CTU Monthly Economic Bulletin
No. 71 (July 2006) 

Either read on, or download a printable version here (PDF file, 88 kb).

Comment

Is the Doha round of the World Trade Organisation (WTO) dead? A few of the old hands are saying that the sort of crisis we saw a week ago is to be expected and that in a few months the threads will be gathered up and talks will recommence. But it looks like a serious rupture. This sort of multilateral negotiation is incredibly complex with 150 countries, hundreds of issues, dozens of groups, and huge inequities in negotiating resources. In the wake of the suspension of talks last week, the EU set out a long list of accusations against the US including one that said the US was offering, on the one hand, to reduce trade-distorting agricultural subsidies in what is known as the “amber box” (the most distorting) but on the other hand, trying to shift some subsidies to the Blue Box (less distorting subsidies) without having to change their heavily trade-distorting nature. The US also had a series of accusations against the EU. The G6 group which adds India, Brazil, Japan and Australia to the EU and US was meant to be able to find a solution that could be accepted by the other 144 countries. 

The EU was trying to set up a sequence where the US would first move to further reduce subsidies and as Mandelson from the EU said, “If the US does this it will force the G20 (group of developing countries) to reciprocate on NAMA (industrial goods) and Europe will be in a position to employ the flexibility we have offered” (which was a further cut in agricultural tariffs). But it all fell apart – with plenty of recriminations.  

Should we care if the Doha round completely collapses? Not an easy question to answer – but we probably should care. If the result is that a rules-based multilateral trading system is abandoned in favour of regional trading blocs, and an even greater proliferation of bilateral negotiations, then we should worry. But if the collapse causes a rethink of the inequities of world trade resulting in a new set of rules – then that would be a good outcome. Guy Ryder from the ICFTU commented that “the whole approach of tit-for-tat privileging of market access cannot deliver that which workers of the world desperately need - a process of globalisation that leads to more and better jobs, with workers worldwide sharing in its benefits and a trade system that corrects the imbalances and allows developing countries the space to develop. Trade negotiators, faced with an ever-proliferating number of regional and bilateral trade agreements, must now finally realise that the only thing which will save the multilateral trading system is its reorientation towards (fair trade) rules."  

Of recent times the World Bank has, in any case, drastically scaled back the anticipated benefits of a “successful” Doha round. And David Skilling, from the NZ Institute has questioned whether the resources the Government devotes to trade negotiations would not be better used in straight out trade promotion. The problem for New Zealand is that, having already unilaterally deregulated tariffs and quotas and also opened up services trade in the last WTO round, there is not a lot to negotiate with in any bilateral negotiations – hence the importance of a multilateral outcome from the WTO. This does not mean that workers in New Zealand have nothing to lose from the Doha round. Sure there would be gains, largely in agriculture, but some of the recent moves by NZ officials in Geneva, if they came to pass, could seriously undermine the ability of this and future Governments to regulate in our domestic interests (for instance on qualifications and licensing). And officials keep pushing for more and more ‘ambition’ in our services offers. What is clear is that, Doha or not, unions need to maintain an active interest in all these trade negotiations – China, Malaysia, ASEAN, PACER/PICTA in the Pacific, and others that may emerge (a possible APEC deal, or NZ-USA negotiations). While we should always be prepared to acknowledge that some benefits can emerge from such trade negotiations, they also pose major risks to workers.  

Meanwhile, the Government has released a discussion paper on the Business Tax Review. The stated aims are to examine company tax both in respect of how changes could improve productivity and also competitiveness with Australia. The Review includes an option of a 3 cent cut in company tax costing around $540 million a year. Company tax is a withholding tax. For NZ residents, company tax paid on dividends is offset (this is called ‘imputation’) against personal tax. But overseas owners would get the full benefit of a simple reduction in company tax. Also, business organisations here that complain of a higher company tax rate than Australia conveniently forget to mention such things as stamp duties and payroll taxes that apply in Australia (as well compulsory employer contributions of 9% for superannuation and also capital gains taxes etc). 

