CTU Economic Bulletin No. 61

July, 2005

Comment

Remember just a few months ago when the big story about workers was that their wages were too low? We saw bus drivers out on strike for 6 days with editorials agreeing they should be paid more and support from customers and the public alike. The reaction to the CTU Fair Share campaign and the EPMU "5% in 05" was also very positive. But now the media focus has shifted to the other component of take-home pay - tax.

The preoccupation with the fiscal surplus and tax cuts has also meant that there is very little comment at the moment on the size of the employer surplus compared with wage increases. In fact, business has never had it so good. Directors' fees are up by 20.5% in the last year. A recent Reserve Bank Bulletin paper revealed that the average increase in profit among the country's 160,000 corporates has been 11% a year from 2000 to 2004. Compare that with wage increases measured by the Labour Cost Index of 2.1% a year over that period. And the National Business Review Rich List had to increase their qualifying threshold this year to $25 million as otherwise there would have been many more than the 205 individuals and families who made it on to the list.

Yet employers are calling for a cut in company tax and many also support lower income tax. Even when employers got a backdated cut in depreciation of $250 million a year in the 2005 Budget, they shrugged it off as a minor adjustment.

Unions have argued consistently (see CTU Economic Bulletin March 2004) that the key difference with Australia is the 25% wage difference whereas taxes are roughly the same at just over 20 cents in the dollar on a wage based on the average NZ wage. The Government for its part has increased the minimum wage by 35.7%, increased pay in the state sector (particularly for some groups), and passed an employment law to promote improved collective bargaining outcomes, which we are starting to see now. But what about private sector employers? What have they done to address low pay? They have enjoyed a significant lift in profits. Management salaries and Directors fees have increased significantly. Although real per capita incomes are up 11 per cent since the March 2000 quarter, that is mainly from more jobs and hours worked. Yet wages have not been rising to a significant extent. And now of course, the National Party are promising these same workers who have missed out on a decent wage rise a boost in pay via a tax cut.5

It seems that every National Party policy is a tax cut. Early childhood education policy? Tax cut. Student loans? Tax cut. And of course after promising to announce National Party income tax policy a few days after the election date announcement, Brash is dragging it out. Maybe he is waiting for the pre-election fiscal update on 18th August. No doubt this aims for maximum electoral impact. It keeps everyone guessing for now. It allows National more time to finesse the announcement to respond to all the criticisms. And it gives voters less time to look at the consequences or details of any tax cuts. Compare this with Labour in opposition before the 1999 election when they produced a fully costed alternative budget.

We have pointed out that workers will pay twice for major tax cuts. The first way is through a combination of less spending on health, education and other public services, higher interest rates, and a constrained government. Labour have pointed out that a tax cut from 33 to 30 cents for both company tax and the middle income band gives a worker on the average wage $1.15 a week. But that costs the equivalent of 567 primary school teachers, plus 449 secondary teachers, plus 176 police, plus 481 nurses and 127 doctors, plus 28 social workers. If the tax cuts are higher, then the ability to fund teachers, nurses, police etc reduces accordingly.

The second is that tax cuts hide the real agenda which is to attack wage rates and employment conditions through an Employment Agreements Act (ECA version 2), axing time and a half and so on. If someone on the average wage received an increase of 5% this year, 4% next year, and 3% the year after, their take home pay would be up by around $65 a week. But if the tax cut bribe (whether it is $10, $20, $30 or $50 or more a week over a period) gets National into Government, then the chances of getting such wage increases reduces.

I have shown later in this Bulletin what happened to collective bargaining on wages under 5 years of the Employment Contracts Act compared with 5 years under the Employment Relations Act. Sure, we are not happy with pay increases in recent years, but it was much worse under the ECA.

