CTU Economic Bulletin No. 42

October 2003

Comment

The desperate coup that elevated Don Brash to lead the National Party heralds a more concerted push to win business confidence and investment in a political alternative to a Labour-led Government. Don Brash is polite, hard-working, and has a resolute determination to introduce a policy framework based on lower taxes (at least for those on high incomes), low regulation, privatisation, individualism and trickle-down economics. For an impression of what Don Brash supports, have a look at these quotes from his Orewa Rotary speech earlier this year.

Abolishing the unemployment benefit completely could not be done in isolation, "but it might well be done in conjunction with other measures, such as having local governments become employers of last resort - offering a job to anybody who turned up at, say, the local post office at 8am, with payment for that day's work at the end of the day, in cash".

"I am absolutely sure we ought to be making better use of the private sector in providing hospital care."

"As long as the state is funding education, so that all children get an opportunity to be educated to the best of their ability, we should not be afraid to use private education providers."

"We have seen a whole series of measures introduced - the Local Government Act, the Health and Safety in Employment Act, the Kyoto Protocol, and all the rest - which will reduce the chances of our increasing our growth rate in any sustainable way."

"What we desperately need is political vision and political leadership - not the mediocre and complacent management which panders to every union official, every Maori radical, every Greenie that we have now."

If we look at two particular areas where Don Brash is also on the record - tax, and minimum wages - we can see the absurdity of Don Brash's claims. He strongly opposed the increase in the top tax rate to 39 cents and wants it reduced. His main argument is that higher taxes harm economic growth. But the fact is since the top tax rate increase, the rate of economic growth has actually got better. Don Brash also opposes increases in the minimum wage. In the last 4 years we have had regular increases in the minimum wage and unemployment has kept falling. A recent paper by Treasury and the Labour Department analysts have provisionally found that a 69% increase in the minimum wage for 18 and 19 year olds in 2001 and a 41% increase in the minimum wage for 16 and 17 year-olds over a two year period had no adverse effects on youth employment or hours worked. In fact hours of work increased for 16-17 year olds relative to other age groups.

Of course, economic policy implementation occurs within a context, and is affected by both good management and good luck. So the current Government has had a happy coincidence of strong labour demand, and for a while a low dollar and high commodity prices, alongside the introduction of many of its policies. But even if we do not argue that a higher minimum wage resulted in more employment, or higher taxes helped growth, we can say that these policies did not have the negative effect on the economy that Don Brash (and ACT, Business Round Table etc) predicted. But this will not deter them from arguing that the policies of 1984-99 were correct and that we should get back to "unfinished business" as Roger Douglas advocated. The media will no doubt give Dr. Brash something of an armchair ride for a while, but hopefully they will analyse not only the incredible damage caused by the neo-liberal policy prescription that Brash advocates, but also acknowledge that his predictions about current policies have also been shown to be absolutely mistaken.

Economic Snapshot

This is a snapshot of key indicators for unions. In general, the New Zealand economy continues to be lopsided. The domestic economy bounces along due to housing, immigration, credit card purchases and so forth, whereas the overall export sector, due to a high dollar, is winding down from previously high levels in 2001 and 2002 that were caused by a coincidence of high commodity prices and a lower than average exchange rate. Consumer prices rose by 0.5% in the September 2003 quarter and are up by 1.5% in the September 2003 year. Food prices did not increase in the last year. Unemployment is at 4.7%. Meanwhile, ordinary time wages as measured by the Quarterly Employment Survey (May 2003) were up by 4.2% in the private sector and 2.3% in the public sector. The Labour Cost Index (June 2003) showed private sector wages up 2.2%, and public 2.6%. 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 (14% of those surveyed), the average rate of increase was 3.8% and the median increase was 3%. Economic activity (GDP) increased 0.2% in the June 2003 quarter, following increases of 0.6% and 0.8% in the March 2003 and December 2002 quarters. For the year ended June 2003, the economy grew by 4.0%. The official cash rate set by the Reserve Bank is 5%.

A Structural or Cyclical Surplus?

