The wage caps were first imposed to reduce deficits incurred during the GFC. When the deficits were replaced by booming surpluses, the government justified the policy with reference to low inflation. Now that inflation is spiking they just impose them because they can.

What was originally billed as a temporary, emergency measure to help the state deal with fiscal deficits in the wake of the 2008–09 Global Financial Crisis, has become a permanent feature of wages policy governing public sector workers in NSW.

The state government initially imposed a cap on annual wage gains for workers in state-funded public services of 2.5 per cent in 2012–13, supposedly necessitated by the modest deficits incurred by the state after the GFC.

Those deficits were never large: they peaked at $1.7 billion in 2012–13 – equal to just 0.4 per cent of the state’s GDP that year.

And those deficits quickly disappeared due to the combination of fiscal austerity and renewed economic growth. In fact, starting in 2013–14 the state ran a series of six consecutive annual operating surpluses (amounting to a combined total of over $20 billion).

This had no impact on the state government’s draconian wages policy: the 2.5 per cent pay cap remained in place, even as the state racked up record surpluses that reached $5.7 billion in 2016–17 alone.

Later the government tried to justify the policy with reference to inflation – claiming they were intended to be consistent with the Reserve Bank’s target of 2.5 per cent annual inflation. But when inflation leaped well above that benchmark, the government quickly dropped that justification for the caps.

Dr Jim Stanford of the Australia Institute said the wages cap policy is motivated by ideology and politics, not fiscal necessity.

“After a decade of sustained pay suppression, in good years and in bad, it is now clear the government imposes these harsh restrictions on public sector pay, without free negotiation or consideration of normal wage determinants – like the cost of living, productivity, or wage comparators – as a matter of political and fiscal convenience,” he said.

Wage caps have damaged the economy

A disturbing finding in the report is that the NSW wages cap policy has “since been mimicked by other states, by the Commonwealth Government and even by local and regional councils – all of which have been eager to dispense with normal collective bargaining mechanisms in order to achieve short-term fiscal savings”.

This, it said, has had damaging consequences for Australia’s economy. Specifically, it has led to “an unprecedented slowdown of wage growth across Australia’s labour market since 2013”.

“The NSW pay caps have had a particularly harmful impact on overall wage trends – not just in NSW, but across the country.”

“The NSW Government’s pay caps suppressed pay for all workers, not just its own employees – and helped set off a historical slump in wage growth that has be-devilled Australia’s macroeconomy ever since.”