Employer organisations and many employers no doubt relish the prospect of an election campaign that focuses on tax cuts from Government, rather than the need for wage increases from employers and a minimum code from a worker-friendly Government. It is our job to keep arguing that workers need wage increases, not tax cuts that give a little and take a lot.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.9% in the June 2005 quarter and were up by 2.8% annually. Food prices increased by 1.5%% in the June 2005 year. The next CPI update is on 17th October. Unemployment is at 3.9%. Maori unemployment is 8.8% and Pacific peoples 6.7%. The minimum wage is $9.50 for those aged 18 years and over and $7.60 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey for March 2005 were up annually by 3.5% (2.9% in the private sector and 6.6% in the public sector). The average ordinary-time-hourly wage as measured by the QES is $20.51. For the private sector it is $19.07 and for the public sector it is $26.40. For females it is $18.87 which is 86.4% of the male average wage of $21.85 an hour. The Labour Cost Index (for March 2005) showed private sector wages up 2.5% for the year, with public sector wages up by 2.6%. The key statistic for unions to note probably is that the LCI shows that where there were wage increases in the last measured quarter, the average rate of increase was 4.2% and the median increase was 3.1%. The next update of wages data is on 8th August. Economic activity (GDP) increased by 0.6% in the March 2005 quarter and 4.2% for the March 2005 year. The official cash rate set by the Reserve Bank is 6.75%. The next review of the cash rate (and Monetary Policy Statement) is on 15th September (two days before the election).

Consensus forecasts published by NZIER

Period	% increase March 2006 yr	% increase March 2007 yr
GDP	2.4	2.3
CPI	2.9	2.6
Wages (QES)	3.4	3.8
Unemployment	4.1	4.4

Wage increases - ECA and ERA

The table below shows the average percentage wage increase in collective agreements for each of two 5-year periods. It shows that in the 5 years after the Employment Contracts Act, there were 26.2% of collective agreements with either a decrease in pay or no pay increase. (In fact, 7% of collective agreements showed actual wage decreases in 1992). This compares with 9% receiving no pay increase in the 5 years under the Employment Relations Act. In the 5 years after the Employment Contracts Act, wage increases of 2% or more occurred in 33.6% of collective agreements. However, in the 5 years after the Employment Relations Act, wage increases of 2% or more occurred in 70.6% of collective agreements. If we added in the cost to workers of all the other things they lost - overtime rates, penal payments, service pay etc, then the contrast would be much worse.

% increase	Negative	Zero	0.1 to 1.9	2.0 to 4.9	5 to 9.9	10 or more
1992 to 1996	3.4	22.8	39.4	29.8	2.4	1.4
2001 to 2005	0	9.0	20.2	64.4	6.0	0.2

600 leaving a week

The National Party has made many statements concerning 600 New Zealanders leaving each week for Australia. But in National's last year in Government, the net loss to Australia was higher than it is now. In fact, the level of emigration to Australia has varied considerably over the last few decades. Departure levels have been higher than this year both under National (825 a week in 1980) and Labour (858 in 1989). In the March 1999 year, there were 30,323 permanent and long-term departures to Australia. That is 583 a week. There were 10,254 arrivals. The net outflow was 20,069. There were 33,019 departures in the June 2005 year. That is 635 people a week. But there were 13,742 arrivals. The net outflow was 19,277. This is nearly 800 fewer people than in 1999. In other words, net migration to Australia was worse under National's last year of Government than it is now.

What explains our productivity gap with Australia?

A recent Treasury paper states that between 1995 and 2002 some 70 percent of the difference in the growth of labour productivity is explained by a lower rate of growth of capital intensity in New Zealand. In the period 1990 to 2002, the amount of capital per hour worked grew very modestly in New Zealand. In contrast capital per hour worked rose by about 25 percent in Australia. In 1978, New Zealand and Australian workers had about the same amount of capital per hour worked. By 2002, capital intensity in Australia was over 50 percent greater than in New Zealand. The price of labour relative to Australia was very comparable in the late 1980s. By 2002 it had fallen to about 60% of the level in Australia. The paper observes that with labour relatively cheaper in relation to capital than in Australia, it appears that New Zealand firms opted for a lower level of capital intensity. An earlier Treasury paper is more specific. It says that between 1992 and 1996 the relative price of labour to capital fell by 22%. The paper adds, "this occurred shortly after the introduction of the Employment Contracts Act (1991) and welfare reform".

National supports the Irish model - yeah right!

John Key from the National Party has recently said he thinks we could learn from the Irish model of economic development. Actually John, we've been saying that also. But, National only seem interested in the lower nominal company tax rate in Ireland. In fact, company tax in New Zealand of 33% is offset against personal income tax (imputation). But the Irish company tax of 12.5% is on top of lincome tax. This means that for many companies in New Zealand, shareholders and owners would pay more tax, not less with the Irish system. In Ireland there is also a capital gains tax, capital acquisitions tax (which includes inheritance tax), and stamp duties on transfers of various types of property. As a member state of the EU, Ireland levies VAT (like our GST), currently at a rate of 21%. The top income tax rate is 44%. National also did not mention the fact that the minimum wage in Ireland has been put up to 7.65 Euros (NZ$13.60 or 43% higher than our current minimum wage), tertiary education is free, and also that the entire Irish model is based on cooperation between government, business and unions whichever government is in power.

