CTU Economic Bulletin No. 83

August 2007

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Comment

A major political issue is the level and quality of government spending. Government spending is crucial to the quality of life of all New Zealanders. Whether it is in terms of biodiversity, climate change, vital social services, defence, policing, health, trade promotion, education or the many other important jobs performed by civil servants, we all get value for money from effective government spending.

What do the critics say about government spending? One argument is that government spending has gone up by around $20 billion since 1999. The increase in core government spending is however a lot smaller than this. But more importantly, private sector spending has gone up by at least $35 billion in that period. A more accurate way of looking at this increase is to see how the ratio of government spending to GDP has changed. In 1999, central government spending was 33.3 percent of GDP. By 2004 it was down to 30.1 percent. It was 31.9 percent in 2006 and is forecast to be 32.2 percent for 2007 and rise to 33.1 percent by 2011. So with all the so-called increases in government spending, this ratio only gets to 1999 levels by 2011. And Crown debt levels have been cut dramatically from 35.4 percent of GDP in 1999 to 22.6 percent last year with a small rise expected this year to 23.3 per cent.

The major areas of expenditure are in social security (including NZ Super), health, education, defence and law and order. In 2006 this comprised 81 percent of government spending. So the big money is going into areas which are highly valued by the public. For instance, nominal spending on health has gone from $5.9 billion in 2001 to $11.9 billion in the coming year. Less than half of that increase is due to inflation and demographic factors. And at the last election, 80 per cent of voters thought the government should spend "more" or "much more" on healthcare. Public transport spending in the 1990s was around $40 million a year. This year it is $450 million.

The National and ACT Parties are often critical of government spending without being specific about areas where they would cut spending. They will also say that rather than cut spending, if they were in office, they may simply not let spending rise at current rates. However, in many cases the increases needed to maintain current levels of real expenditure once inflation and population changes are taken into account are considerable – around $750 million a year in health for instance.

Another argument is that state sector employment is rising too fast and competing with the private sector. But since 1999, employment in both the state sector and the private sector has increased by around 19 percent. Increases in the state sector have been estimated as 5225 more doctors and nurses, 4240 additional teachers, 1700 extra police, a large increase in custom officers comprising an extra 956 people, 580 more quarantine and agricultural officers at ports, 1698 more social workers, 2536 more prison officers, and 2898 more case workers. Again – once government spending is expressed in terms of the quality jobs performed in the state sector and valued by the public we can see the huge support there is for government spending.

It is true that from 2001 to 2006 there was a 34 percent increase in public service employment. However, this growth occurred from a low base. In 1999, public service employment was only 2.18 percent of total employment. It is now around 3 percent.

Wages in central government rose by 15.8 percent from June 2001 to June 2006. In the private sector, wages rose by 12.5 percent in this period. Sure a small difference there of half a percent per year. But this is hardly a blow out? And isn’t it more the case that private sector employers where collective bargaining density is at only 9 percent have been getting away with low levels of pay?

A further criticism is about productivity in the state sector. Of course it is a challenge to accurately measure value for money in a sector which is largely service-based and non-profit. For instance, how do you measure the productivity of an employee of MAF Biosecurity NZ or a quarantine officer who just happens one day to stop foot and mouth disease coming into New Zealand? Hmmm. One day’s work saves billions of dollars….There are many initiatives under way addressing productivity issues in the state sector. But they will work best where there is an acknowledgement that what is being produced is not a quantity of goods and services, but a crucial investment into a quality of life that is highly valued by New Zealanders.

This leads to another criticism which is often heard – the quality of public spending. It is inevitable that individuals and sections of the community will value some areas of government spending more than other areas. This is one reason why we regularly hear the same organisations and political parties call for both more public spending and less public spending! But the point is that government spending is across a broad base to address the needs of all New Zealanders – not just certain lobby groups. And little attention is taken by business groups to the commitment of those in the public sector to quality – for instance as exemplified by the series of Government-PSA Partnership for Quality agreements.

In addition, there are different forms of spending. For instance some spending is about long-term capital investment. And sometimes a tax cut is also described as spending by critics. For instance a cut in company tax is recognised as an actual tax cut. But a tax cut for a worker in form of a tax credit based on earnings and numbers of children, rates rebates and tax cuts to induce workplace savings have all been criticised by business groups as examples of low quality spending. In a wider sense, it is clear that there have been considerable tax cuts. The business tax package for instance is worth $3.4 billion over the next 4 years. And tax relief through Working for Families is now worth $1.6 billion a year.

So this takes us to another criticism which is why should the Government think they can spend taxpayers’ money in a better way than individuals? There is clearly some fiscal room for additional tax cuts. But they also can be inflationary and have to be affordable over the medium and long-term. Workers also notice the effect of bracket creep. But we are also aware that we need an investment approach in order to create a high wage, high skill, quality and sustainable economy.

