CTU Economic Bulletin No. 54

November, 2004

Comment

There is a danger that with a tight labour market, the debate shifts to migration solutions rather than how to lift wages. And with a Budget surplus of such large proportions, there is a danger that the frustration about the slow pace of wage increases shifts to a debate about tax cuts. CTU policy is to support a progressive taxation system. We also know that middle and high-income people pay most of the income tax. Last time there were tax cuts (in the 1990s) only 29 cents in every dollar of the tax cuts went to low and middle income workers. But with government revenue rising because of much greater levels of employment and economic activity, it is no surprise that the tax scale has come under pressure.

The problem is that in order to address bracket creep (or fiscal drag) which is when people slide up into a higher tax bracket as wages rise, it is very difficult not to give those in the top tax bracket a much bigger tax cut than others. This is because their income is in 3 brackets. So if the $38,000 and $60,000 thresholds are changed then those on top incomes get a double benefit compared with those on low incomes. It also needs to be remembered that GST, which is highly regressive, now accounts for about 21% of total tax revenue. GST revenue went up by $1 billion last year but there is no bracket creep there because there is only one rate. So the higher tax revenue is because of more spending and more economic activity.

Apart from the problem that once you give tax cuts in good times it is hard to have tax increases in bad times, it is quite expensive to give meaningful tax cuts. For instance a $10 a week tax cut for the 2 million workers in the labour force would cost over $1 billion each year. If the Reserve Bank reacted to this stimulus by putting up interest rates then for some people the tax cuts get clawed back and only the banks benefit. In the CTU submissions to the Tax Review 2001, we proposed that the first $5,000 is tax free as a way of providing tax relief weighted towards those on low incomes. Since then the Government made tax cuts for low-income families the main priority in the 2004 Budget.

The tax rates in Australia are zero on up to $6,000, 17 cents above $6,000, 30 cents above $21,600, 42 cents above $58,000 and 47 cents above $70,000. On top of this they pay a medicare levy of another 1.5%. Despite moving tax brackets recently, the average income tax rate in Australia is 23.7%. In New Zealand it is 21.1%.

There is also pressure to look at company tax rates. The main suggestion is to lower company tax from 33% to 30%. Company tax is essentially a withholding tax. In other words, if a company paid less tax, then to the extent that was reflected in higher dividends then it would be paid as income tax (probably at 39%). The cost of reducing company tax would be about $500 million but some of this could be offset by more income tax paid as set out above, and perhaps a higher level of economic activity meaning that although there is a lower rate of company tax, there are more firms and more profits and so on. So we should not just automatically oppose company tax changes. However, there are some real problems with lowering company tax. One is that the nominal rate of 33% is not the actual rate. This is because firms can bring forward losses, and in some cases use overseas tax preferences. For instance the Census of Manufacturing in 1995 showed that actual company tax averaged 21% that year, not 33%. Also, the main beneficiaries of lower company tax are foreign companies.

What the Government has signalled is that it wants to focus on targeted measures (which could reduce tax on depreciation and tax on savings and maybe scrap capital gains tax on investments in some managed funds) rather than a simple cut in company tax. So they want to focus on assisting savings - rather than tax cuts. This sounds like good economics but I guess we will have to wait and see if it proves to be good politics. With a large budget surplus, and a complex set of initiatives on income tax (Working for Families) not yet eating into the surplus, and more to come on targeted tax initiatives for business and on savings, it appears relatively easy for opposition parties to push for a basic cut in income taxes and company tax as well as promise to keep the Super Fund and not cut education and health spending. Such simple proposals may cut through the complexity of the Government's mix of assistance for low-income families, businesses and savers.

It is important therefore for unions to be clear on our priorities. We have called for a rebuilding of the state sector. We are seeking improvements in state sector pay and conditions. We support Government having a hands-on role in economic development. We support higher levels of collective investment in skills and education and other initiatives that can build a high wage, high skill economy. We support targeted assistance to those on low incomes. We want incentives so that workers can save more for their retirement and encourage employer contributions. The list continues. So while we shouldn't automatically oppose tax cuts (or proposals to address bracket creep at some appropriate time), the priorities we have articulated mean that there is more to be done before tax cuts become the key focus.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.6% in the September 2004 quarter and were up by 2.5% annually. Food prices increased by 1.1% in the September 2004 year. Unemployment is at 3.8%. The minimum wage is $9.00 for those aged 18 years and over and $7.20 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey for September 2004 were up annually by 3.4% (3.4% in the private sector and 3.5% in the public sector). The average ordinary-time-hourly wage as measured by the QES is $20.25. For the private sector it is $18.98 and for the public sector it is $25.05. For females it is $18.60, for males $21.62. The Labour Cost Index (for September 2004) showed private sector wages up 2.2% for the year, with public sector wages up by 2.4%. 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 0.9% in the June 2004 quarter and 4.4% for the June 2004 year. The official cash rate set by the Reserve Bank is 6.50%.

