CTU Economic Bulletin No. 80

Submitted by Editor Policy on 1 June, 2007 - 11:16.

May 2007

Either read on, or download a printable version here (MS Word 227k)

Comment

KiwiSaver starts in just over 4 weeks. It will provide a new platform for a second tier of retirement income. The Budget 2007 announcements of up to $20 a week from the Government paid annually into individual savings accounts and the phasing in of compulsory employer contributions are a significant boost to KiwiSaver and come on top of the $40 annual fee subsidy, the $1000 net kickstart, and the benefits for some first home buyers. But there are still some significant design issues to resolve. The CTU has consistently argued for easier access for low-income workers into KiwiSaver. That is why we put up a 2% minimum contribution option in our submission. This was not accepted but the option of employer contributions counting towards the minimum of 4% was agreed and was a step forward. But now the time frame to put such an option in place is only until 1st April 2008.

Some of the issues for submissions to the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill will include an option of a 2% minimum contribution or maybe a phasing in of worker contributions at 1% rising to 4% in 2011, or delinking compulsory employer contributions from worker contributions so that there is just a phasing in of a 4% employer contribution. Other issues will be the deductions from redundancy pay and also the need for an inflation (or wage movement) adjustment for the $20 a week maximum for the member and employer tax credits.

Union reaction to KiwiSaver has been almost entirely positive. But of course there have been concerns about the suggestion of imposed trade offs with wage increases, the plight of low-paid workers who find it extremely hard to save, as well as the impact on existing schemes. As regards a wage trade off, the costs to employers for contributions arise only if workers join a KiwiSaver scheme, and even then only occur towards the end of the phase in period except for higher paid workers. For employers of workers on $26,000 a year, the employer tax credit fully compensates the employer for compulsory contributions even if they went to 4% in April next year (and for those on $52,000 the employer tax credit fully compensates up to 2%). So the cost impact for employers is too small, too distant and too variable for it to be a significant issue. In the short term, there may be some trade offs to get a 2% employer contribution to count towards the minimum of 4% - but this will depend on the circumstances.

Many people appear to be unaware of the transitional provisions in the Bill. They allow a 2+2 formula (for example) to be put in place prior to April 2008 which then means contributions for the worker can remain at 2% until April 2010 when they go to 3% and then 4% in 2011. From the date the arrangement comes in before April 2008, the Government will give a member tax credit to the worker equivalent to 2%, or $20 a week whichever is the lesser amount. And from April 2008, the employer will get a tax credit equivalent to 2%, or $20 a week whichever is the lesser. In fact, there is nothing to stop an employer under this arrangement increasing their contribution from April 2008 in the case of workers on under $52,000 a year to (say) 2.5%, 3% or 4% or whatever the figure is in order to qualify for the full $20 employer tax credit. What this shows is that although there are still significant issues about access to KiwiSaver for low paid workers, there is an option available, as the Bill currently stands, for low paid workers to start at 2% for at least 2 years, get the member tax credit, and in some cases get the full employer contribution of 4% from April next year which for the employer would be completely offset by the employer tax credit.

Meanwhile home affordability and monetary policy tools remain topics of major concern. Select Committees are set up to look at both issues. Just to recap on some statistics. By mid-2006 the outstanding debt of households had increased around five times in dollar terms since 1990 and household debt as a proportion of annual disposable income has gone from around 74% in 1992 to 100% in 2000 to 160% by 2006. Servicing costs for debt as a proportion of income rose from 7.8% in the year to March 2001 to 13.1% in the March 2006 year. The valuation of overall housing stock relative to overall household disposable income surged from 3.7 in the March 2001 year to 6.7 in the March 2006 year. Borrowing from New Zealand households has doubled since 2001 whereas gross disposable household income rose by 23% in that period. Around 90% of household debt is accounted for by residential mortgages, and total household debt grew by 14% in the year to June 2006.

In the three years from 2004 to 2006, house prices increased by 38.5% while at the same time wages went up by 8.7%, meaning that house prices are outstripping wages by 4 to 1. In the two years to February 2007, there was a 38% drop in the number of intending first home buyers with income of less than $45,000. Between 1981 and 2004, the real price of vacant residential sections rose by 286% on average across New Zealand while the increase in Auckland City was almost 700%. While the amount of borrowing may be way up - the actual number of households making mortgage payments has fallen although the average household size has barely changed in a decade - it was 2.7 people in 2006 and 2.8 people in 1996. In 2006 there were 405,267 households making mortgage payments, down from 448,374 in 1996. But there were 388,272 households making rental payments in 2006 compared with 290,124 in 1996. The home ownership rate was 73.8% in 1991, 67.8% in 2001, and 66.9% in 2006.