Debate continues on the size and nature of the operating surplus. As discussed in the last few CTU Economic Bulletins, the Government continues to run a strong surplus on the operating side of the accounts, and low debt on the capital side. The OBERAC [Operating Balance Excluding Revaluations and Accounting Changes] has come in at $5.6 billion for the 2002/03 year, which is around $1.5 billion above the budget night forecast and reflects higher tax revenues, delays in spending and higher State Owned Enterprise and Crown entity surpluses. If we look at the Core Crown Cash Flows from Operations, the Government actually had $4.85 billion net cash flows from operations, they applied net advances of $896 million to student loans, housing corporation, Tranzrail, Health Boards etc, another $1.68 billion on capital expenditure in the health sector and NZ Super ($1.2 billion), leaving $1.2 billion available for debt repayment. But gross debt levels are now at their lowest since 1971 and net Crown debt (about 13% of GDP) is around $1.3 million lower than projected at budget time. So if there is a figure we could call a structural surplus, it is the $1.217 billion left after these capital payments, advances, and prefunding retirement savings.

CPI

The Consumers Price Index increased by 0.5% in the September 2003 quarter and 1.5% in the September 2003 year. Housing group prices rose by 2.0% in July-September, the most significant upward contribution to the CPI for the fifth consecutive quarter. There were also increases in petrol, alcohol and electricity. These increases were partly offset by lower international airfares. On an annual basis, the CPI increased by 1.5%. The most significant contribution to the annual change of 1.5% also came from housing with a 6.9% rise in prices for the purchase and construction of new dwellings. Inflation in the export sector is negative at -0.9% for the year. However, in the domestic sector, inflation is 4.1%. Food prices recorded no overall change in September 2003, nor in the year from September 2002 to September 2003. Upward contributions came from grocery food, soft drinks and confectionery (up 1.8%) and restaurant meals and ready-to-eat food (up 2.1%). These were offset by price falls for fruit and vegetables (down 5.6%) and meat, fish and poultry (down 3.4%).

Incomes Survey

The NZ Incomes Survey showed that average hourly earnings for wage and salary workers rose by 6.9% between the June 2002 and June 2003 quarters to reach $17.82. Average hourly earnings for females increased by $1.22 to $16.57, while average hourly earnings for males increased by $1.08 to $19.02. However, this is a household survey, and presents a different picture from the Labour Cost Index and the Quarterly Employment Survey figures on wages. For instance the Labour Cost Index shows that overall labour costs increased 2.2% from the June 2002 quarter to the June 2003 quarter. There are several possible explanations for the difference. The Incomes Survey is picking up the effects of more employment in higher paid jobs. It is also perhaps picking up some "cash economy" effects. The Labour Cost Index can miss increases in pay that occur when a job is reclassified. So while the LCI may understate wage increases, there is no way that most workers have received anything like a 6.9% increase in the last year. The next detailed set of wage statistics is due on 5th November with the LCI and QES.

Housing

House prices continue to be a major source of concern with many more people now being priced out of home ownership. The ASB has noted however that the average house price has increased by around 26% since late 1997 but average household income has also gone up by over 20% over that time, and interest rates have come down by around 30%. But the reality is that many new home buyers simply cannot contemplate the higher prices currently in the housing market. The national median price for September was $215,000, the same as in August. The Auckland median price showed a reduced rate of growth, rising from $315,000 in August to $319,000 in September, but in Wellington there was a 6% rise in the median from $225,000 in August to $238,750 for September. Other regions to show significant increases included Canterbury/Westland, up from $162,500 to $170,000 and Otago with an increase in the median selling price from $132,500 to $142,500. In terms of new housing, consents were issued for 2,989 new dwelling units in September 2003. This is the highest number of new dwelling units recorded for a September month since 1973. Since April 2003, there has been a steady rise in the number of new dwelling units. The total value of consents for all buildings was $8,642 million, up $1,128 million or 15% when compared with the year ended September 2002. In the rural property market, the BNZ has observed that the impact of low financing costs, poor alternative returns and speculative behaviour are propping up rural property prices. They note that at a time when returns to the underlying asset are under pressure this suggests a degree of sectoral vulnerability.

