CTU Economic Bulletin No. 112 - Reading the 2010 Budget tea leaves

April 2010

Reading the 2010 Budget tea leaves

The National led government presents its second Budget on 20 May. What might be in store?

We'd like to see continued government stimulus spending to ensure the economy does not return to recession in an environment acknowledged by both Bill English and the Reserve Bank to still be fragile. Those out of work also need strong support in acquiring new skills if they need them, and finding jobs. Obviously further significant public service staff cuts would not be at all helpful. The government will be repeating its line about rising debt to justify cuts - "the government is borrowing about $240 million a week" - although we note that it is now quietly conceding that this is literally only a half truth. In a recent speech to the Wellington Regional Chambers of Commerce, Bill English modified it subtly: "The latest published forecasts in December show the Government borrowing about $240 million every week for the next four years to roll over existing debt and to fund growing deficits" (our emphasis). Only just over half of that $240 million, $130 million, is new. The rest is to "roll over existing debt". The New Zealand government's gross debt levels are much lower than the rest of the OECD - about one third of the average as a proportion of GDP. The growing debt is a matter for concern but should not get in the way of maintaining government programmes in this uncertain international and domestic environment.

Instead we've been promised an Operating Allowance - new spending for the year - of only $1.1 billion compared to $1.45 billion in this year and $1.75 billion in years before that. The sum needed to keep Health just at its current state, including DHB deficits, waiting lists and all, is likely to be half of that, leaving little for real increases in other programmes. That indeed is what the government is telling us to get used to. Instead it says it will find savings of $1.8 billion elsewhere, through line-by-line reviews which are likely to continue the current rate of job loss in the public service - around 1,500 jobs in the last year. English says those savings will be used for new spending in Health and Education. Just where the cuts fall and whether the increases really go beyond compensating the current levels of funding for rising costs and increasing population are matters to watch for.

Tax changes will probably create the headlines. We know of the probable 20 percent increase in GST from 12.5 percent to 15 percent. But the way low income people are "compensated" for that increased cost will need scrutiny, and how much more than "compensation" high income earners get in their tax reductions is equally important. It is likely that top tax rates will reduce from 38 percent to 33 percent, but it is also possible that the two top tax rates are reduced to a lower value. Either means that most of the benefits will go to people on high incomes. Compensation for low income earners is likely to be in increases in New Zealand Superannuation, Working for Families, and benefits, but also possibly cuts in lower income tax rates - which would benefit high income earners too.

The government has backed out of a golden opportunity to create a national consensus around a capital gains tax exempting the primary residence, or other forms of asset taxes, though there is still a possibility of a more restricted form of capital gains tax that is likely to be much less effective in moving investors away from housing into more productive forms of investment. Don't hold your breath for it though. Tax deductibility for depreciation on property is likely to be stopped. We'll need to watch just how much revenue it will raise (apparently less than the Tax Working Group estimated) and what types of property it will apply to. We also need to watch its affect on rents. It's a useful step in rebalancing investment, but is likely to be less effective in the long run than the options that have been rejected.

It is also likely the Budget will announce a tightening of "thin capitalisation" rules which targets foreign owned companies financed by high levels of debt rather than equity (shares). Interest paid on debt is tax-deductible whereas dividends on shares are not. The change would reduce the level of debt at which special rules kick in. However it is also on the cards that the government announces a further reduction in corporate tax rates, saying it must compete us into the ground against Australia and others. A major review of Australia's taxation system is being released on Sunday. However the total taxes faced by companies in New Zealand are already the seventh lowest in the OECD according to a study by PricewaterhouseCoopers and the World Bank. Countries other than Australia are likely to be raising rather than lowering taxes to repay their hugely increased government debt as a result of government stimulus programmes to combat the recession and bailing out banks.

There is also likely to be some form of incentive for research and development, replacing the previous government's tax credits under another name. Other matters to watch for are the projected effects of reduced ACC entitlements, reduced benefit entitlements, and further announcements or provision for more public-private partnerships for running schools, roads and other government assets. The effects of the beginning of Emission Trading this year will also be seen.