This is not a pretty picture. Options to address this include: significantly lift wages to close the gap on house prices; subsidised home lending programmes for low-income families; more state housing; income related rents for third sector housing providers; major investment in skill development for residential construction; more restrictive immigration policies given that migration is a major driver of house prices; restrictions on foreign buyers; capital gains tax on secondary housing; removing the ability to get favourable tax treatment of rental property expenses; shared equity where the Government takes a share of a house and takes on the risks and benefits of changes in the value of that equity; healthy housing programmes to address poverty, health and energy reduction issues; changing zoning rules to free up more land; regulate to require high density urban housing; force land-banked property into affordable housing; introduce variable stamp duties particularly on higher priced housing to slow demand and as a revenue source for affordable housing and; increase accommodation supplement payments; require local bodies to insist on an affordable housing quota of houses; and no doubt many more suggestions.

It will be difficult to get a sense of the relative impact of these different options, measure that impact against a broader range of policies, and also factor in unintended consequences. For instance, slowing immigration will help cool the housing market but it will also impact on the labour market in ways I won't go into here. Preventing landlords from offsetting expenses will reduce the desirability of investment housing, but could push up rents in the short term. It may be that the housing market will cool either as part of a long cycle or through the eventual weight of interest rate rises. But there is no doubt that other measures are needed - especially in terms of increasing the supply of affordable housing.

And as for monetary policy, a substantive comment on that will have to wait for another Bulletin. But I do wonder at the lack of balance of some economists that make it sound like we have hyperinflation instead of an annual rate of 2.5%. There are pressures in the medium term - but interest rates have gone up significantly and given the lagged effects, time should be allowed for recent increases to take effect rather than adding further pain to the export sector. Some in the export sector are of course enjoying the impact of higher commodity prices which surged in world price terms by 21% in the last year with dairy prices up by 58%. And for those trying to add value to commodities, paying the high world price for logs for instance as a domestic input for value-added timber exports while facing high exchange rates is a huge squeeze. Sure there are medium term inflation pressures from the dairy payout and the boost in the terms of trade, but we also see more factory closures citing the impact of the exchange rate and high interest rates, and it looks like employment growth is also slowing. The latest forecasts are for 2.1% GDP growth for the March 2008 year, a far cry from the 4% levels we saw from 2002 to 2004. The risk of a hard landing will be that much higher if interest rates go up next week.

Consensus forecasts¹ published by NZIER

The consensus forecasts were updated in March 2007.

March Year (%)	2007	2008	2009
GDP	1.8	2.4	2.9
CPI	2.6	2.5	2.6
Wages (QES)	5.3	3.9	3.4
Employment	0.9	0.9	1.3
Unemployment	4.0	4.3	4.4

Economic Snapshot

Consumer prices rose 0.5% in the March 2007 quarter, and were up by 2.5% annually. The next CPI update is on 16th July. Food prices increased 4.3% in the April 2007 year. Unemployment is at 3.8%. Maori unemployment is 8.6% and Pacific peoples' unemployment is at 8.0%, compared with 2.9% for European/Pakeha. 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 Survey² (QES) for March 2007, were up annually by 4.6% (5.5% in the private sector and 1.9% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.59 ($21.03 in the private sector and $29.00 in the public sector). The female rate of $20.84 is 86.8% of the male rate which is $24.02. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the March 2007 year (3.0% in the private sector and 3.7% in the public sector). For those workers who actually got an increase, the average increase for the year was 5.4% and the median was 4.1%. The next update of wages data is on 6th August, 2007. Economic growth increased by 0.8% in the December 2006 quarter and 1.5% in the December 2006 year compared with a 2.2% increase in 2005. The Official Cash Rate (OCR) set by the Reserve Bank is 7.75%.

Wages

Total gross weekly earnings rose by 6.7% in the March 2007 year. This includes increases due to more people employed, more hours and also higher pay rates. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for March 2007, were up annually by 4.6% (5.5% in the private sector and 1.9% in the public sector). The QES showed that the average ordinary time hourly wage is now $22.59 ($21.03 in the private sector and $29.00 in the public sector). The female rate of $20.84 is 86.8% of the male rate which is $24.02. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.2% in the March 2007 year (3.0% in the private sector and 3.7% in the public sector). For those workers who actually got an increase in the last measured quarter, the average rate of increase was 4.7% (4.8% in the private sector and 4.2% in the public sector) and the median increase was 4.0% (4.0% in both the private sector and the public sector). The average increase for the year was 5.4% (5.4% in both the private sector and the public sector) and the median was 4.1% (4.1% in the private sector and 4.0% in the public sector).