Included in the options are tax credits for companies that invest in research and development, and/or skills, and/or export market development. Contributions to superannuation were not included. Other options included a higher rate of depreciation which would also boost investment in technology which is very important in a country with low capital per worker. We have already seen criticism from many in the business community of such tax credits. Sure, it makes the system more complex. But most countries have more favourable tax treatment for research and development. And we would argue that investing in skills development is essential to lift productivity and is just as deserving of a tax credit as R&D. What is disappointing is that very little policy work or detail on how a tax credit for investment in skills would work is included in the Business Tax Review discussion document. There is a danger therefore that much of the discussion and submissions will focus on the depth of a cut in company tax, rather than how such tax credits could help build and sustain a high wage high skill economy.  

The Government clearly expects the discussion on company tax to flow on to subsequent discussions about personal tax rates. I have discussed the tax design challenges the Government faces in a recent Economic Bulletin. But what all this shows is that a focus on tax issues will continue for the foreseeable future. The political necessity for the Government to front-foot this issue does not overcome the many risks – to expenditure on health, education, social services and infrastructure, and to the problem of widening income inequalities over a long period. It is vital therefore that all unions take an interest in the Business Tax Review. It is not just an issue for businesses. Submissions close on 8^th September. 

Consensus forecasts (note 1) published by NZIER  The consensus forecasts were updated in June 2006.  

Economic Snapshot

Consumer prices rose by 1.5% in the June 2006 quarter and were up by 4% annually. Food prices were up by 2.9% in the June 2006 year. The next CPI update is on 25^th October 2006. Unemployment is at 3.9%. Maori unemployment is 8.7% and Pacific peoples’ unemployment is at 7.6% compared with 3.2% for European/Pakeha. The minimum wage is $10.25 for those aged 18 years and over and $8.20 for 16/17 year olds and trainees. Ordinary time wages as measured by the Quarterly Employment Survey (note 2) for March 2006 were up annually by 5.3% (4.6% in the private sector and 7.8% in the public sector). The QES showed that the average ordinary time wage is now $21.59 ($19.94 private, $28.45 public). The female rate of $19.97 is 87.1% of the male rate of $22.92. The Labour Cost Index shows that ordinary time wages went up by 3.2% (3.0% private, 4.0% public). 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 4.6% and the median increase was 3.9% (the average for the year was 5.4% and the median was 4.1%). The next update of wages data is on 7^th August. Economic activity (GDP) increased by 0.7% in the March 2006 quarter and was up by 2.2% for the March 2006 year. The next GDP update is on 29^th September, 2006. The official cash rate set by the Reserve Bank is 7.25%.  

Consumer Price Index

The CPI rose by 1.5% in the June 2006 quarter and 4% in the June 2006 year. In the June quarter alone petrol prices were up by 14.7%, international air travel by 7.1%, fresh vegetables by 12% and electricity by 3%. For the year to the June 2006 quarter, prices for petrol increased 32.2%, international air travel by 8.7%, and the cost for new houses by 5%. Meanwhile, food prices for June were up by 2.9% from June 2005. 

Government Accounts

The operating balance for the 11 months ending May was $8.795 billion, slightly under (for a change) the forecast which was $8.992 billion. The OBERAC (Operating Balance Excluding Revaluations and Accounting Changes) was $7.311 billion, slightly higher than the $7 billion forecast. The cash surplus of $2.69 billion was $655 million up on the forecast.  

Drop in Number on Unemployment Benefit

In 1999, there were 161,000 on the unemployment benefit. At the end of June this year, 39,572 New Zealanders were registered unemployed. The last time Unemployment Benefit numbers were under 40,000 was in 1982. Sole parent benefit numbers have dropped 5% in the last year to 93,400, but there was a 3% increase of those on Sickness Benefit and 4% for those on Invalids Benefit. The most significant drop has been in the number on unemployment benefit (down by 75% since 1999). The drop since 1999 in the total of those on working-age benefits (Unemployment Benefit, Sickness Benefit, Invalids Benefit, Domestic Purposes Benefit) – is over 30%, from 372,000 to 280,300.  

