CTU Economic Bulletin No. 25

Comment

National has not only released their economic policy but has found a ready-made Finance spokesperson in Don Brash. They have also released an employment relations policy which the CTU has described as the "ECA in drag".

In this comment I focus however on their economic policy. Key features are:

a drop in the top tax rate from 39c (in each dollar) to 35c from April 2003;
a drop at the same time in the company tax rate from 33c to 30c;
a drop of 1 cent each year in both rates so that by April 2006, the top personal rate is 32c and the company tax rate is 27c;
a commitment to drop both to 25c by 2012;
exempt small businesses from regulations and reporting requirements; establish a Ministerial review to push through changes to the Resource Management Act, Occupational Health and Safety Act, Hazardous Substances and New Organisms Act and other "major compliance Acts"; privatisation of ACC;
reduce Government spending to below 30% of GDP;
and scrap the NZ Superannuation Fund.

The only glimmer of moderation is that they promise to "work in close partnership with business, workers, and unions to ensure workplace training drives higher productivity and higher incomes".

Combined with National's employment relations policy, this reads more like competing with the Act Party on the far right than aiming for the political centre. The tax cuts are absolutely biased towards those on higher incomes.

Those on low incomes will feel the least secure about retirement incomes. The reduction in government spending will lead to more user pays and cuts in vital public services. We are still suffering from the damaging effects of the last few rounds of tax cuts as the Government is under more and more pressure to adequately fund quality public services.

We also found in the 1990s that "trickle down" did not work. Higher profits and greater personal wealth for the wealthy did not mean more investment and jobs in New Zealand - but more repatriation of profits to overseas owners, and many wealthy New Zealanders relocating their investments outside New Zealand.

It was also interesting to note the comments by Fletcher Building Chief Executive, Ralph Waters, who recently said that New Zealanders are undertaxed and that "lowering taxes for top-end earners like himself only encouraged them to invest overseas".

National Party economic policy has therefore confirmed that their prescription for growth is to maximise the incomes of those already earning the most, remove regulations on business, and cut government spending. We know only too well the effects of this policy mix. Does National really believe that everyone has forgotten?

Dollar on the rise

The NZ dollar has increased in value against the US dollar from around 41 cents in November last year to 45 cents. There is considerable concern that speculators could focus on the NZ dollar given the more aggressive interest rate stance of our Reserve Bank compared with Australia.

I note that BNZ economists predict the "Kiwi will surge ahead over the next few months" and could hit 50 US cents before December. This would have a very damaging effect on export returns. They also acknowledge that "the strongest current support for the NZ dollar comes from (the) widening interest rate differential".

In other words, the fact that our Reserve Bank is tightening interest rates out of "sync" with other countries is attracting speculation on the NZ dollar.

If the US dollar falls as some predict that will further boost the Kiwi. Although the NZ dollar is expected to fall next year, there will be considerable damage done to the tradable sector in the meantime (the timing of all this depends on the extent of currency hedging and fixed contracts).

Interest Rates

As widely expected, the RBNZ raised the Official Cash Rate (OCR) on 17th April by 25 points to 5.25%. Brash reverted to type before departing. This is in contrast to Australia where the Reserve Bank Governor said this month that although a rate rise, above the current level of 4.25%, could be expected by the years end, although the bank is in no hurry to move (despite that many are picking an increase next week in Australia).

Commenting on the conduct of monetary policy in New Zealand, Deutsche Bank said it is interesting that the construction sector seems to be the only area where price increases clearly reflect demand driven price inflation. Other major contributions to the inflation relate to government policy changes (excise taxes), external factors (oil and food commodity prices) and structural adjustments (electricity charges, health insurance costs, structural depreciation of the exchange rate).

Once again, we have a different view of the economy from the Reserve Bank. There is no doubt that there are inflationary pressures.

Brash could argue that on 17th April he could see a scenario where CPI could fall back to 2.25% in the next year or so - but not 1.5% which is the mid-point target. But given the one-off nature of most of the price increases, and the likelihood that CPI will either remain in, or come back into the 0-3% range, there must be a serious concern about the hugely damaging effect of interest rate rises. I have noted above the effect of a higher dollar as speculators chase our high interest rates.

However, most commentators are picking at least another 0.25% rise in the official cash rate on 15th May.

Consumer Prices

The consumer price index showed a 0.6% increase for the March 2002 quarter which lifts annual inflation from 1.8% to 2.6%. A full table for CPI is attached. Also I have updated and sent out to all of you the real wage calculator which uses the CPI index to calculate what wage is needed to compensate for CPI over any period you want to check.

The key upward contributions to the 0.6% quarterly increase were a 1.2% rise in food prices, a 1.4% rise in construction costs, a 2.3% increase in used car prices, a 2.8% increase in electricity charges, an excise tax related increase in prices of tobacco products, and higher health care costs.

The Food Price Index for March 2002 recorded an increase of 0.4% from February 2002. This follows a fall of 0.5% in February and a rise of 1.5% in January 2002. Food prices rose by 5.5% from March 2001 to March 2002. High food prices continue to put pressure on those on low incomes.

As we have observed before, it is much harder for low-income workers to adjust their spending on food, or adjust other spending to cope with higher food prices. The continued existence of food banks is another indication of the financial hardship still faced by many thousands in New Zealand. For instance, the Auckland City Mission says the number of food parcels it gives to older people has doubled in the past two years.

Work Stoppages

There were 42 work stoppages in the December 2001 year. This comprises 28 private sector stoppages and 14 in the public sector. The level of 42 stoppages in a year is the same number as in 1997 and much lower than the 69 stoppages in 1995 and 72 in 1996.

