CTU Economic Bulletin No. 84
September 2007
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Comment
Privatisation is back on the political agenda – with a vengeance. John Key recently told a Colliers International property briefing that public-private partnerships can play a really big role in the property sector, in areas like prisons, schools and hospitals. He went on to say that a property could be developed and owned by private investors and leased back to the government, with the asset transferring back to the Crown after a period of time. Or, he said, a private company could have a contract to manage a particular facility without owning the property in which it was based. This raised the spectre of classrooms and hospitals being owned by private interests and leased back to Government – at a cost. National’s health policy announcement this week also suggested "smarter use" of the private sector through public-private partnerships. Then Bill English stoked the fire this week by saying he "wouldn't exclude any" electricity companies from partial floats and subsequently defended a more general consideration of selling off part of any number of SOEs. The National Party is already on the record as supporting the sale of Landcorp (worth $1.1 billion) and Solid Energy ($233m). They also favour privatisation of the ACC Scheme. Of course the electricity SOEs are very significant assets with Mighty River Power ($2.098 billion), Genesis ($1.453 billion) and Meridian ($4.237 billion). Speculation of other possibilities for partial sale if there was a National-led Government include Learning Media ($5.6m), MetService ($6.9m), Quotable Value ($7.9m), AgriQuality ($26m), Animal Control Products ($4.3m), Asure New Zealand ($8.3m), Airways Corporation ($85m), Kordia ($100m), Public Trust ($42m), and Timberlands West Coast ($59m). Let’s review for a moment what happened in this whole process of setting up SOEs and selling off state assets in the 1984-99 neo-liberal experiment. The corporatisation and privatisation programme was both massive and deceptive. Promises not to privatise were routinely broken. From 1987, 40 state-owned commercial assets were sold for a total of $19.1 billion. This included the Bank of New Zealand, Petrocorp, New Zealand Steel, Postbank, Shipping Corporation, Air New Zealand, State Insurance, Tourist Hotel Corporation, Telecom, State Railways, and State forests. As at August 1999 these assets had an estimated value of $35.7 billion, nearly double the original sale price. Remaining Government commercial assets at that time were worth less than $5 billion. Telecom is one example of a sale that was significantly underpriced. In June 1990 it was sold for $4.25 billion. By 1999, Telecom had paid $5.5 billion in dividends and its total value had risen to $16.6 billion. In late 1989, there were 16,265 staff at Telecom. By 1998 this had reduced to 8,136. The privatisation was a huge windfall for overseas investors. Brian Gaynor estimated that just over 79 percent, or $13.1 billion, of the increase in value of state assets up to the end of 1999 went to offshore interests. The net gain to domestic investors was only $1.9 billion. Gaynor also noted that:"In the final analysis many of our best and biggest companies have been sold to offshore interests, yet New Zealand’s total overseas debt has risen from $46 billion in 1989 to $102 billion (in 1999)".1 Since then, in October 2001, the New Zealand Government announced that it would provide Air New Zealand with an $NZ885 million rescue package, and in return would take up 80 percent ownership. Then in June 2003 the Government moved to buy-back New Zealand’s rail tracks for $1, plus pay $50 million for property assets including leases and Wellington Railway Station, and agreed to spend $200 million a five year period upgrading the track via a new State-owned company. So after all the massive profits made in this privatisation process, in the end, the Government had to step in to rescue these strategic assets. And a few months back there was a $20 million settlement by Sir Michael Fay and David Richwhite after the Securities Commission accused the company of insider trading and said Mr Richwhite, as a Tranz Rail director, tipped off Midavia when to sell because he knew of financial problems not in the public domain. A business owned by the men, Midavia Rail Investments, made $63 million selling Tranz Rail shares in 2002. Bill English claimed that partial privatisations would provide good opportunities for ordinary Kiwis to invest via their KiwiSaver accounts. But what we know from the recent past is that once a state asset is sold, then anyone can buy it subsequently. And most of the value of the assets has been captured offshore. And in the process all sorts of people try to clip the ticket along the way - as we have seen. New Zealand is in catch-up mode after the disastrous effects of the 1984-99 period. We need massive investment in our infrastructure to be sure. But we do not need to sell off SOEs or allow the private sector to own important infrastructural assets. We already have a huge current account deficit which is due in large part to the repatriation of profits to the overseas owners of NZ based firms and assets. In the June 2007 quarter alone New Zealand's income deficit was $3,014 million with $1,483 million paid overseas in dividends. Another round of privatisation would only make this worse. We need collective investments in the interests of all New Zealanders – not some clumsy attempt to deepen capital markets for the benefit of a few. Meanwhile there is some speculation about how immune New Zealand is to the global credit crunch. Obviously it has hit some finance companies. Although we have many people who have stretched very considerably to buy a house (and will be finding it tough with the increased mortgage interest rates as they roll over their fixed term), we do not have all that hedge money chasing sub-prime mortgages as in the USA. But there are many people with high credit card debt and significant hire purchase payments. So while there is no need for particular alarm – there is no cause for complacency that it could never happen here.