Trade

In the June 2006 quarter, seasonally adjusted exports of merchandise goods rose 9.4% from the previous quarter with milk powder, butter and cheese up by 25.6%. The quarterly results were ahead of forecasts. However, the trade balance for the June 2006 year is a deficit of $6,632 million (20.4% of exports), the largest deficit ever recorded for a June year. The value of merchandise exports for the year ended June 2006 was $32,440 million, 6.0% higher than for the previous year, and the highest level ever recorded for a June year. The largest increase was for milk powder, butter and cheese (up $844 million). Exports to four of New Zealand's top five trading partners increased in the June 2006 year. The largest increase was to Australia, up $300 million (4.6%), followed by China, up $153 million (9.6%) and the United Kingdom, up $119 million (8.3%). By contrast, exports to Japan decreased $142 million (4.1%). Merchandise imports for the year ended June 2006 were $39,072 million, up $3,279 million (9.2%) on the previous June year. Petroleum and products (up $1,242 million), and aircraft and parts (up $1,184 million) recorded the largest increases. Imports from the USA and China increased $1,116 million and $770 million, respectively. The NZ dollar is 12.2% lower than a year earlier in terms of the trade weighted index. 

Industry Training

As of 31 March this year, 119,886 people were involved in industry training - up 12,524 or nearly 12% on the same period last year. This includes 8,838 in modern apprenticeship training, with 97% of those aged 15-21 years.  There are 450 more modern apprentices than at the same time last year. 

Retail Sales

Retail sales were up by 1.3% for May and 5.1% for the year. 

Property

Housing prices are clearly reducing the level of home ownership. Research done by AC Nielson for Wizard Home Loans shows a drastic fall in home ownership in the year to March 2006 – down by 12% (with a 26% fall in Auckland). Other reasons for the fall include income security due to casual employment, and a trend for people to start families later in life. The 2001 Census showed a drop from 74% in 1996 to 68% in the rate of home ownership. No doubt the latest AC Nielson research will be questioned as it is such a drastic drop. But who could disagree with Bob Hargreaves from Massey University when he says “wages and salaries have not kept up with house prices”? Latest Quotable Value statistics show that property values increased by 11.5% (calculated over the three months ending June 2006 in comparison to the same period last year).  This is down from the 12.4% growth reported in May, and down from 16.8% growth reported in January.  In the main cities the annual increases were Auckland 6.7%, Hamilton 19.2%, Wellington 10.5%, Christchurch 11.3% and Dunedin 5.8%.The average New Zealand sale price was $328,829 for this period. REINZ say that the national median price for residential property in New Zealand hit a new high of $310,000 in June 2006. Meanwhile the number of dwelling consents continues to decline.   Consents for 1,883 new dwelling units were issued in June 2006, 246 fewer than in June 2005. 

Work Stoppages

There were 10 work stoppages that ended in the March 2006 quarter and 66 in the year. This compares with 32 stoppages in the March 2005 year. Of the 66 stoppages which ended in the March 2006 year, 22 were in manufacturing, 5 in transport and storage, 5 in Government administration and defence, 6 in education, 11 in health and community services, 4 in cultural and recreational services, and 13 in all other industries combined. 

Migration

In the year ended June 2006, there were 80,100 permanent and long term arrivals, up 1% on the June 2005 year. Over the same period, departures decreased by 1,200 (2%) to reach 69,400. The overall result was a net migration gain of 10,700 in the June 2006 year, 24% up on the previous June year. In the year ended June 2006, there was a net inflow of 10,500 from the United Kingdom, up 13% from the previous year and there were also increased net inflows from Fiji (2,300), Germany (1,500), China (1,400), Philippines (1,300) and South Africa (1,300). In contrast, there was a reduced net inflow from Japan (1,700), down from a net inflow of 1,800 in the previous year. There was no change in the net inflow from India (2,000), compared with the previous year. The net inflow from Asia reduced from 14,400 in the June 2004 year, to 6,900 in 2005, and then increased to 8,400 in 2006. During the past 12 months, the annual net outflow to Australia increased from 19,300 in June 2005, to 21,400 in December 2005 and January 2006. It then decreased by 1,000 over the next five months, to 20,500 in June 2006. This drop in the net outflow was driven primarily by a fall of 900 in the number of New Zealand citizen departures to Australia.

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