Wooden didn't think higher wages would do much to boost retailers fortunes either.

"Life has changed. Once upon a time, if you gave people more money they spent it at the shops. They do it these days but the shops are global. There's more money hemorrhaging overseas than ever before. And low wages at least make companies more competitive." The biggest pressure low wage growth put on the economy was the pressure it put on politicians such as Hockey to tighten their budgets further, he said. "Low wage growth means he isn't getting the tax receipts he was hoping for and that'll pressure him to get tougher and make the Australian economy even worse, potentially setting off a downward spiral. It's unfortunate that we've got all this focus on reining in the budget now, when we should have had it in 2005, when the economy was strong." John Buchanan, director of the Workplace Research Centre at Sydney University, agreed. "The way to solve unemployment is not by cutting wages but by increasing demand. We've seen state governments in particular pull demand out of the economy and the federal government itself has been trying to pull a whole lot of demand out. When the export sector is flat and the public sector is pulling resources out unemployment rises, the bargaining power of workers is weakened and it feeds into a cycle of lower spending."

Asked whether the government should consider being more generous to its own employees, Buchanan said it should, especially to the lower-paid ones, who were more likely to spend the extra wages rather than save them, and it should push for higher minimum wages in submissions to Fair Work Australia. For now Hockey says he at least won't cut further. "We are not going to have cuts – new cuts, in order to make up for revenue shortfalls that have come about because of external challenges," he told the national accounts press conference. "We want Australians to go out there and spend for Christmas." But beyond Christmas there are no promises. Mitchell thinks Hockey should continue his "no new cuts" pledge beyond Christmas and even boost spending until such time as the economy picks up. When it does the budget deficit will begin to repair itself. "The best thing a government can do when private-sector spending is weak is demonstrated by what Rudd did in 2008. I'm not talking about the specifics - you could argue that the way he did it was problematic, I've got mixed feelings about that - but from a macroeconomic point of view, this was a perfect demonstration of what a government should do. It got in quickly, got in relatively substantially, and the economy turned around pretty quickly."

"If Swan hadn't developed this obsession with delivering a surplus in 2011-12 and had just let the deficit sit, employment growth would have stayed pretty strong, private investment would have stayed strong, and they would have the deficit down to what they wanted it by now. It would have fallen like the American deficit." The American economist Paul Krugman likes to quote the saying: "No good deed goes unpunished". There have been times when wage restraint and budget restraint have been exactly what the economy needed. The need for both seems to have become hardwired into the Coalition's psyche, even though it was Labor that delivered Australia's most successful attempt at wage restraint, during the accord with business and trade unions in the mid-1980s. But those times might not be these ones, and it's hard to shake a commitment to good deeds. Loading Peter Martin is economics editor of The Age.