CTU Economic Bulletin No. 39

The CTU monthly commentary - July, 2003

Comment

The Government will soon consider the Post-2005 Tariff Review. This review has been taking place for over a year now. The CTU has made several submissions during this process. While we are pleased that a Labour/Alliance Government imposed a 5-year tariff freeze from 2000, there are major concerns about the impact of any reduction in current tariffs. One of the reports received by the Government notes that the removal of tariffs will result in a 17% fall in domestic market share in the clothing sector and 22% in footwear.

Back in 1987 clothing, footwear and textile tariffs were between 40% and 65%. By 1990 they had been cut to between 25% and 40%, by 1995 they were down to between 21% and 35% and by 1999 to between 12.5% and 19%. Hours worked fell by 57% from 1986 to 2001. In other words there has been a massive effect on jobs. The CTU has argued that a further cut in tariffs will undermine the industry development strategy just being established in this sector. We have also argued that there is little or no likely gain for consumers compared with the risk of job losses. This will impact particularly on women and M?ori.

We have also pointed out that it is foolish for New Zealand to unilaterally lower tariffs when exporters of New Zealand made clothing and textiles are facing high tariffs. In fact the Non Agricultural Market Access negotiations through the WTO are discussing lowering tariffs for all countries so why should New Zealand go it alone yet again. The APEC Bogor (watch the pronunciation on that one) goals of removing all tariffs (or achieving free trade which could be interpreted as retaining some tariffs) in developed countries by 2010 lack any credibility. But even if that does come about, there is no reason for New Zealand to act unilaterally. Australia seems to be moving towards at least a 10% tariff on clothing and textiles for 2010 and they are an APEC signatory.

A recent book by NZIER on New Zealand's Trade Policy Odyssey observes (p.10) that "one of the misconceptions ... is that New Zealand is listened to on the international stage because of its recent moves to bring about a deregulated economy. It is thought that New Zealand is able to use the 'moral high ground' thus gained to somehow persuade, browbeat, or otherwise obtain concessions from larger, more powerful nations". The authors (Chris Nixon and John Yeabsley) argue that "this could not be further from the truth".

A sensible decision would be to recognise that due to the adverse employment effects, the lack of reciprocity in a unilateral decision to remove tariffs, the minimal gain if any to consumers, and the importance of the industry development strategy, the only decision can be to keep on the current tariffs and commence another review after 2008.

Meanwhile the Government coffers continue to fill. The operating surplus for 11 months ending 31st May 2003 was $2,939 million. However, the OBERAC measure which takes out the effects of investment asset movements as well as GSF and ACC liabilities, is $5,601 million. The Government had previously argued that the OBERAC is the most relevant measure but is now saying we should focus on the smaller operating surplus. With net debt down to 14% of GDP and over $5 billion in the operating surplus, the Government can hardly say that the surplus is cyclical (depending on the ups and downs of the economic growth cycle) rather than structural. This means that not only can the Government afford to spend more, but assuming the Reserve Bank will be cautious about large interest rate cuts, there is room for an economic stimulus.

Ideally, they would bring forward to Christmas (as one journalist has suggested) the tax cuts for low income working families rather than wait for next year's Budget. They could also afford to address the low levels of benefits. No doubt the private member's Bill promoted by Sue Bradford for a universal child benefit of $15 a week for the first child, and $10 a week for all other children, will focus attention on benefits in general.

No doubt the Government finds it tiresome when every interest group constantly makes helpful suggestions on how to spend the surplus. But the claims for those on the lowest incomes should rank very high in the Government's considerations. That still leaves room for better pay and conditions in the state sector, more spending on the capital side in terms of infrastructure and a number of other initiatives.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices did not rise in the June 2003 quarter and are up by 1.5% in the June 2003 year. Food prices fell by 0.4% in June and were up by 0.6% in the June 2003 year. Unemployment is at 5%. Ordinary time wages as measured by the Quarterly Employment Survey (February 2003) were up by 2.5% in the private sector and 1.9% in the public sector. The Labour Cost Index (March 2003) showed private sector wages up 2.2%, and public 2.5%.

The key statistic for unions to note probably is that the LCI shows that for those firms where there were wage increases in the last measured quarter (15% of those surveyed), the average rate of increase was 3.9% and the median increase was 3%. The next set of statistics on wages and employment are out on 5th August. The increase in GDP for the March quarter was 0.6% and 4.3% for the March 2003 year. The official cash rate set by the Reserve Bank is 5%.

