CTU Economic Bulletin No. 57

March, 2005

Comment

Every year 8 million people die as a result of extreme poverty. On February 3, Nelson Mandela issued a rallying cry to make poverty history in front of over 22,000 people in Londons Trafalgar Square. Wearing a white armband, he said that "like slavery and apartheid, poverty is not natural. It is man-made and it can be overcome and eradicated by the actions of human beings". The Global Call to Action Against Poverty involves a wide range of organisations, including Global Unions. A group of NZ organisations has been meeting to support this campaign which focuses on three areas: trade, debt and aid. On trade the campaign argues for trade justice rather than free trade. They argue the debt of the world's poorest countries should be cancelled in full, by fair and transparent means. And they say a firm timetable should be set for when donors should meet the target of 0.7% of national income in aid.

Global Unions and their affiliates have been advocating more generous debt relief and its expansion to a greater number of countries. They argue it should consist of full cancellation of debt owed to the International Financial Institutions, not be dependent on structural adjustment conditionality, and not reduce concessionary assistance from the IFIs or other sources. Unions are also supporting measures such as the British proposal for an International Finance Facility, and the French and German suggestions of a form of Tobin tax (tax on cross border capital transactions) to limit speculative capital movements. Unions have also criticised the bias shown by the IMF and World Bank against public provision. One example of this is the "Output-Based Aid" approach, which the Bank has used to promote the contracting out of infrastructure services.

New Zealand's aid budget is currently 0.23% of Gross NationaI Income (which is lower than GDP). Our overseas aid is $398 million. To lift it to 0.7% would mean going to $1.21 billion or another $812 million. If done over 10 years it means adding on (approximately) each year another $82 million.

Meanwhile, a UNICEF Report shows that out of 24 OECD countries in 2000, only Italy, USA and Mexico had worse child poverty levels than New Zealand. The Government can point to lower unemployment plus numerous measures (minimum wage, state housing policies, Working for Families package) that are addressing child poverty but clearly there has been a persistent legacy effect from the policies of the 1984-99 period.

The common thread between poverty in New Zealand and extreme poverty, especially in the heavily-indebted countries, is the need for active measures to address such poverty, and the fact that neo-liberal financial policies have worsened and in many cases created the conditions that result in such hardship. Whatever its faults it is clear that the Working for Families package will shift $1.2 billion into low and middle-income families but it will not be enough on its own to address embedded poverty. In terms of our overseas aid, we need to address the fact that the level is far too low compared with the 0.7% of GNP target.

Economic Snapshot

This is a snapshot of key indicators for unions. Consumer prices rose by 0.9% in the December 2004 quarter and were up by 2.7% annually. Food prices increased by 1.7% in the February 2005 year. The next CPI update is on 15th April. Unemployment is at 3.6%. 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 December 2004 were up annually by 2.1% (1.9% in the private sector and 2.8% in the public sector). The average ordinary-time-hourly wage as measured by the QES is $20.19. For the private sector it is $18.85 and for the public sector it is $25.30. For females it is $18.55, for males $21.56. The Labour Cost Index (for December 2004) showed private sector wages up 2.4% for the year, with public sector wages up by 2.5%. 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 3.8% and the median increase was 3%. 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%.

Family Support and Benefits

From April 1, family support payments will go up by $25 for the first child and by $15 for each additional child. The accommodation supplement will also rise for a number of families, particularly those in the central and North Auckland areas. Foster care allowance, Unsupported Child Benefit and Orphans Benefit will also rise by $15 per child. The Government says that these changes will benefit almost all families earning less than $45,000 and a substantial number of those earning up to $70,000. They estimate this will affect 260,000 families. Also from April 1, benefits, superannuation and student allowances will increase by 2.7% and income thresholds for the Community Services Card will rise. This will mean that for a single unemployed person aged under 20 years living at home, the Unemployment Benefit is $112.38. For a single unemployed person aged between 20 to 24 years it is $140.48 and for a married couple receiving the Unemployment Benefit with no children, $280.96. For a sole parent with one child, the Domestic Purposes Benefit is $241.47. For a single student aged over 25 years studying away from home the Student Allowance is $168.59 and for a married couple who are both qualified to receive New Zealand Superannuation the amount is $393.56. With the increase in payments, the income thresholds for Community Services Card holders will also increase. The thresholds have also been adjusted to take into account the change in income levels due to the Working for Families changes. The thresholds now range from $20,275 per year for a single person sharing accommodation to $57,632 per year for a family of six people.