Consensus forecasts2 published by NZIER
The consensus forecasts were updated in September 2007. 2007 2008 2009 1.7 2.4 2.0 2.5 3.0 2.8 5.3 4.0 4.0 1.7 1.2 0.7 3.8 3.9 4.2
March Years %
GDP
CPI
Wages (QES)
Employment
Unemployment
Economic Snapshot
Consumer prices rose 1.0 percent in the June 2007 quarter, and were up by 2.0 percent annually. The next CPI update is on 15th October. Food prices rose 3.4 percent in the year to August 2007. Unemployment is at 3.6 percent. M?ori unemployment is 7.0 percent and Pacific peoples’ unemployment is at 7.8 percent, compared with 2.6 percent for European/P?keh?. The minimum wage is $11.25 an hour for a person who is aged 18 or over and $9.00 an hour for those aged 16 or 17 years old or a trainee. Ordinary time wages, as measured by the Quarterly Employment Survey (QES) for June 2007, were up annually by 4.3 percent (4.2 percent in the private sector and 4.6 percent in the public sector). The QES showed that the average ordinary time hourly wage is now $22.77 ($21.25 in the private sector and $28.72 in the public sector). The female rate of pay is $20.98, compared to the male rate of $24.24. The Labour Cost Index (LCI) shows that ordinary time wages went up by 3.1 percent in the March 2007 year (3.1 percent in the private sector and 2.9 percent in the public sector). For those workers who actually got an increase, the average increase for the year was 5.4 percent and the median was 4.1 percent. The next update of wages data is on 5th November. Economic activity increased 0.7 percent in the June 2007 quarter, compared with 1.2 percent in the March 2007 quarter. In the year ended June 2007, the economy grew 2.2 percent, the same as the 2.2 percent growth recorded in the June 2006 year. The next GDP update is on 21st December. The Official Cash Rate (OCR) is 8.25 percent.
Food Prices
Food prices have increased by 3.4 percent in the last 12 months with meat, poultry and fish up 8.4 percent. Fresh milk has increased by almost 10 percent in just the last month. Butter increased 23 percent on 17th September. Over the last year, the price of tomatoes increased by 18.3 percent and bananas 24.7 percent. Chicken pieces were up 27.3 percent and whole chickens were up 26.1 percent. (Broccoli lovers no doubt were pleased prices fell by 34.6 percent). Higher food prices impact on those on low incomes in particular. That is not just because they have less money than others. It is also due to the fact that a higher proportion of their income is spent on food. Food expenditure is weighted at 17.38 percent of the overall CPI yet low income families would spend more than that proportion of their income on food. Around the world, the price of cocoa, sugar, corn, wheat, barley, soy and coffee have all risen sharply in recent months. The price of maize has doubled in a year, and wheat futures are at their highest in a decade. The United Nations has predicted that by 2016, people in the developing countries will be eating 30 percent more beef, 50 percent more pig meat and 25 percent more poultry. This means that animals will need a great deal of grain, and meeting that demand will require shifting huge amounts of grain-growing land from human to animal consumption - so the price of grain and of meat will both go up. In addition, a sixth of all the grain grown in the United States this year is "industrial corn" destined to be converted into ethanol. Higher world prices for food, especially protein, will benefit the New Zealand economy but given consumers here pay the world price for dairy and meat exports; there is a major concern about the impact on low income families.
Economic Growth
As noted above, economic activity was up by 0.7 percent in the June 2007 quarter, and 2.2 percent in the June 2007 year. There are clear signs of slower growth in household spending and this was reflected in a reduction in volumes of imports of consumption goods, together with flat retail trade activity and a build-up in distribution inventories. Non-residential building and other construction were also down, with residential building, transport equipment and land improvements the only asset types to offset the decline. Of concern is the fact that gross fixed capital formation decreased 1.0 percent this quarter, largely due to a 5.9 percent decrease in plant, machinery and equipment investment.
Job Vacancies
There were 6,094 advertised job vacancies measured in August 2007, which is 1 percent higher than a year ago. Compared to four years ago (August 2003), there were 10 percent more jobs advertised in August 2007.
