McKell Institute report says ‘some correlation’ between the reductions in take-home pay on 1 July and the significant decline in consumer spending

This article is more than 2 years old

This article is more than 2 years old

The controversial cuts to Sunday and public holiday penalty rates on 1 July have been followed by the weakest three months of consumer spending since 2008.

A new report from the McKell Institute, a Labor-aligned thinktank, has analysed the impact of the Fair Work Commission’s decision in February to cut public holiday penalty rates, and begin phasing-in cuts to Sunday penalty rates, for some workers in the retail, hospitality, fast food and pharmacy sectors.

Public holiday penalty rates were cut on 1 July – from 250% to 225% – for some workers in the hospitality, restaurant, retail, fast food and pharmacy sectors.

Sunday penalty rates were also cut for award-rate workers in the hospitality, retail, fast food and pharmacy sectors.

The McKell Institute report says there appears to be “some correlation” between the reductions in take-home pay on 1 July and the significant decline in consumer spending in July, August, and September.

The September quarter was the first quarter since the 1 July cuts came into effect, and economists have admitted that the fall in consumer spending has been surprisingly large since then.

“It is probably too early to say that this is the beginning of a new trend, but given the unsavoury mix of headwinds facing the consumer at present, alarm bells should be ringing,” warned a JP Morgan economist, Sally Auld.

The McKell Institute report, called An Analysis of the Impact of Penalty Rate cuts on National Growth Trends, was released on Tuesday.

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Its authors say while it is too early to be definitive, it appears the decision to cut penalty rates in July has had a negative impact on the economy.

They say proponents of a cut in penalty rates suggested up to 40,000 jobs would be created by the wage reductions over coming years, but the retail industry has not shown any significant rise in employment in the last three months and the accommodation and food services industry has seen a slight reduction in employment.

“While the changes only started to come into effect on July 1, 2017, there is no evidence of a major surge in employment in the affected industries,” the report says.

“Despite claims that penalty rates will increase economic activity, retail turnover has seen a standstill with sales showing 0% growth.”

Sam Crosby, the McKell Institute’s executive director, told Guardian Australia most of the people who had their penalty rates cut this year have suffered a “very real and noticeable impact” on their quality of life.

“That’s because most are on low incomes, so every dollar counts,” he said.

“If you are going to introduce a measure that directly hurts low-income earners, you would want to be certain that measure will have a significant offsetting benefit. Our report finds no evidence whatsoever of that benefit.

There is no evidence of job creation, which proponents of the cuts argued was the whole point Sam Crosby, McKell Institute

“There is no evidence of job creation, which proponents of the cuts argued was the whole point. There is, however, evidence of lower household spending, which the McKell Institute argued would be a likely outcome.

Crosby said the McKell Institute has had concerns that the primary effect of the penalty rate cuts will be a simple transference of wealth from low-income hospitality workers to business owners and corporate shareholders.

“There is nothing in this first tranche of data that would indicate this is not the case,” he said.



In February the Fair Work Commission president, Justice Iain Ross, said Sunday and public holiday rates were no longer a “fair and relevant” safety net for workers, and he agreed with employers that reducing rates could boost employment.



He acknowledged cuts to Sunday rates would “inevitably cause some hardship to the employees affected”, but promised transitional arrangements would mitigate that hardship.

He decided to cut Sunday rates but to keep them higher than Saturday levels because “Sunday work has a higher level of disutility” for workers, although to a lesser extent than in the past.

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He said evidence from business owners demonstrated that the current level of Sunday rates had led them to restrict trading hours, reduce staff levels and restrict the services provided, and cutting rates would therefore increase trading hours, and the “level and range of services” on Sunday and public holidays.

Small businesses and retailers told the Fair Work Commission that its decision to phase in penalty rate cuts in the hospitality, retail, pharmacy and fast-food sectors over two to three years – rather than in a single year – would prevent employment gains happening quickly.

On 1 July workers on hospitality and fast-food awards saw their Sunday rates cut from 175% to 170%, to be followed by two more rounds of cuts in 2018 and 2019 (to stop at 150% on 1 July, 2019).

Workers on retail and pharmacy awards saw their Sunday rates cut from 200% to 195%, to be followed by three more rounds of cuts in 2018, 2019 and 2020 (to stop at 150% on 1 July, 2020).