GDP

Economic growth as measured by Gross Domestic Product went up by 0.4% in the December 2004 quarter and 4.8% in the 2004 year. If we look at annual growth measured by the last four quarters then it is 3.9% but 2% of that is in the March 2004 quarter so drops out of the figures to be announced on 24th June. This means that the annual growth figures we have seen this past year are unlikely to be repeated throughout 2005. NZIER forecast GDP growth in the March 2006 year to be 2.4%. The low quarterly figure of 0.4% also implies a slower rate of economic growth. However, a number of one-off factors such as lower electricity generation and wet weather affecting dairy production affected the quarterly figure. Also the fall in construction activity could just be a lull between less residential activity and a pick up in non-residential building (given the increase in permits). Some are picking a 1% March quarter GDP figure based largely on increased retail spending.

Trade

The estimated trade balance for February 2005 is a deficit of $127 million, or 4.8% of exports. A small surplus of $70 million was expected so the deficit adds to the concern about the high current account deficit. Imports were up by 14.7% for the year. The current account deficit was $2.5 billion for the December 2004 quarter, and has grown to 6.4% of GDP. This is a real concern - but we do not have this on our own. In Australia, the current account deficit is A$15.2 billion - 7% of GDP. New Zealand's net international debt in December 2004 stood at $94.5 billion (64.6% of GDP compared with 59.6% of GDP as at December 2003). When we include the $29 billion deficit on international equity, total net debt is $123.5 billion. While a lot of the focus is on domestic spending sucking in imports, we need to remember that higher income accruing to foreign investors is a huge factor in the current account deficit. The current account deficit stood at $9.39 billion at December 2004. The deficit on investment income for this period was $8.89 billion. So 95% of the current account deficit is due to the fact that interest payments, dividends and so on accruing to overseas owners of firms in New Zealand far outstrip earnings by New Zealanders investing overseas. During a period of relatively high economic growth and a significant lift in profitability, one of the factors affecting the current account is the remittance of such profits to overseas owners. An anticipated effect of a high current account is a lower exchange rate. The dollar hit a 20-year high in February and now appears to be showing signs of edging down (but the effect of other currencies such as the US dollar is always very significant). But some economists are using the current account deficit figures to warn that interest rates need to rise to dampen domestic spending on imports. They also argue that if the dollar falls in response to the current account deficit, then that is also inflationary so interest rates need to rise anyway. Other economists say that high interest rates will keep the dollar up for a while longer (interest rates in Australia were increased this month to 5.5% - still 1.25% lower than New Zealand. So we can expect a lot more debate about interest rates in the run up to 28th April!

Government Finances

The figures for Government finances for the first 8 months of the year are due out on 1st April. The statement for the 7 months to the end of January 2005 showed a cash surplus of $1.78 billion, just above forecast, with an operating surplus of $5.27 billion which is $1.11 billion above forecast. There is considerable speculation about how much of this surplus is available for spending, what the impact of the 19th May Budget will be as it is clearly a large Budget, and the longer term track of gross debt.

Wages

As if we needed any more arguments in favour of pay rises, a recent survey by Sheffield of 502 managing directors, chief executives, and general managers in New Zealand revealed an average increase in base salary year-on-year of 5.2%, the same increase they got in 2003. Meanwhile a recent UK survey found that CEOs are often on huge salaries compared with the average wage of their workers. The top pay rate at Compass, a catering firm, is 100 times that of the average Compass employee. At Rentokil the ratio was a mere 21 times but at Tesco Supermarkets, the CEO is paid 200 times the pay of their average employee and at Carnival, the cruise group, the CEO is paid 500 times more than their average employee.