Trade

The provisional value of merchandise imports for the year ended September 2003 is $31,942 million, a decrease of 0.7% from the September 2002 year. The estimated value of merchandise exports for the same period is $28,764 million, resulting in an estimated trade deficit of $3,178 million. The annual trade deficit was $3.15 billion. This compares with a deficit of $481m a year ago, i.e. the trade balance has deteriorated by around $2.7bn over the past year (a little over 2% of GDP). The value of imports for the three months to September was 2.5% lower than a year earlier. Allowing for price movements, import volumes are estimated to have grown by around 10% over the past year. The value of exports during the three months to September was 7.2% lower than a year earlier. Allowing for price movements, export volumes were 2-3% higher than a year earlier. Some (e.g. Deutsche Bank) are forecasting that the dollar which hit a 6 year high in October will go up to 63 cents against the US dollar over the next year. Meanwhile Ports of Auckland report that total container volumes are up by 7% for the September 2003 year.

Tax Issues

The Minister of Finance has signalled that foreigners and returning New Zealanders who have been away at least ten years may be given a tax holiday on their overseas income in a measure to assist businesses to attract talented people to work in New Zealand. The provision would apply only to people who came here to work as employees and only to income earned offshore. Income earned in New Zealand would still be subject to tax. Meanwhile, there has been another slight change to the new tax arrangements which can be applied to employer superannuation contributions. The Government had introduced a Bill reducing the tax rate to the marginal tax rate. However, they have now agreed that where an employer's contribution tips an employee into a higher tax bracket, the portion of the employers contribution which falls below $38,000 (for example) will be taxed at 21 % not 33 %.

Banking

The Australian-based ANZ Bank has bought the National Bank for over $5.6 billion to create the countrys largest bank, with over a third of the banking market. Unlike the proposed Qantas-Air New Zealand alliance, this major purchase did not excite the same reaction although concerns have been expressed by Finsec and numerous others.

Retail sales

Actual retail sales for August show a 4.1% increase on August 2002. Seasonally adjusted sales were up 0.6% in August 2003 compared with July. There is a suspicion that this overstates the increase due to a change in the way new businesses are incorporated in the figures.

Tourism

Visitor numbers for August 2003 showed 2% growth over August 2002, with visitor numbers for the year ended August 2003 showing an increase of 4%. The tourism sector generates close to 10% of New Zealands GDP and is directly and indirectly responsible for one in eleven jobs.

Student Loans

The recent Student Loan Annual Report noted that 326 people had their student debt written off in the 2002/03 year to the tune of $3.5 million.

Work Stoppages

Five work stoppages ended in the June 2003 quarter. Thirty-one work stoppages ended in the June 2003 year, which involved some 18,179 employees. In comparison, 46 work stoppages involving 24,580 employees ended in the June 2002 year. The health and community services industry contributed 10 of the 31 work stoppages ending in the June 2003 year. Six stoppages were recorded in manufacturing, four in transport and storage, and three in education. While health and community services had the highest number of work stoppages, education recorded the highest number of employees involved and loss of person-days of work. Manufacturing recorded the highest estimated loss in wages and salaries. The education industry contributed about 82% of the total 18,179 employees involved. Eighteen private sector stoppages and 13 public sector stoppages ended in the June 2003 year. The number of workers involved and the person-days of work lost were higher in the public sector than in the private sector. The loss in estimated wages and salaries was higher in the private sector than in the public sector.

Migration

In the year ended September 2003, there was a net migration gain of 40,400 - 9% higher than the net inflow of 37,100 people in the previous September year. This resulted from 95,500 arrivals (up 100), and 55,100 departures (down 3,200) in 2003. Compared with the September 2002 year, New Zealand citizen departures were down 5,400 and New Zealand citizen arrivals were up 2,200. There were significant net inflows from China (13,000), India (5,500), Japan (2,300), Fiji (2,000), South Africa (1,800) and Korea (1,700) in the year ended September 2003. There was also a substantial net inflow from the United Kingdom (9,600), up 64% on the September 2002 year (5,900). Conversely, there was a net outflow to Australia of 9,300 in the September 2003 year, compared with net outflows of 12,800 in the September 2002 year and 28,400 in the September 2001 year.

ACC Levies

ACCs Board has recommended no change in key average levy rates and reductions of 6.8% for Motor Vehicle Account for the 2004/05 year. The Self-Employed levy would fall 2.2%. The Employers and the Earners levies would remain unchanged from current rates. The ACC says that its ability to again absorb cost increases is related to its strong investment performance and to a recent upward trend in interest rates.

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