CPI

There was no measured increase in consumer prices for the June 2003 quarter. The most significant upward contribution to the CPI came from the purchase and construction of new dwellings. Less significant upward movements came from rents and electricity. The most significant downward items were lower prices for petrol and used cars. The annual figure fell from 2.5% to 1.5% because the June 2002 quarter was 1% which dropped out of the annual statistic this time.

The zero change is due to some one-off factors so there will probably be a slight correction next quarter. But when the next quarter figure is known (15th October) CPI is still likely to under 2% on an annual basis. Unless CPI rises by more than 0.5% in the September quarter, annual CPI will stay at 1.5%. I have sent out both the table of CPI changes from 1987 and the CTU Real Wage Calculator.

Interest Rates

The Reserve Bank has reduced interest rates (official cash rate) to 5% from 5.25%. The CTU called for a 0.5% cut because of the damaging effect on the export sector of the high dollar, the very low annual inflation, and the need for lower cost of capital for firms to invest. Our concerns are that there will be significant downstream employment effects from high interest rates holding up a high dollar. The Reserve Bank has said that in considering its next move, it will be watching the export sector, the exchange rate and the housing market.

Trade

The June monthly trade deficit was $230 million. This could be affected in part by a delay in some large shipments. However, the June year deficit of $2,883 million reflects lower prices as well as the high dollar. Import prices fell by 8.8% over the year but volumes were up by over 8%. There was a big surge in new and used car imports. Export returns are down by 13.6%. Meanwhile Ports of Auckland has recorded a 9.5% increase in containers for the year.

Work Stoppages

There was one work stoppage that ended in the March 2003 quarter with 42 stoppages in the year.

Student Debt

Student debt has now topped the $6 billion mark. The student loan scheme, which was introduced 12 years ago, has grown by a billion dollars in the past year and is forecast to reach $20 billion by 2020.

Tourism

International tourists rose by 6.9% in June and are down by only 3% now on June 2002. This indicates a bounce-back from the SARS induced decline.

Housing

The median house price is $210,000. In Auckland the median is $289,000 compared with June 2002 when it was $261,800. The average house price in Auckland is $370,837. Home affordability dropped 3.2% in the June quarter as house price rises were greater than the combined effect of interest rate falls and slightly higher wages. The fall over the year in home affordability is 6%. Consents were issued for 29,068 new dwelling units for the year ended June 2003, up 6,535 or 29% when compared with the year ended June 2002. The total number of new dwelling units for the year ended June 2003 is the largest June year total recorded since 1976.

Retirement Savings

The CTU and a number of affiliates participated this month in a valuable forum on savings. The CTU is intending to be an active participant in ongoing initiatives to address barriers to employment-based retirement savings. We know that pay rates need to be higher before many are able to save. But there are also problems around arranging deductions, reducing costs for employers to be in schemes, tax rates on employer contributions and so forth. Clearly, unless employers are prepared to contribute, the growth in employment-based schemes will be limited. The important thing is that there is now a willingness by many groups to get together and try to find some solutions. The previous CTU Economist, Peter Harris, is leading a lot of the research, analysis, and facilitation in this process.

Retail Sales

May retail sales were up by 0.7% and sales for the year ending May 2003 were up by 5.2%.

Migration

In the year ended June 2003 there were 97,200 permanent and long-term arrivals, up 4,600 or 5% on the June 2002 year. Over the same period departures fell by 5,100 or 9% to 54,700. The overall result was a net migration gain of 42,500 in the June 2003 year - 30% higher than the net inflow of 32,800 people in the previous year. Compared with the June 2002 year, New Zealand citizen departures were down 6,700, and non-New Zealand citizen arrivals were up 2,800. There were significant net inflows from China (14,800), India (6,100), Japan (2,300), South Africa (2,100) and Korea (2,000) in the year ended June 2003. There was also a substantial net inflow from the United Kingdom (8,500), 72% higher than the June 2002 year figure (4,900). Conversely, there was a net outflow to Australia of 9,700 in the June 2003 year, compared with net outflows of 13,700 in the June 2002 year and 31,000 in 2001.

Mining Exports Up

Mineral and coal exports were $519 million in 2002, up from $306 million in 1998. Coal exports doubled in this period.

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