Wages, cuts and confidence: Albanese's economic reboot gains steam

With interest rate cuts, rising wages and a housing rebound, the Albanese Government’s economic policies are sparking renewed optimism for a sustained recovery into 2026. Stephen Koukoulas reports.

GOOD POLICY DECISIONS from the Albanese Government and the belated start of the interest rate cutting cycle, with more cuts to come, have sparked a more favourable outlook for the economy into late 2025 and, more likely, into 2026.

While the outlook is increasingly being focused on a sustained and broadly based return to better economic times rather than an economic boom, the rate of recovery is showing signs of gaining in foothold in critical areas of household spending, dwelling construction, consumer sentiment and business conditions.

This favourable outlook is predicated on three or four additional 25 basis point interest rate reductions over the next 12 months, at which time the contribution to the economy from government spending is set to wind back after several years of strong growth.

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In terms of the most impactful policies in the last few years and their impact on the economy, one of the most fundamental has been in wage policy.

The Government has successfully pushed for a series of wage increases for lower-paid and female-dominated sectors of the workforce.

The increase in the minimum wage, set by the Fair Work Commission, was 5.2% in 2022, 3.75% in 2023, 3.75% in 2024 and a further 3.5% in 2025.

Other wage increases achieved by the Albanese Government include those for aged care workers, nurses, teachers and other carers. Many of these increases have been between 15 and 25%.

Each of these increases was above the rate of inflation and filtered through to other wage settings, to the point where, for the last two years, real wages at an aggregate level have increased.

High wages boost spending

One of the benefits of rising wages is a boost to household purchasing power. To that end, the recent data on household spending was positive.

In May, household spending rose 1% which was followed by a further 0.5% rise in June. Both were strong results. Annual growth in spending lifted to 4.8%, the strongest increase since the start of 2024.

In real, inflation-adjusted terms, household spending rose a solid 0.7% in the June quarter, which will make a solid contribution to GDP growth.

To the extent that annual wage growth is set to continue at an annual pace of around 3-3.5%, with inflation looking to be entrenched around 2.5%, household purchasing power will continue to improve over the next few years.

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Add to that the yet-to-impact effect of the 75 basis points of interest rate cuts delivered since February 2025, with more cuts to come, and the positive outlook for household disposable incomes is further enhanced.

It is also important to take account of the reworking of the so-called Stage 3 tax cuts, which saw a greater stimulus skewing towards low and middle-income earners. This segment is the part of the economy that has a high propensity to spend.

There are additional tax cuts legislated for July 2026 and July 2027, both of which will boost disposable incomes and hence bias spending higher.

We are building more dwellings — good for GDP, good for housing supply

One of the sleeper issues, or one that has received scant attention in the perennial discussion on housing, is the clear and increasing powerful lift in new dwelling construction.

The number of building approvals rose a hefty 11.9% in June to be up a strong 33.4% from the low point in April 2023.

This impressive rise is based on ongoing strong demand for housing, lower interest rates, an easing in construction costs and the early stages of the Government’s reforms to boost housing supply. Issues relating to financial incentives for local councils to fast-track building approvals and some relaxation of zoning rules have further to run, which bodes well for further increases in housing construction over the next few years.

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While it will remain challenging for the Government to meet its target of 1.2 million new dwellings in the next five years, it is now likely to get close to this level, such is the momentum unfolding in the construction sector.

Amid this good news is a lift in consumer sentiment, which has hit its most optimistic level in three-and-a-half years. Buoyant sentiment is consistent with a pick-up in growth in consumer spending. Consumers are smart. They can see the financial benefits of rising wages, lower interest rates and tax cuts and are reacting accordingly.

At the same time, the NAB survey of business conditions and business confidence has lifted from the low point reached in the first half of the year. Lower business input costs, an easing in labour shortages in construction and lower interest rates are all likely to have impacted the business sector.

Where to now?

The main impediments to sustaining the increasingly positive news on the economy, if they are to emerge, will likely come from the international economy. The tariff war is still playing out, geopolitics is unforecastable and the Chinese economy is still negotiating its way out of a deflationary funk.

If there is a downside shock from any of these factors, additional interest rate cuts are likely.

Domestically, the outlook is improving after several years of cost-of-living concerns. To help lock in better times, the Reserve Bank needs to keep cutting interest rates, the Government needs to continue to roll out confidence boosting reforms and wage growth needs to remain strong.

Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.