CTU Economic Bulletin No. 46

March, 2004

Comment

A puzzle. Why does Don Brash use Australia as an example of why New Zealand should deregulate and lower taxes? It doesn't seem to strengthen his case one bit. The top tax rate in Australia is 47% compared with 39% here. Their next tax rate below that is 42% which is still higher than our top tax rate. On top of this they pay a medicare levy of another 1.5%. The company tax rate is 30% in Australia but they also have payroll taxes, which vary from 3.65% to 6.85%. Their equivalent of ACC charges is also at 2.47% which is higher than in New Zealand.

Australian workers have a minimum wage of $11.80 ($NZ13.49) which is much higher than the $9.00 rate in New Zealand. Their average wage is 26% higher than here. Over 80% of Australian workers are protected by multi-employer agreements in the form of award minima. Australian workers have had four weeks annual leave for 30 years.

So what is Don Brash saying? That we could have Australian rates of productivity and economic growth if we reintroduced the 1987 Labour Relations Act, put up tax rates, increased the minimum wage, and immediately introduced 4 week's annual leave? Well - no.

What he appears to be saying is that we should have joined the invasion of Iraq (which National supported) so that we could be better placed for a so-called free trade agreement with USA. Also - that although Australia has higher taxes and more labour market regulation ensuring higher wages and a fairer distribution of economic wealth, we should do the opposite. You can't have it both ways Don. If you are going to complain that Australian workers are better off, you can't attack the policies that produce this result.

Meanwhile a Treasury paper on Youth Minimum Wages and the Labour Market has indicated that there is "no robust evidence of adverse effects on youth employment or hours worked" from the large increases in youth minimum wages. The authors say, "in fact, we find stronger evidence of positive employment responses to the changes". This completely contradicts what Anne Knowles, (at that time with Business NZ) said in January 2002 that "the higher the minimum wage is set, the less likely it is that (the less skilled) will gain employment". In the Business NZ submission on the review of the minimum wage later that year, they referred to numerous studies that showed that a 10% increase in the minimum wage leads to between 1% and 4% fall in employment. Using this logic the 41% increase in youth minimum wages analysed in the Treasury paper should have meant a 12% fall in employment. But in fact there was a 10% to 15% increase in hours worked by that age group. In other words - Business NZ were completely wrong - again! I am not arguing that a higher minimum wage will usually increase employment - there will always be a number of factors determining employment levels. But in the recent New Zealand context of strong labour demand, skill shortages, persistently low wages, and a freeze in minimum wages from 1997-99 under National, the increases in the minimum wage have been a very positive measure.

Finally, business complains about regulations that prevent the free market from operating. But they conveniently forget to mention that all companies are protected by a hugely significant regulation - limited liability. That means that a firm can owe someone a million dollars and not have to pay it. The owners of the firm do not have to give up any personal assets to pay the firm's debts (unless there is some personal security arranged). This is a sensible protection to ensure that businesses take risks, employ people, enter into contracts and so forth. But it is hypocritical of business to attack very minor regulations in the labour market, when they have such a high level of protection themselves.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.7% in the December 2003 quarter and were up by 1.6% overall in 2003. The next CPI figure is out on 19th April. Food prices rose by 0.1% in the February 2004 year. Unemployment is at 4.6%. The minimum wage (from 1 April) is $9.00 for those aged 18 years and over and $7.20 for 16/17 year olds and trainees. Meanwhile, ordinary time wages as measured by the Quarterly Employment Survey for December 2003 were up annually by 2.7% in the private sector and 4.6% in the public sector. The Labour Cost Index (December 2003) showed private sector wages up 2.1% for the year, and public sector by 2.8%. 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, the average rate of increase was 3.9% and the median increase was 3%. Economic activity (GDP) increased by 0.6% in the December quarter 2003 quarter and 3.5% for the December 2003 year. The official cash rate set by the Reserve Bank is 5.25%.