Farewell Gemma

This is the last Bulletin that Gemma Habens will be contributing to. Gemma has been working part time at the CTU on the Bulletin since March 2009 while she worked on a Masters in International Relations at Victoria University. Prior to that, she worked as a researcher at EPMU. Having finished her study (she is still waiting for final results but we are confident that with her abilities she will excel!) Gemma has been looking for a permanent full time position. While she is not yet able to make an announcement, the writing is clearly on the wall. Gemma has made a highly valued contribution in drafting the statistical section of the Bulletin each month - a painstaking but essential task - while also assisting with other CTU activities including UnionAID. We're very sorry to lose her, but wish her all the best in her new position, and hope that the union movement will not lose her skills and commitment whatever position she finds in the immediate future. All the best Gemma.

Bill Rosenberg

NZIER Consensus Forecasts¹

These consensus forecasts were published on 23rd March 2010.

Economic Snapshot

• GDP increased by 0.8 percent for the December 2009 quarter. In annual terms GDP declined 1.6 percent.
• The Consumer Price Index (CPI) rose by 2.0 percent for the year to March 2010 and by 0.4 percent for the quarter.
• Food prices rose 0.3 percent for the year to March 2010 and were up 0.2 percent for the month.
• Unemployment was at 7.3 percent in December 2009. M?ori unemployment was 15.4 percent, Pacific unemployment was 14.0 percent, Asian unemployment was 9.2 percent and European/Pakeha unemployment was 4.6 percent. Youth unemployment (15-19 year olds) was 26.5 percent. In December 2009, 60,211 people were on unemployment benefit, down from the 66,328.
• The total number of people in employment decreased in the year to December 2009 by 2.5 percent to a total of 2,152,000.
• The minimum wage is $12.75 an hour and $10.20 an hour for new entrants aged 16 or 17 in their first 3 months or 200 hours, whichever ends first.
• Ordinary time hourly wages, as measured by the Quarterly Employment Survey (QES) for December 2009, were up 4.0 percent in annual terms (3.1 percent in the private sector and 5.7 percent in the public sector). The average hourly wage is now $25.37 ($23.45 in the private sector and $32.30 in the public sector). The average female wage is $23.50 which is 87.1 percent of the male wage of $26.98. The Labour Cost Index (LCI) shows that ordinary time wages went up by 1.8 percent in the December 2009 year (1.5 percent in the private sector and 2.4 percent in the public sector). For those workers who received a pay rise in the year, the median increase was 3.7 percent and the average increase was 4.4 percent.
• On 29 April, the Reserve Bank left the official cash rate at 2.5 percent for the 9th consecutive review.

Gross Domestic Product (GDP)

GDP grew 0.8 percent in the three months to December 2009, the first solid increase since contraction of the economy ceased in the June quarter. It followed increases of 0.2 percent and 0.3 percent increases in the June and September quarters. It contracted by 1.6 percent in during the year. Growth during the quarter was across the economy, the main exceptions being in construction which contracted by 0.6 percent in the quarter, and personal, health, and community services, which fell 1.1 percent. Construction has contracted in every quarter except one since December 2007. However investment continued to fall. It contracted by 0.9 percent in the quarter, and 12.2 percent for the year. Although this was largely due to falls in investment in intangible assets (software and exploration), it does not bode well for future employment growth. There was a strong rise in manufacturing output (4.5 percent for the quarter), but that follows seven quarters (almost two years) of contraction. Manufacturing has not had two consecutive quarters of growth since September 2005, and its output in December was 17 percent below the level in that quarter. It will be a considerable time before manufacturing returns even to that peak.

Consumer Price Index

The consumer price index (CPI) for the March 2010 quarter rose 0.4 percent and increased 2.0 percent for the year to March. In the three months to March, the most substantial increases in the categories that make up the CPI came from food prices (up 1.0 percent), transport prices (up 1.1 percent) and in particular petrol prices that rose 6.9 for the quarter. There was also a 23.4 percent rise in the 'other education' category during the quarter, which occurred as a result of the cut in subsidies to adult community education. CPI is expected to rise substantially - between 4.5 to 5.0 percent in early 2011 - if GST is increased later this year.

Food Prices

The food price index rose 0.2 percent for the month of March 2010 and 1.0 percent for the March 2010 quarter. All food subgroups increased, apart from the price of fruit and vegetables which fell a further 1.9 percent. The biggest individual rise came from beef prices (up 7.2 percent). It is worth noting that although food prices have risen only 0.3 percent since March 2009, they are still 8.9 percent higher than they were 2 years ago. In annual terms, there is some variance between subgroups, with fruit and vegetables prices having fallen 5.3 percent and dairy prices having risen 3.5 percent.