Unemployment

Between March 2000 and March 2005 the economy added on some 260,000 more jobs, of which 218,000 were full-time and 42,000 part-time. Meanwhile a recent report showed that the number of Pacific people on the unemployment benefit in Auckland is down by over 50 percent (from 5,532 to 2,622) since July 2003.

Government Surplus

For the 11 months ending in May, the cash surplus was $3.3 billion and the operating balance was $7.5 billion. Gross debt was $35.4 billion (24.2% of GDP) and net debt $11.2 billion. Significant interest will now focus on the PREFU (pre-election fiscal update) which is on 18th August.

Consumer Price Index

From the June 2004 quarter to the June 2005 quarter, the CPI rose 2.8%. This follows rises of 2.8 percent in the year to March 2005 and 2.7 percent in the year to December 2004. The June quarter increase was 0.9%. For the June 2005 quarter, the most significant upward contributions to the movement in the CPI came from price increases for petrol (up 7.1 percent), and the purchase and construction of new dwellings (up 2.2 percent). The most significant downward contribution came from lower prices for meat, fish and poultry (down 1.8 percent) and leisure and recreation (down 1.0 percent). I have already sent out a list of all CPI increases from 1987 and the updated CTU Real Wage Calculator.

Paid Parental Leave Pay Goes Up

Maximum paid parental leave payments increased from 1 July 2005. Eighty seven per cent of people on paid parental leave currently receive the maximum rate, which increased from $346.63 to $357.30 a week. More than 45,000 people have benefited from paid parental since it was introduced.

Per capita income puts us at 35th in the world

New Zealand - in terms of gross national income per head of population and expressed in US dollars - is in 35th place in the world on $20,310. This puts us one rung below Spain. The richest country in the world is Luxembourg, with a per-capita income of $56,230. Norway, Bermuda and Switzerland are next. The United States is in fifth place with $41,400. The rest of the top ten are Denmark, Liechtenstein, Iceland, Japan and Sweden. Australia is in 24th place with just under $27,000 (33% more than NZ). Meanwhile NZ weighs in as the 42nd largest economy in the world. The "lucky country" Australia is 13th. Top of the pile is the USA with GDP of almost US$11.7 trillion.

Housing

House prices are up 14.2 percent nationally in the year to the end of June.

Trade

The annual trade balance shows that the value of imports outstripped exports by $5.176 billion. A major increase in the cost of oil contributed to the surge in imports. The trade deficit with China has gone up another $500 million in the last 12 months to $2.09 billion. The current account deficit has expanded to around 7.4% of GDP. One major factor is the exchange rate. The value of the NZ dollar TWI (trade weighted index) increased about 35% in the three years to March 2005. So although prices for agricultural export commodities increased by 5 percent during the past year and by nearly forty percent from mid-2002, overall the rise in the dollar has tended to cancel out the benefit of price increases.

Work Stoppages

There were 32 work stoppages ending in the March 2005 year (the same number as in 1999). There were 18 private sector and 14 public sector stoppages. There were 10 manufacturing sector stoppages with 4 in transport and storage, 5 in Government administration, 4 in health and community services and 9 in all other industries combined.

Dairy Farmers creaming it?

Fonterra have announced a final payout of $4.59 per kilogram of milk solids - 34 cents up on last seasons payout. This means a $5.3 billion distribution to shareholders, which is an increase of $225 million on the previous year.

Jobs from the Net

The number of job ads posted on the internet rise rose by 44 percent compared to last June, and internet job ads have almost doubled over the past five years.

Farm Prices Up

The national farm median price rose to $937,000 for June. This was significantly up on the June 2004 median of $710,000.

Food Costs a bit more in Auckland

The University of Otagos Annual Food Cost Survey has found the basic cost of food a week to feed a family of four in Auckland is $227.This compares to $219 in Wellington, Hamilton, Christchurch and Dunedin.

Retail Sales

Total retail sales were 6.8 percent higher in May 2005 compared with May 2004.

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