Employment

Unemployment has fallen to 3.8% - the lowest level in the 18 years that the survey has been one in this form. Out of a working age population of 3,135,500 there are 2,022,000 in work, 79,000 unemployed and 1,037,000 not in the labour force. There are 81,900 underemployed (wanting more hours) and 146,500 jobless (which adds those not currently available for work or are discouraged from seeking work to the 79,000 unemployed). Unemployment for those in the 40-50 year age group is 1.9% compared with 11.7% of 15-19 year olds. P?keh? unemployment is at 2.6%, while for M?ori it is at 8.3% and 7.7% for Pacific peoples. In the September 2004 quarter, 16,000 of the 19,000 new jobs went to women. The number on unemployment benefit at the end of October was 65,085 down 26,000 on a year earlier.

Wages

Most economists are still puzzled by the absence of wage pressures given historically low unemployment. BNZ have recently referred to labour market data highlighting "ridiculous" resource constraint and claim that "pipeline wage pressures are becoming excessive". But the data seems to confirm that in general wages are not rising much, that it is only in areas of acute shortage that we see significant rises and that in any case wage increases are not inflationary so far as they do not exceed CPI plus a productivity factor. HSBC say wages are edging up but "not taking off". But there is increasing debate about which statistics tell the most accurate story about wages.

Ordinary time wages as measured by the Quarterly Employment Survey for September 2004 were up annually by 3.4% (3.4% in the private sector and 3.5% in the public sector). The unweighted average across the sectors showed an average of 4.1% in the private sector and some are claiming that this is a more accurate figure. The average ordinary-time-hourly wage as measured by the QES is $20.25. For the private sector it is $18.98 and for the public sector it is $25.05. For females it is $18.60, for males $21.62. The Labour Cost Index (for September 2004) showed private sector wages up 2.2% for the year, with public sector wages up by 2.4%. Once again, some economists are now tending to focus on some LCI statistics that do not adjust for the quality and type of job - this shows an annual figure of 4.5%. 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, the average rate of increase was 3.9% and the median increase was 3%. The highest annual increases were in trades (3.2%) and construction (3.4%).

Productivity Report

The Report of the Workplace Productivity Working Group was released yesterday. This represents another major opportunity for unions to emphasise the importance of investment in skills, good workplace relations, and smart use of technology alongside good workplace organisation. Worker perceptions of productivity issues are inevitably shaped by their own (often negative) experiences. But the Report acknowledges this head on - so now the effort has to go into an approach to productivity that demonstrates clear benefits to workers and ensures their involvement.

Labour vs Capital - share of income

The labour share of economy-wide income is 42.8%, higher than 41.8% in 2001/02, but lower than the 44.0% average since 1987. Meanwhile, the capital (business) share of income is 44.6%, lower than 46.0% in 2001/02, but above the long-term average of 42.7%.

Household Spending

The Household Economic Survey is done every 3 years. The latest one shows that average weekly household expenditure is $888. Housing is the largest component (24%), followed by food (16%), transport (16%) and household operations (13%). The Survey also contains information on incomes (showing that household income from wages and salaries increased by 18.2% since 2000/01 (this is a combination of more jobs and hours worked per household along with some increase in wages). The Survey also notes that 62% of households have a computer compared with 47% in 2000/01.

Government Accounts

The annual surplus for the June 2004 year has been confirmed as $5,662 million (up by $1,015 million from 2003). Income rose by 7.2% while expenditure went up by 5.5%. With higher levels of economic activity, company tax rose by $989 million while GST went up by $1,085 million. For the first 3 months of this financial year, the Government surplus of $1.5 billion is $300 million ahead of forecast.

Housing

House prices are rising more slowly but were still up by 16% in the September 2004 year. Building consents are up 8% in the October 2004 year. Permits for apartments are driving the latest figures.

Trade

Although the NZ/US dollar exchange rate is making it tougher for exporters, commodity prices and volumes are generally favourable. Exports picked up in October with a $550 million trade deficit lower than expected. Imports were also lower than expected despite higher oil prices. The rise in the monthly imports trend has slowed, with a 1.3% increase over the last six months, compared with an 8.8% increase in the year to April 2004. Commodity prices are up by 19% on a year ago - driven by dairy and meat prices mainly. But in New Zealand dollar terms the rise was a more modest 5.7% for the year. In October 2004, the value of the New Zealand dollar was at its highest level since April 1997, and 10.2% higher than for October 2003. However, the current account deficit is still likely to reach 7% of GDP next year as the terms of trade worsen.

Migration

In the year ended October 2004, there were 81,300 permanent and long-term arrivals, down 13,600 (14%) on the October 2003 year. Over the same period, departures increased by 8,800 (16%) to reach 64,400. The overall result was a net migration gain of 17,000 in the October 2004 year, 57% lower than the net inflow of 39,300 people in the previous October year. In the year ended October 2004, there was a net inflow of 9,300 from the United Kingdom, down 8% on the October 2003 year figure (10,000). There was also a net inflow from China of 3,400, down from 12,400 in the October 2003 year. Overall, net inflow from Asia has reduced considerably, from 26,600 in the October 2003 year, to 11,100 in the October 2004 year. There was a net outflow to Australia of 13,800 in the October 2004 year.

Tourism

October saw visitor numbers up by 9% on October 2003.

Inflation

The cost of capital goods rose 4.1% in the September 2004 year. Producer prices rose by 2.5% (inputs) and 2.4% (outputs) over the year. For the latest quarter input prices were up 1.5% and output prices 0.8% suggesting that not all costs are being passed on. The capital goods price index rose by 4.1% for the September year (mainly reflecting higher costs for construction components).

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