Unemployment Benefit

For the March 2010 quarter, the Ministry of Social Development reported that the number of people receiving unemployment benefit had dropped by 10.2 percent (or 6,117 people) to 60,211 compared to the previous quarter. Nevertheless, the number of unemployment beneficiaries has grown 62 percent (or 23,000) since March 2009. Of the total, 31.8 percent were aged 18-24, 33.2 percent were aged 25-39, and the remaining 35 percent were mature job seekers in the 40-64 age group. The proportion in the youngest age group has fallen from 34.0 percent in December 2009, with the availability of seasonal work and return of people to tertiary education after the summer break likely contributing causes. The proportion of unemployed beneficiaries who have been receiving support for more than one year has risen from 16 percent at the end of December 2009 to 22 percent at the end of March. This means that despite the fall in overall numbers on the unemployment benefit, the number of long term unemployed among them is rising. There were 10,400 who had been on the benefit for more than a year in December and 13,200 in March.

Online Job Vacancies

The Department of Labour's job tracking tool, Jobs Online, reported a 9.5 percent rise in vacancies over the three months to the end of March 2010, and an 8.3 percent increase in skilled vacancies for the same period. In the North Island, advertising for skilled vacancies has increased with Wellington (up 12.7 percent), Auckland (up 10.4 percent), and the rest of the North Island (up 8.8 percent) seeing marked gains. In the South Island, Christchurch saw a 0.6 percent rise in skilled vacancies in the three months to March, following contraction in February, and skilled vacancies (up 3.0 percent) in the rest of the South Island also marked a return to positive territory. Since December, the biggest increase in advertising occurred in retail and marketing (up 14.6 percent) and the biggest decline occurred in health and medical sector (down 0.4 percent). Although statistics for skilled vacancies are improving, advertisements are still down 39 percent from the peak of March 2008.

Retail Sales

Seasonally adjusted retail sales values for February 2010 were up 0.6 percent (or $32 million) on January 2010 figures. However, core retailing, which excludes the automotive sector, remained weak, dropping 0.9 percent (or $35 million) in February following a rise of just 0.3 percent in January. The largest monthly gains in sales came from the automotive repair and services (up 3.7 percent) whilst the largest fall came from department stores (down 3.3 percent). Compared to February 2009, retailing sales have grown 2.4 percent.

Manufacturing Sector

In March 2010 the Performance of Manufacturing Index (PMI) continued to show expansion with an index of 56.3³, up from 53.3 in February 2010. This was the highest PMI value since March 2007. The employment index (50.1) continued to look fragile in contrast to the more robust expansion in production (59.4), new orders (56.9), deliveries (57.0) and finished stocks (52.8). Metal product manufacture (62.4) and machinery and equipment manufacture (58.1) had the highest indices across all the manufacturing sectors. All regions, other than the Central area (49.0), experienced improved manufacturing performance in March. Internationally, the global PMI was 56.7, with the USA's at 59.6 and Australia's index falling back to 50.2.

Service Sector

The Performance of Services Index (PSI) was 57.33³ in March 2010, marking eight continuous months of expansion and marking the best March PSI since the survey began. The new orders index rose to 62.7 and deliveries rose to 53.1, whilst indices for stocks and inventories contracted slightly, hovering just below the 50 mark. The employment index started to recover from the fall it experienced in February (50.6) to sit at 51.9. All regions recorded expansion in February. Retail trade (52.3) and transport and storage (55.7) both moved into expansionary territory March, whilst the strongest indices occurred in property and business services (61.1) and wholesale trade (59.1).

Housing and Property Prices

The Real Estate Institute of New Zealand's (REINZ) Monthly Housing Price Index showed that stratified median house prices increased from $362,150 in February 2010 to $368,225 in March 2010. House prices have increased 6.4 percent since March 2009. There were 6,161 residential sales in March.

Building Consents

In March 2010, seasonally adjusted building consents were down 8.3 percent after increasing 9.8 percent in February 2010. There were 1,426 new building consents (excluding apartments) worth $528 million. The number of residential building consents for the year to March was down 5.3 percent to 15,381. In the year to March 2010, the value of residential building consents was the lowest annual total in any March year since 2002, at $5,415 million.