Housing and Property
REINZ figures show that the median house price in August was $350,000, up 12.9 percent for the year. Quotable Value reported a 13.3 percent growth in national property values over the past year. The average sale price is $394,397. This doesn’t look like a slower rate of increase in house prices. However, property sales in August slipped from 6,660 in July to 6,394 in August; well down on the August 2006 figure of 8,556 sales, and the lowest August sales for seven years. The average number of days to sell a house has been on the increase over the last six months and is now at 33 days (up from 31 in July). There were 2,465 new dwelling units authorised last month, compared with 2,437 in August 2006. The trend for the value of residential buildings has been increasing since December 2006, but at a slower rate in recent months. Meanwhile a Fairfax media survey has revealed that home loans have reached record levels of unaffordability. In Auckland, almost 100 percent of a single median income is required to afford the mortgage on a median priced house purchased in August. In Wellington it is now well over 80 percent. In New Zealand as a whole, the median house price was $350,000 in August. Just five years ago it was $185,000.
Trade, Balance of Payments and International Investment Position
The level of foreign investment in New Zealand was $254.1 billion at 31 March 2007, an increase of $19.4 billion from 31 March 2006. Australia accounted for $79 billion (31.1 percent) of total foreign investment in New Zealand. At 31 March 2007, the level of New Zealand's investment abroad was $111.0 billion, of which investment in Australia was $30.1 billion (27.3 percent). The June figures show that the annual current account deficit has improved from NZ$14.6 billion in the year to June 2006 to NZ$13.6 billion in the June 2007 year. As a result, the current account deficit dropped to 8.2 percent of GDP - down from 8.3 percent in March 2007 and 9.3 percent in March 2006. Of the $13.6 billion deficit a huge 83 percent ($11.242 billion) is due to the deficit on investment income rather than due to balances on trade in goods or services. In the year to June 2007, of the $14.7 billion income accrued to foreign investors in New Zealand, $5.2 billion has been paid out in dividends and $7.3 billion in debt interest payments, with the remaining $2.3 billion reinvested in New Zealand subsidiaries of foreign parents. New Zealand's net international liability position at 30 June 2007 was $148.6 billion The monthly trade balance for August 2007 was a deficit of $945 million (35.6 percent of exports). The trade balance for the year ended August 2007 was a deficit of $6.3 billion (18.4 percent of exports). Exports of goods increased $4.1 billion in the March 2007 year, with increased prices and volumes of dairy products the main contributors to the rise. Imports of goods increased $2.8 billion over the same period, with the biggest contributor being petroleum. The trade weighted index measure of the value of the New Zealand dollar fell 6.9 percent in August, but despite this, it was still 11.1 percent higher in August 2007 than in August 2006. Exports were down 2.7 percent on August 2006, while imports were down 2.2 percent on August 2006. According to the ANZ Commodity Price Index, dairy prices in New Zealand dollar terms rose by 66 percent in the year to July while overall commodity prices have risen 36 percent.
Price Increases
The Capital Goods Price Index rose 2.8 percent in the year to the June 2007 quarter. Input prices for producers rose by 1.2 percent and output prices rose 1.5 percent between the June 2006 and June 2007 quarters.
Retail Sales
In July 2007, total retail sales remained at the same level as in June 2007. This follows a 0.4 percent decrease in June 2007. Core retail sales (which exclude the vehicle-related industries) fell 0.2 percent ($9 million); following a 0.5 percent ($19 million) decrease in June 2007. Eleven of the 20 core retail industries had lower sales in July than in June 2007. Sales were up by 5.3 percent for the year.
World Bank 2008 ranking for NZ in Ease of Doing Business
New Zealand has just been ranked 2nd by the World Bank out of 178 countries in relation to the ‘ease of doing business’. Singapore was rated highest and after New Zealand there were the United States and Hong Kong. Denmark was next prompting the observation by the World Bank that countries can be both business friendly as well as provide strong social protections.
Elective Surgery Up
The number of patients who received elective surgery in the last financial year rose from 105,694 to 112,507 an increase of nearly 7000 procedures.
Migration
In the year ended August 2007, there were 83,000 permanent and long term arrivals, up 3 percent from the August 2006 year and there were 74,200 departures, up 8 percent. As a result, net migration was 8,700 in the August 2007 year, down from 12,500 in the August 2006 year. There was a net outflow of 30,100 New Zealand citizens in the year ended August 2007. There was a net inflow of 8,800 from the United Kingdom, down from 10,600 the previous year. There were also net inflows from India (3,100) and Fiji (2,400) in the August 2007 year. The net outflow to Australia was 25,900 in the August 2007 year, up 27 percent from 20,400 in the August 2006 year. The highest August year net outflow to Australia in the past decade was 29,100 in 2001. By age group, the net outflow to Australia in the August 2007 year consisted of 8,900 people aged under 20 years, 11,500 aged 20–39 years, 5,000 aged 40–59 years and 500 aged 60 years and over. New Zealand has, for the first time, overtaken the UK as the largest source country for permanent migrants to Australia. For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz
Notes
1 Gaynor, Brian. NZ Herald 2 October 1999 2 The consensus is made up of the average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand and Treasury. They are done every 3 months which means that we sometimes have actual figures for some of the forecasts.