In a globalised world, with huge pressures to internationalise throughout supply chains, a small country distant from markets with no subsidies and negligible tariffs is in a very vulnerable position despite some of our commodity and natural advantages. That requires considerable scale of investment relative to our size – and we are in catch-up mode after the disastrous 1984-99 period. This investment is partly by private firms and households. But it is also by the State in the form of collective investments – in health, education, industry training, tax incentives for science, research and development, modernised physical infrastructure and improved connectivity through high-speed broadband.

None of this comes cheap. You cannot build a high value economy at low cost. And a high value economy also needs to value the public services that underpin its success and social cohesion. So we need to recognise that tax cuts could have a significant opportunity cost. A tax cut of $2 billion, which could equate to an average reduction of $20 per person also amounts to the same value as around 3,200 state sector workers – that is 995 primary school teachers, 786 secondary school teachers, 309 police, 835 nurses, 225 doctors and 50 social workers. There is no doubt that many would like to see a tax cut. But there is also high demand from the public for spending, including on these types of jobs. So, consideration of tax cuts needs to be set against the priorities that remain in collective investment that the state can more effectively fund.

We should all be open to suggestions that government spending can be done more effectively, needs to be balanced across a range of interests, and needs to watch it does not blow out in terms of ratio to GDP and other measures. But the hypocritical criticism of government spending using blatantly distorted statistics and a bias against the very collective investments we need to lift the quality of life of New Zealanders does not contribute to a useful debate.

Consensus forecasts¹ published by NZIER

The consensus forecasts were updated in June 2007.

Economic Snapshot

Consumer prices rose 1.0 percent in the June 2007 quarter, and were up by 2.0 percent annually. The next CPI update is on 15th October. Food prices rose 3.4 percent in the year to July 2007. Unemployment is at 3.6 percent. M?ori unemployment is 7.0 percent and Pacific peoples’ unemployment is at 7.8 percent, compared with 2.6 percent for European/P?keh?. The minimum wage is $11.25 an hour for a person who is aged 18 or over and $9.00 an hour for those aged 16 or 17 years old or a trainee. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for June 2007, were up annually by 4.3 percent (4.2 percent in the private sector and 4.6 percent in the public sector). The QES showed that the average ordinary time hourly wage is now $22.77 ($21.25 in the private sector and $28.72 in the public sector). The female rate of pay is $20.98, compared to the male rate of $24.24. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.1 percent in the March 2007 year (3.1 percent in the private sector and 2.9 percent in the public sector). For those workers who actually got an increase, the average increase for the year was 5.4 percent and the median was 4.1 percent. The next update of wages data is on 5th November. Economic activity increased 1.0 percent in the March 2007 quarter. In the year ended March 2007, economy activity (GDP) grew 1.7 percent, compared with 2.0 percent in the year ended March 2006. The next GDP update is on 28th September. The Official Cash Rate (OCR) is 8.25 percent.

KiwiSaver

The latest enrolment numbers for KiwiSaver are 129,591, with 5,900 opt-outs also received. This comprises 61,061 people who have actively chosen a provider and gone directly to a scheme to enrol, 51,139 people who have actively chosen to join KiwiSaver and enrolled via their employer, and 17,391 new employees who have been automatically enrolled by their employer. The numbers include those who have 8 weeks to opt out so may change.

Wages

The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.1 percent in the March 2007 year (3.1 percent in the private sector and 2.9 percent in the public sector). For those workers who actually got an increase, the average increase for the year was 5.4 percent (5.4 percent in the private sector and 5.1 percent in the public sector) and the median was 4.1 percent (4.2 percent in the private sector and 4.0 percent in the public sector). The increases for the quarter however are showing a trend towards slightly lower increases of 4.8 percent (4.9 percent in the private sector and 3.9 percent in the public sector) for the average increase and 4.0 percent (4.0 percent in the private sector and 3.5 percent in the public sector) for the median increases. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for June 2007, were up annually by 4.3 percent (4.2 percent in the private sector and 4.6 percent in the public sector). The QES showed that the average ordinary time hourly wage is now $22.77 ($21.25 in the private sector and $28.72 in the public sector). The female rate of pay is $20.98, which is 86.6 percent of the male rate of $24.24.