Employment

Employment growth was 1.6% for the March 2007 year, 25,000 in the March quarter and 36,000 for the year. Unemployment is now 5th lowest in the OECD at 3.8%, which is 84,000 people. The labour force participation rate is now at 68.6%. The number of jobless (which includes those available for work but discouraged from seeking work or temporarily unavailable for work) increased by 7.6% for the March 2007 year to 173,500. The number of underemployed people (those employed part-time who would like to work more hours) fell to 79,800. Pakeha unemployment is 2.9% compared to 8.6% for Maori, and 8.0% for Pacific peoples. The unemployment rate for those aged 15-19 was 15.5% and for those 20-24 it was 8.6%, compared with a rate of 1.3% for those aged 50-54 years. Meanwhile, there were 7,125 advertised job vacancies listed in April 2007, 2% fewer than in April 2006. There has been an annual fall in vacancies in every month since October 2005. Despite the on-going fall in vacancies, there were still 28% more advertised vacancies in April 2007 than in April 2003. However this survey does not yet include vacancies advertised on the internet. And the Quarterly Survey of Business Opinion released 31 May, shows that 41% of firms had difficulty finding skilled staff in the March 2007 quarter. This is up from 29% in the December 2006 quarter, while 21% of firms had difficulty finding unskilled staff in the March 2007 quarter, up strongly from 11% in the December 2006 quarter.

Trade

There was a 13.5% increase in total imports from April 2006 whereas exports were up by 5.2% on April 2006 to reach $3.2 billion, a record for an April month. The monthly trade balance for April 2007 was a deficit of $212 million. However, if the import of an oil-drilling/processing sea vessel, worth around $220m large is removed, April 2007 would have had a small surplus of $19 million. Commodity prices were up by 4.8% in April and 20.8% in the last year. Adjusting for exchange rates however, commodity prices rose by 4.7% for the last year. It is not all good news for agricultural exports however. World lamb prices have dropped around 16% over the past year but forecasts are for a lift.

Migration

In the year ended April 2007, there were 82,400 permanent and long term arrivals, up 2,500 (3%) on the April 2006 year. There were 71,200 departures, up 1,300 (2%). Net migration was 11,200 in the April 2007 year, up from 10,100 in the April 2006 year. In the year ended April 2007, there was a net inflow of 9,900 from the United Kingdom. The Philippines was the second largest source of net migration to New Zealand in the April 2007 year. There were also net inflows from India (2,600) and Fiji (2,300) in the April 2007 year. The net outflow to Australia was 24,000 in the April 2007 year, compared with 20,400 in the April 2006 year. The highest net outflow to Australia in the past decade was 31,100 in the April 2001 year. However, we had a high exodus to Australia back in the 1980s for example when our labour market was considerably smaller than today so the impact was more significant. If we look at figures of New Zealand residents departing for an intended period of 12 months or more (or permanently), plus overseas visitors departing New Zealand after a stay of 12 months or more, then in 1980 the number going to Australia was 825 a week and in 1989 it was 857 a week compared with 734 in the 2007 March year. In net terms if we include those coming or returning to New Zealand from Australia, the figures show a net loss of 636 in 1980 and 570 in 1989 compared with 447 in 2007.

Property

Quotable Value's April statistics reported growth in national property values at 10.6% over the past year (whereas the REINZ figures show a 14% increase).The QV growth rate increased from the 9.8% reported in March with an average sale price for New Zealand properties was $366,032. On a square-metre basis, the price of building has increased by 8.4% in the March 2007 year. Meanwhile, in the year to April 2007, building consents were issued for 25,964 new dwelling units, up 2.4% from the previous year.

Retail Sales

The volume of retail sales increased 3.4% in the March 2007 quarter and 7% for the year. This is the largest quarterly increase since the beginning of the series in September 1995.

Producer Prices

Output prices for all industries in the Producers Prices Index (PPI) fell 0.2 % in March 2007 quarter, following a fall of 0.5% in the December 2006 quarter. The most significant downward contributors to the PPI outputs index in March 2007 quarter were a fall of 11.4% in the livestock and cropping farming index, an 11.5% fall in the horticulture and fruit growing index, and a fall of 3.1% for the electricity generation and supply index. Meanwhile, the Capital Goods Price Index rose 0.4% in the March 2007 quarter and 3.7% in the year.

Firm Size

You have heard the story that we are a nation of small firms. Yes we are. But so are countries such as Australia, USA, UK, and across Europe. We are just a small country so have fewer large firms as well as much fewer small firms than those countries. And you may think that small firms employ most of our workforce. In fact, enterprises employing fewer than 20 workers accounted for 29.7% of total employment as at February 2005. The average number of employees per enterprise as at that time was 5.2. When non-employing firms are removed, the average number of employees per enterprise was 14. Of NZ enterprises, 96.3% employ 19 or fewer people, 86.5% employ 5 or fewer people, but these figures mean little in terms of the labour market as 63.2% of enterprises have no employees. So the 3.7% of enterprises with 20 or more workers employ 70.3% of the workforce.

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

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. Because the consensus forecasts are done only every 3 months, some of the more recent forecasts will be more accurate.

2 As a measure the Quarterly Employment Survey has "compositional problems" meaning that if there is more employment of workers in a higher than average wage part of the labour market, this shows up in the QES as an increase in average wages. So the adjusted Labour Cost Index is a better measure. However, it tends to miss increases in pay due to promotion or new job categories.