The 42 stoppages that ended in the December 2001 year consisted of 38 complete strikes, two partial strikes and two lockouts. The 42 stoppages involved 22,022 employees with a loss of 54,440 person-days of work and an estimated $7.7 million in wages and salaries.

In comparison, 21 stoppages involving 2,632 employees ended in the December 2000 year, resulting in a loss of 11,495 person-days of work and an estimated $2.3 million in wages and salaries.

There were six work stoppages that ended in the December 2001 quarter and these involved 14,947 employees with a loss of 23,394 person-days of work. This is an average loss of 1.6 person-days of work. An estimated $3.5 million was lost in wages and salaries. In the September 2001 quarter there were 19 stoppages.

Kyoto Protocol

The Government has announced its preferred mix of policies to comply with the obligations required if the Kyoto Protocol becomes operational. There is now a period of consultation until July.

The CTU will be calling a meeting of affiliates for a full briefing on the policies. Key points include:

the Government will keep the carbon sink credits;
agriculture is exempted for the first commitment period (2008-2012) in respect of methane and nitrous oxide but they will need to find research funds;
there will be a carbon charge of around $25 a tonne from 2007/08 which is expected to cost households around $5 a week;
firms and industries can negotiate greenhouse gas agreements with the Government and gain concessions if they agree to a programme of emissions reduction; there may also be some emissions trading allowed.

Immigration

In March 2002, permanent and long-term arrivals exceeded departures by 1,700, compared with a net outflow of 1,900 in the March 2001.

There were 2,100 more arrivals and 1,600 fewer departures in March 2002, compared with March 2001. Permanent and long-term arrivals from China were up 600 or 67% in March 2002, while departures to Australia were down 1,000 or 31%.

There were net gains from China (1,300) and India (500), but net outflows to Australia (1,100) and the United Kingdom (400). In the year ended March 2002, arrivals reached a new high of 88,400 and exceeded departures by 25,600, compared with a net outflow of 12,600 migrants in the previous year. This was the first net inflow in a March year since 1998.

There were 21,900 more permanent and long-term arrivals and 16,300 fewer departures in 2002, compared with the previous year.

There was a net outflow to Australia of 16,100 in 2002, compared with a net outflow of 31,600 in the March 2001 year. Conversely, there were net inflows from China (12,500), India (5,100), the United Kingdom (3,400), South Africa (3,100), Fiji (2,400) and Japan (2,300), in the year ended March 2002.

Meanwhile the Government has announced the details of its Talent Visa policy and Priority Occupations Work Policy under a "Work-to-Residence programme". Unions have been assured they will receive "effective consultation" when employers are seeking accreditation under the scheme which applies only to jobs that pay at least $45,000 a year.

Tourism

International visitor arrivals in March were up by 14.5% compared with March last year to reach a new 12-month record of 1.955 million visitors.

Retail Sales

Total nominal retail sales rose 1.8% in February to be 9.9% higher than a year earlier. The market had expected only a 0.3% monthly rise. Strong migration flows, a rebound in tourist arrivals, and general consumer confidence are the explanations given by many for this result.

Trade figures

The average foreign currency price of New Zealands commodity exports fell by 0.7% in March.

The average price was 8.4% below last years level. The March trade estimates show a lift again in exports which were up by 3.1% on the same time last year.

In the March quarter, imports rose by 2.3%, with crude oil and consumption goods such as food and drink, and household alliances the main factors.

But imports of capital machinery fell nearly 5%. For the year to March, imports totalled just over $31.9 billion dollars, up 1. 4%, while exports earned $32.7 billion, a rise of more than 7% on the previous year.

While this is much lower than some of the big annual increases we saw last year it represents something of a bounce back against the trend of falling export returns.

The turnaround began in February after three months running of falling exports.

Meanwhile, in the dairy industry the most likely final payout for the 2002/3 season is now NZ$4.00 per kilogram of milksolids. This is down from an initial forecast of NZ$4.50/kgms advised in February. Fonterra said the causes were falling commodity prices and a strengthened New Zealand dollar. But the forecast of the most likely final payout for the 2001/2 season which ends on 31 May, continues to be NZ$5.30/kgms.

OECD on New Zealand economic growth

In its six monthly economic outlook, the OECD says growth in gross domestic product (GDP) is forecast at 2.9% this year, rising to 3.5% in 2003.

Review of the Centre moves to second stage

A "Change Implementation Advisory Group" has been appointed to help implement changes in the State sector arising out of the Review of the Centre.

The group comprises:

Angela Foulkes (Chair),
Druis Barrett,
Wayne Brown,
David Caygill,
Paul Cochrane
and Beverly Wakem.

The recommendations of the Ministerial Committee on the Review of the Centre signalled some major changes in the way in the State sector will operate. These include:

better coordination and cooperation by departments and other agencies, especially at the front line;
addressing the fragmented structure of New Zealands State sector;
reinvesting more consistently in the skills of public servants;
and helping re-establish a sense of a career service. It is anticipated that while some specific recommendations of the Review of the Centre would be implemented soon, much of the programme was about longer term rebuilding of capacity in the State sector.

Building

Building consents for 1,986 new dwelling units were issued in March 2002. The trend in the number of new dwelling units has increased by 23% over the 15 months since December 2000.

However, the level of the trend is still below the peak reached in July 1999. For the year ended March 2002, the average number of new dwelling units was 1,775 per month compared with 1,614 per month for the year ended March 2001. This is an increase of 161 units per month or 10%. The change has mainly been driven by an increase in the average number of dwelling units in the Auckland region, up 100 dwelling units per month on average or 16.2% compared with the year ended March 2001.

For further information please contact Peter Conway on 04 8023816 or peterc@nzctu.org.nz

ANNUAL INCREASES IN C.P.I.

QUARTERLY INCREASES IN C.P.I.