Employment

Employment increased by 0.7 percent over the June 2007 quarter and 1.5 percent over the past year. In the June 2007 quarter there were 14,000 additions to the workforce, meaning the labour force participation rate reached its highest ever recorded point, at 68.8 percent. The number of people unemployed decreased by 2,000 over the quarter, and this resulted in a decrease in the unemployment rate point to 3.6 percent, equal to the lowest rate ever recorded. M?ori unemployment is 7.0 percent (down from 8.6 percent in the March quarter) and Pacific peoples’ unemployment is at 7.8 percent, compared with 2.6 percent for European/P?keh?. Unemployment among those aged 15-19 was 13.2 percent, 5.9 percent for those aged 20-24, compared with 1.4 percent for 50-54 year olds. A Labour Department survey showed that those aged 18 to 24 made up almost 28 percent of those on the dole in 2002, but as of June this year the number has fallen to 18 percent. In that cohort, average wages rose from around $8.50 an hour in 2001 to over $10.80 in 2006, chiefly due to rises in the minimum wage. The number of jobless (which includes those available for work but discouraged from seeking work or temporarily unavailable for work) increased by 13.4 percent in the June 2007 year to reach 155,600. There were 86,800 underemployed (largely part timers wanting more hours) up from 68,100 in June 2006. However the Labour Department survey of skill shortages shows that 42 percent of firms had difficulty finding skilled workers and 26 percent had difficulty finding unskilled labour in the June quarter, in each case a higher proportion of firms than in the March quarter. Meanwhile the Government says 44 percent of all prisoners are now working or in training.

Property

According to REINZ, property prices dropped in July 0.7 percent to NZ$345,000. The national median is now 10.4 per cent higher than the July 2006 median of $312,500. This is lower than the June 2007 median which was up 12.09 per cent on a year ago. July's house price decline was the second consecutive monthly fall. Sales also dropped by 14.2 percent in July to 6,660 - the lowest level since July 2001), and there was an increase in the number of days to sell (up to 31 days from 30 in June and 27 in March). Meanwhile, Quotable Value recently reported that national residential property values have increased by 12.7 percent over the past year. Over this period, the average sale price for New Zealand properties was $381,298. Consents were issued for 2,160 new dwelling units, compared with 2,145 in July 2006. The value of consents issued for residential buildings was $679 million, 11 percent higher than in July 2006. On a seasonally adjusted basis building consents issued for new dwellings in July were down 16 percent on the previous month.

Trade

The trade balance for the year ended July 2007 was a deficit of $6.3 billion (18.3 percent of exports).The trade weighted index measure of the value of the New Zealand dollar was 21.7 percent higher than in July 2006. Exports were down 12.6 percent in July 2007, while monthly imports fell 7.6 percent. Figures for July 2007 indicate that the trade balance was a record deficit for a July month, of $791 million or 30.0 percent of exports, the highest proportion of exports for a July month since 1976. The current account deficit is estimated at around 8.5 percent of GDP.

Linked Employer-Employee Data

In the year to June 2006, the average quarterly worker turnover rate was 17.3 percent with 303,520 employees per quarter starting a job and 298,900 leaving a job. These data also show that the Northland region had the highest job and earnings growth in the year to June 2006, and for the five years to June 2006.

Retail Sales

Seasonally adjusted total retail sales rose 0.4 percent in the June 2007 quarter. Sales were up 5.9 percent for the year.

Migration

In the year ended July 2007, there were 82,500 permanent and long term arrivals, up 2 percent from the July 2006 year and there were 73,500 departures, up 7 percent. As a result, net migration was 9,000 in the July 2007 year, down from 12,100 in the July 2006 year. In the year ended July 2007, there was a net inflow of 9,000 from the United Kingdom. The Philippines was the second largest source of net migration to New Zealand in the July 2007 year, increasing from a net inflow of 600 in 2005, to 1,400 in 2006, and 3,200 in 2007. There were also net inflows from India (3,000) and Fiji (2,300) in the July 2007 year. The net outflow to Australia was 25,500 in the July 2007 year, compared with 20,500 in the July 2006 year.

Non-profit Institutions

Until now New Zealand has had no official way to measure the quantity and economic value of activities undertaken by nonprofit institutions. As a result, the impact of these groups, and the contribution of their volunteers, has not been clearly visible in New Zealand’s official statistics. The Non-profit Institutions Satellite Account: 2004 provides the first comprehensive economic view of non-profit institutions in New Zealand. Non-profit institutions contributed 2.6 percent to New Zealand’s gross domestic product (GDP) in 2004. When volunteer labour is included, non-profit institutions’ contribution to GDP increases from 2.6 percent to 4.9 percent (about the same as the tourism sector). Over one million (1,011,600) volunteers gave more than 270 million hours of unpaid labour to non-profit institutions in 2004. There were 97,000 non-profit institutions identified as at October 2005. Non-profit institutions had 105,340 paid employees as at October 2005.

The Rich get Richer – UK style

The Guardian's pay survey shows yet again that directors have awarded themselves huge increases in their annual pay packages. These were up 37 percent last year compared to an average rise in earnings of 3.3 percent. The average chief exec's pay is now £2.9m - that is 98 times more than the average employee in a FTSE 100 company. And the averages mask a yawning gap between directors and workers at companies that employ a lot of women and part-timers. The boss of Punch Taverns, for example, earns 1,148 times the pay of his workers. At Tesco, Terry Leahy takes home more than 400 times the wages of those on the shop floor.

Notes 

1 The consensus is made up of the average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand and Treasury. They are done every 3 months which means that we now have actual figures for some of the forecasts. 

For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz