CTU Economic Bulletin No. 59

May, 2005

Comment

Tax cuts, inflation, government spending level and quality, and public debt are all to the fore at this time in election year. Various parties are now in a bidding war to see how much they can give in tax cuts. What should the union approach be to this issue? I don't think we should just simply oppose tax cuts in every situation. We need to point out what the risks are, the circumstances which would justify tax cuts, and the form they should take. Clearly from our point of view, the key incomes issue is the need for a general lift in wages. In the short term this is a about a fair share of economic growth and employer profits in the private sector, and in the public sector it is more about the pay levels needed to attract staff and provide quality services as well as recognise the role public servants make to a strong economy and society. In the longer term, a lift in wages is about getting the investments at the right level in skills and education, technology, infrastructure and all the elements that drive productivity. Of course we also need a bargaining system that ensures that such improvements are fairly distributed.

What are the risk with tax cuts? They risk a flow-on effect of cuts in important government services or at the very least an inability to increase spending where needed. They tend to favour those on the highest incomes. And they can be highly inflationary.

When National cut taxes twice in the mid-1990s, the over $2 billion of tax cuts went mainly (71%) to those in the highest incomes bands. These tax cuts were made at a time when we had hundreds of foodbanks handing out food parcels each week to hungry families, infectious diseases spreading because of overcrowded houses, a collapse in industry training, high unemployment, massive underinvestment in roading, the rail network and other infrastructure, and a desperate need for economic development on a regional and industry basis. So these tax cuts were not only unfair, they were incredibly shortsighted and workers are still paying the price.

Tax cuts can be inflationary. But so can wage increases and government spending. The level of wage increases unions are advocating are affordable out of company profits and productivity levels without increasing current levels of inflation. Government spending has increased significantly in order to address the massive social and economic deficits created in the 1984-99 period. The first budget after 1999 set a fiscal cap of around $6 billion for new spending over three years. The level in Budget 2005 was $13.9 billion.

This Government has in fact introduced significant tax cuts through Working for Families. Although that package has some features we don't support, it is basically a $1.2 billion a year package aimed at low-income families. Much of that is yet to be rolled out. There has been a lot said in the media about the Australian budget having a $22 billion tax package. But that is over the next 4 years. Over one year it is more like $5 billion. But Australia is 5 times our size. So the equivalent in NZ would be a $1 billion a year package - about the size of Working for Families. And the Chief Economist of the HSBC Bank pointed out that the Australian tax cuts were "markedly more generous to the well off than the not so well off". The average increase was $A6 a week but the top earner will get $86 a week.

So National has a major problem with its tax cut promises. Is it instead of wage increases or as well as? If they are not going to significantly cut government expenditure, then large tax cuts would be inflationary. If they do cut government expenditure then a tax cut means cuts in health or education or some other important area. If they say they will delay any tax cuts, isn't that what they have criticised Labour about? Clearly there is room for the government to be less aggressive about reducing debt but isn't this an important buffer when we have such a high current account deficit. Labour is also using some spending to induce higher levels of savings which is counter-inflationary - yet National have criticised that policy also. It appears that National are just desperate to give tax cuts no matter what the arguments are. Of course, their ideology favours less investment in collective goods and services, and more wealth in private hands.

But it is important for unions also to be clear about when and how we might advocate tax cuts. After all, union members want higher take-home pay, which means in basic terms they have an interest in higher wages and lower taxes. I mentioned in this Bulletin last November that Labour's approach was fairly complex and it would be relatively easy for the political opposition to argue for simple across the board cuts in company and income tax. I don't think unions should oppose tax cuts no matter what. We have previously argued that if there were tax cuts then we would prefer making the first $5,000 tax-free so the tax system is more progressive. That would however cost a considerable sum. The real question is what should the priority be for Government. That priority is clearly to invest back into health, education, infrastructure. We would not say that the level is right even with the last two Budgets. We only need to look at pressures in tertiary education and residential aged care as two examples.

This Government taken a balanced approach to economic management and has been able to increase government spending as well as reduce government debt, stop any privatisation of assets, put $6 billion into the NZ Superannuation Fund, and still have a sizeable surplus. But this surplus could reduce significantly if the economy does slow to 2.5% annual GDP growth from 4.8%. The tax take could easily decline by $2 billion a year or more in that case. So the planned levels of government expenditure have to be affordable even if revenue falls by that much. However, if growth has fallen to around a 2.5% level of annual increase, and expenditure can be established at an adequate level and maintained, then it would make sense at that time to give tax cuts because they would be countercyclical (which means they would increase demand for goods and services at a time when the economy is slowing and there are deflationary rather than inflationary pressures) and would come out of a recognisable structural surplus - rather than a cyclical one.

There are over 2 million workers in New Zealand. A tax cut of $10 a week costs $1 billion. So significant tax cuts will have to come at the expense of spending or higher government debt. That is National's problem. But Labour's problem is that its targeted tax cut approach is fairly complex. And it handled the bracket creep issue badly. It is clear now that it would have been better to have let everyone know in the days prior to the Budget that the proposal was for a small future adjustment in tax bands rather than let expectation build for tax cuts. Although the costs to the change in 2008 is about $360 million, that is a much smaller tax change and therefore is not particularly inflationary. It is hard to see why it couldn't apply from April 2006 rather than 2008. Labour have therefore got little credit at this stage for being the first Government ever to come up with a permanent solution to bracket creep using a 6% adjustment every 3 years based on 2% a year.

So what are the key points for unions? There will be a number of opinions within the union movement. We need wages to rise rather than tax cuts. The people going to Australia are because wages are 25% higher. Tax cuts, unless targeted, generally favour those on the highest incomes. We need the rebuilding of a stronger economy and fairer society to continue - and not have tax cuts for those on higher incomes wreck that strategy. We don't automatically oppose tax cuts but only support them if they make the tax system more progressive, not less, and not if they mean we end up paying in other ways such as higher mortgages and cuts in government spending (i.e. a lower social wage).

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.4% in the March 2005 quarter and were up by 2.8% annually. Food prices increased by 0.4%% in the April 2005 year. The next CPI update is on 14th July. 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 for those firms 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 0.4% in the December 2004 quarter and 4.8% for the December 2004 year. The official cash rate set by the Reserve Bank is 6.75%.

Consensus forecasts published by NZIER

Period % increase March 2006 yr % increase March 2007 yr
GDP 2.3 2.3
CPI 2.8 2.6
Wages (QES) 3.6 4.0
Unemployment 3.8 4.2

Wages

The BNZ has described labour cost inflation as "surprisingly low". The Labour Cost Index (LCI) showed that 59% of workers got an increase in the last year. A third of respondents reported pay increases of over 3%, with 40% of these getting more than 5%. The furniture and other manufacturing salary and wage rates (including overtime) rose 1.1% in the March 2005 quarter. The unadjusted LCI still rose 0.9% for the quarter and was up 4.8% for the year. Some economists are now arguing that this is a more credible measure of wage increases than the adjusted LCI, which takes out increases due to promotions, change of job categories and also service-related increments. 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 for those firms 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.

Minimum Wages

As Ross Wilson pointed out recently, when National was last in Government they only lifted the minimum wage in a whole 9 years from $6.13 an hour to $7.00. This was an increase of a pathetic 14% in almost a decade. National actually froze the minimum wage from March 1997 at $7.00 for 3 years with a rate for those under 20 years of $4.20 an hour. This is from the political party masquerading as being concerned about low incomes in New Zealand compared with Australia. But Labour since 1999 has increased the minimum wage from $7.00 to $9.50. This is a 35.7% increase in just over 5 years. The increase for 18/19 year olds has been from $4.20 to $9.50 (126%) and for 16/17 year olds from $4.20 to $7.60 (81%).
Unemployment
Unemployment rose slightly to 3.9% for March 2005. Despite this the number on the unemployment benefit has fallen by 27% in the March 2005 year. Maori unemployment is 8.8% and Pacific peoples 6.7%. The jobless rate (which includes those discouraged from seeking work or not able to work at the survey time) rose from 149,500 in December 2004 to 161,200 in March 2005. Underemployment (those wanting more hours) dropped from 92,600 in December to 71,200 in March 2005. In the year to March 2005, the working age population grew just 1.4%. This is the lowest annual increase since December 2001, but it happened at a time when employment growth is estimated to have been a very significant 3.8%. Meanwhile, total job advertisements in the ANZ survey reached 50,333 in April 2005, up over 11% from April 2004. Job ads in newspapers are down by 1.3% for the year whereas Internet job ads rose by 46%.

Housing

In his Budget speech, Rod Donald of the Greens pointed out that in 1981 the average wage was $12,600 and the average house price was $41,000. By 1999 the average wage was $33,400 and house prices averaged $187,000. This year as the average wage passed through $39,000 average house prices were $260,000. Households are currently spending 12% more than they earn each year. Household debt rose by 46% in the last 3 years. But household net wealth increased by 50% in that period. So the rising value of houses is masking the levels of debt at this stage. Concern about the impact of any rise in interest rates is mounting as many people are also coming off fixed mortgages. A recent analysis showed that someone who borrowed $200,000 in June 2003 and fixed the loan for two years at 6.25% could be faced with rates of 7.73%. This is an increase of $2,700 a year in repayments. Two year fixed rates are around 7.6% which is a similar level of increase.

Trade

Merchandise trade exports for March were $2,793 million compared with imports of $2,987 million. This is only the second March trade deficit in 10 years. But commodity prices have increased by 11% in the past year. This is similar to the increase in the NZ dollar over the year so the commodity price rises are to some extent cancelling out the effect of the high dollar.

Capital Goods and Producer Prices

The Capital Goods Price Index rose by 3.6% in the March 2005 year. The Producers Price Index rose in the March 2005 year by 3.2% (outputs) and 4.2% (inputs).

Migration

In the year ended April 2005, there was a net permanent and long-term migration gain of 9,300, down 64% from the net inflow of 25,700 people recorded in the previous April year. This resulted from 78,500 arrivals (down 7,700), and 69,200 departures (up 8,700) in the April 2005 year. In the year ended April 2005, there was a net inflow of 9,200 from the United Kingdom, down 7% on the April 2004 year figure (9,900), and net inflows from Fiji (2,000) and Japan (1,900). There were reduced net inflows from India (2,100) and China (1,300). Overall, net inflow from Asia has reduced, from 16,500 in the April 2004 year to 7,200 in the latest April year. There was a net outflow to Australia of 18,200 in the April 2005 year, compared with 11,400 in the previous April year.

Retail Sales

Total retail sales volumes are up by 4.6% in the March 2005 year. The dollar value of sales for March 2005 were up by 6.6% for the year. The BNZ point out that there is little evidence of higher interest rates having an effect as sales of durable items (except vehicles) rose 4.4% for the quarter and were up
19.4% for the year.

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