Government Accounts and Debt

Government accounts for the 8 months ending in February 2010 showed that tax revenue was $361 million lower than forecast in the Half Year Economic and Fiscal Update (HYEFU). However, when "structured financial transactions" (repayment of evaded tax) from the four big banks are taken into account, the underlying tax revenue was actually $681 million below forecast; driven down by tax cuts and lower than forecast business profitability. Corporate tax receipts were $228 million below forecast, personal tax receipts were $267 million below forecast and source tax deductions were $455 below forecast. GST revenue, on the other hand, bucked this trend and was up $389 million on forecasts. Core government expenditure was $915 million lower than forecast. The operating balance before gains and losses (OBEGAL) was $4.49 billion in deficit and $567 million smaller than forecast. The operating deficit of $1.62 billion was $1.10 billion smaller than forecast with better than forecasted net gains from ACC's investment portfolio (up $267 million), the New Zealand Superannuation Fund investment portfolio (up $311 million) and actuarial gains from ACC (up $203 million). Net debt, the Government's main debt indicator, grew by over $10 billion in the 12 months to February, but still sat in line with HYEFU forecasts at $24.17 billion or 13.0 percent of GDP. Gross debt was $3.15 billion lower than forecast at $49.38 billion (or 26.6 percent of GDP).

Overseas Goods Trade

In the March 2010 quarter, there was a seasonally adjusted trade surplus of $233 million (or 2.2 percent of exports), which follows deficits of 1.1 percent of exports in December 2009 and 2.0 percent of exports in September 2009. The surplus reflects an increase in exports (up 10.4 percent to $10.4 billion) alongside a smaller increase in imports (up 6.8 percent to $10.2 billion). Exports, which grew for the first time since the December 2008 quarter, were dominated by a 29.2 percent (or $529 million) increase in the value of milk, cheese and butter merchandise. Other notable rises in exports came from the value of meat (up 8.4 percent of $99 million), from logs and wood (up 16.2 percent or $96 million) and from crude oil (up 9.7 percent or $46 million in unadjusted terms). The main contributors to the rise in imports came from crude oil (up $16.4 percent or $150 million), consumption goods (up 4.8 percent or $123 million) and passenger motor vehicles (up 10.9 percent or $69 million). Nevertheless, imports remain 4.9 percent below the figures for the March 2009 quarter. For the month of March 2010, exports were up 0.1 ($3.0 million) and imports were down 3.5 percent ($126 million), creating a sizeable trade surplus of $567 million (or 14.0 percent of exports).

Migration

In seasonally adjusted terms, there were 6,900 permanent and long-term (PLT) arrivals into New Zealand and 5,900 departures in the month of March 2010, giving a net monthly inflow of 1,000 PLT migrants. In annual terms, the year to March 2010 brought 84,300 PLT arrivals and 63,300 departures, creating a net gain of 21,000 migrants. There was a net PLT outflow of 14,900 migrants to Australia, which compares to 33,600 (more than double) that was recorded in the previous March year. In the year to March 2010, 20,700 people arrived on work permits - 3,400 fewer than the previous March year.

Work Stoppages

In the year to December 2009, there were 26 work stoppages, involving 8,705 workers. This compares to 23 stoppages in 2008, 31 stoppages in 2007, 42 stoppages in 2006 and 60 stoppages recorded in 2005. The 2009 figure included 20 strikes, 5 partial strikes and 1 lock-out and a total of 15 of these disputes remained unresolved according to Statistics NZ. It is estimated, 13,942 person-days were lost to work stoppages in 2009 and $2.4 million was lost in wages and salaries.

Beating Australia in billionaires

According to the latest Forbes listing, the richest person in Australia or New Zealand is New Zealand's Graeme Hart, owning a net $US5.3 billion of assets, more than a billion ahead of Australia's richest, Andrew Forrest, head of the Fortescue Metals Group, at $US4.1 billion. Hart began his fortune with government assistance: the cheap purchase of privatised Government Print, tripling the then size of his Rank Group. He is now reinforcing New Zealand's ranking high on the inequality lists.

For further information contact Bill Rosenberg billr@nzctu.org.nz or Gemma Habens on gemmah@nzctu.org.nz

Notes

1 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. Because the consensus forecasts are done only every 3 months, some of the more recent forecasts will be more accurate.

2 As measured by Statistics New Zealand's Quarterly Employment Survey.

3 A figure under 50 shows the sector is contracting; above 50 shows that it is growing. The index is an early indicator of business activity.