GDP

Economic activity increased 0.6% in the December 2003 quarter, following increases of 1.6% and 0.3% in the September and June 2003 quarters. For the year ended December 2003, the economy grew by 3.5%. GDP per capita increased 1.8% in the December 2003 year, following a 2.8% increase in the previous December year. Increased investment, consumer spending, dairy exports and tourism were key factors in the GDP figure for the December quarter. Annual expenditure on durable goods was up by 8.5% for the December 2003 year. The increase in business investment this quarter was largely due to a rise in spending on plant, machinery and equipment, up 10.6%, following a rise of 0.4% in the September 2003 quarter. Much of this increase in investment in plant and machinery was met from imports. Residential construction although well up on the previous year has also showed signs of slowing. There have been some comments about the growth outlook for the next year or so. BNZ predicts growth below 2% for the March 2005 year. BERL regards some of these predictions as unduly pessimistic. The main downside factor is the flow-on effect of the high dollar. But on the upside, there are signs of better export volumes, improvement in some commodity prices, a boost to domestic consumption as the Budget package for low income families takes effect, and ongoing high labour demand. The consensus at the moment seems to be that the economy is slowing but may have a soft landing before picking up again.

Trade

The current account deficit stands at 4.4% of GDP (slightly down). Although the dollar has had a major impact on earnings, export volumes are up by 6% in the last year (although this could be a bit inflated). Import volumes are up by 13%. The annual trade deficit was $3.5 billion, much worse that at the same time last year ($1.7 billion). As an example, beef export volumes were up by 15% in the September year but returns were down by 9% due to the exchange rate effects. Fonterra are forecasting a 15% drop in the dairy payout to $3.50 per kilogram for the year to March 2005. This will take about $750 million out of the domestic economy.

Government Finances

The operating surplus for the first 7 months (to January 2004) was $4.9 billion, which is $919 million higher than forecast. This is largely due to higher revenue, and greater investment income from assets held by ACC, GSF and EQC.

Benefits Cost of Living Adjustment

Benefits, superannuation and student allowances go up by 1.55% from 1 April 2004. I have included some examples so you can see the current level of benefits. For a single unemployed person aged under 20 years living at home, receiving the Unemployment Benefit, up $1.67 to $109.43. For a single unemployed person aged between 20 to 24 years, receiving the Unemployment Benefit, up $2.09 to $136.79. For a married couple receiving the Unemployment Benefit with no children, up $4.18 to $273.58. For a single person over 18 receiving the Invalids Benefit, up $3.13 to $205.18. For a sole parent with one child, receiving the Domestic Purposes Benefit, up $3.59 to $235.12. For a single student aged over 25 years studying away from home receiving a Student Allowance, up $2.51 to $164.16. For a married couple who both qualify for New Zealand Superannuation, up $5.84 to $383.22. The new Community Services Card thresholds now range from $19,741 per year for a single person sharing accommodation to $51,813 per year for a family of six people.

Life Expectancy Rises

The average life expectancy of New Zealanders continues to rise. Based on mortality in 2000-2002, a new-born girl can expect to live 81.1 years and a new-born boy 76.3 years. These represent gains of 1.4 years for females and 1.9 years for males since 1995-1997.

Retail

Sales surprised on the upside for January (up 2.9%) but this probably means a correction for the next month. Retail sales were up by 6.9% for the January 2004 year.

Housing

Residential building was up by 23% in value for the December 2003 quarter compared with December 2002 quarter. Consents for 30,923 new dwelling units were issued in the year ended February 2004, the highest total for a February year since 1976.

Paid Parental Leave

The Government has announced an increase to 13 weeks from 1 December 2004 and 14 weeks from 1 December 2005. The qualifying period will be reduced to 6 months also. This all depends on legislation being passed in time of course.

Electricity

With the cancellation of Project Aqua, the energy options for New Zealand are brought into sharp relief again, as they were when the Maui gas projections were reduced. Meanwhile, a lot of rain and full lakes meant that the spot price in late February was just 0.17 of a cent compared with 25 cents or more during the last electricity crisis.

Migration

In the year ended January 2004, there was a net migration gain of 33,300 which was 15% lower than the net inflow of 39,000 people in the previous January year. This resulted from 91,500 permanent and long-term arrivals (down 4,700), and 58,200 permanent and long-term departures (up 1,000) in 2004. Compared with the January 2003 year, New Zealand citizen arrivals were up 2,200 and New Zealand citizen departures were down 2,400. In contrast, non-New Zealand citizen arrivals were down 6,900 and non-New Zealand citizen departures were up 3,400. There were net inflows from China (10,500), India (4,700) and Japan (2,100) in the year ended January 2004. There was also a substantial net inflow from the United Kingdom (10,500), up 63% on the January 2003 year figure (6,400). Conversely, there was a net outflow to Australia of 10,200 in the January 2004 year, compared with net outflows of 11,700 in the January 2003 year and 21,000 in the January 2002 year.

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