Talking of the UK, a editorial in the NZ News UK in February, 2005, said:

"So the workers want a bigger share of the pie. And the employers dont want to give it to them. Well, that sounds like a story with a familiar ring to it. The issue of New Zealand pay rates has again raised its ugly head and it is one those living in the UK should be paying close attention to. Many expats have avoided the issue of when to go home because the wages are too low, particularly compared with the UK. While the lifestyle opportunities far outweigh those in the UK, its often been money thats prevented people from choosing to go home. But with New Zealands booming economy, unemployment rates at 18-year lows, and a new entrepreneurial economic outlook, the country may not seem as bad as previously thought. Of course, employers have reacted with raised hands, horrified looks, and exclamations of woe. How can they afford to pay their staff more, they ask? Things are tight, borderline even, and any money taken from the business could weaken it. Yet imagine what an extra 5 per cent in the pay packet for many New Zealanders would mean. Think of the spending that would take place, or indeed for some, the debt reduction that could happen. The country has always had an issue with poverty and people living on the breadline. Surely placing more money in the hands of those who need the cash would in the long term benefit the country. There are many companies in New Zealand doing exceptionally well in the new millennium. Why their staff, many of whom would have contributed to that success, can not be rewarded and recognised for their efforts is confusing. It reeks of unfairness - particularly in a country that prides itself on having an even playing field for everyone - for companies to continue sucking up profits. What many in business seem to forget is for people to buy their product or service, they need to have money. That cash needs to come from somewhere. Strikes are never a good option for making your point, for neither the employer nor the employee. But there must come a time when things such as spiralling house prices, increasing product prices, and rising debt become a major concern and force further action. All most New Zealanders want is a fair deal. Its the least they deserve considering the uncertainty and economic problems during the past 20 years."

Housing

House prices are up by 13.5% for the February 2005 year with New Plymouth prices up (32.6%), Dunedin (27.8%) and Christchurch (18.7%). For the year ended February 2005, the total value of consents issued for all buildings was $10.8 billion, up 15% from the year ended February 2004. The trend for the value of non-residential buildings has increased 25% since February 2004. House rents have started to fall in parts of Auckland largely due to fewer overseas students. A recent report from the Salvation Army, From Housing to Homes, was released at the end of February. It argues for numerous schemes such as shared equity, the right to buy state houses in limited cases, supported savings, and a land lease scheme which aims to get the Government to lease land for affordable housing near major employment zones. Home ownership peaked at 73.8% in 1991 but since then the rate has fallen to 67.8% (in 2001). The expectation in the current climate is that home ownership rates are likely to fall below 65% within 10 years. Younger people have seen the biggest reduction in home ownership with a decline of around 12% for people aged 34 years and under, and 10% for people aged 35-39 years. There will be a great deal of interest in the Budget announcements on support for first-home buyers.

Migration

In the year ended February 2005, there were 78,200 permanent and long-term arrivals, down 10,900 (12%) on the February 2004 year. Over the same period, departures increased by 8,100 (14%) to reach 67,100. The overall result was a net migration gain of 11,100 in the February 2005 year, which is 63% lower than the net inflow of 30,100 people in the previous February year. In the year ended February 2005, there was a net inflow of 8,900 from the United Kingdom, down 15% on the February 2004 year figure (10,400), and net inflows from Japan (2,000) and Fiji (1,900). There were reduced net inflows from India (2,200) and China (1,600), down from net inflows of 4,500 and 8,300, respectively, in the February 2004 year. Overall, net inflow from Asia has reduced, from 19,100 in the February 2004 year, to 7,800 in the February 2005 year. In that period, there was a net outflow to Australia of 16,300, an increase of 5,700 (54%), compared with the previous February year.

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