CTU Economic Bulletin No. 113 - Reflecting on the Budget

May 2010

Reflecting on the Budget

Some ideas grow on you. The more you think about them the smarter they appear. The 2010 Budget was the opposite. It dies on me. The more I look, the more worried I get. Not only is it likely to worsen inequalities but it does so little for economic growth that we're unlikely ever to notice. Short of improvements in the economy beyond the government's control, such as a greater than expected improvement in world economic conditions or continuing improvements in produce prices, the living standards of the majority of working people will fall behind in the coming year, measured either in real disposable incomes or in prospects.

Start with the tax changes. People on the main benefits and the Family Tax Credit and Minimum Family Tax Credit parts of Working for Families (WfF) receive compensation for the increase in GST through a 2.02 percent increase in their benefits or tax credits. That 2.02 percent figure is what Statistics New Zealand calculates will be the impact on the Consumer Price Index of the increase in GST. But we know that people on low incomes are harder hit by GST. The 2.02 percent compensation is unlikely to be adequate.

On top of GST is an expected steep rise in other prices with Treasury predicting 5.9 percent inflation in the year to March 2011, only 2 percent of which is due to the GST increase. Treasury is forecasting the average wage to increase only 2.6 percent during the year. Even the tax cuts won't make up the 3.3 percent difference for anyone but the top 10 percent of the population on our calculations.

Most people are reliant on the tax reductions for compensation for the GST rise. GST's variable impact means that for those on lower incomes, the net tax cuts they receive are going to be less adequate than the government's tax calculator tells them, and people on high incomes will benefit more than the calculator tells them. The tax calculator assumes that "other than rent or mortgage payments, all income is spent on items that incur GST", whereas there are other important GST-free aspects of household income, notably including savings, that are not taken into account. Not only will high income households benefit from the highest percentage tax cuts but they will not be affected as badly by GST as the Government would have us believe.

At increasingly high incomes the benefits of the income tax cuts get closer to 5 percent of income compared to just 2.5 percent at the bottom. We have already circulated analyses showing how the gaps are being widened and will do more on this. But the message is clear. The tax changes will favour the rich and increase the gap between rich and poor - at a time when we are reminded of the grossness of the differences, such as a millionaire spending four times the average wage on a month's holiday in Hawaii while his clients agonise over lost savings, and a New Zealand billionaire being the richest person in Australasia despite New Zealand being equivalent to the second poorest "Australasian" state.

The changes to property depreciation rules, which are forecast to raise around $1 billion a year from 2011/12, will take some of the gloss off the income tax reductions for property owners, many of whom (but not all) are among those high income earners. But not all high income earners are property owners, and those that do own property are already receiving a deluge of advice on how to avoid the increase in tax (including of course, getting their money out of property) and how it really won't have that much effect. So for those on low and middle incomes, there is at best not much more than compensation for the changes; for those on high incomes who receive greater cuts in the first place, there is choice as to how they are affected.

High income households will also benefit considerably more from the fall in company income tax and top PIE tax rates (the rate used for some forms of investment income including Kiwisaver). However the greatest beneficiaries from the company income tax cut (30 percent down to 28 percent) will be overseas investors, because New Zealand shareholders already benefit from imputation which means most of the company tax on their shares gets rebated to them. So overseas investors will take most of the benefit of the estimated $340 million cut in public revenue in 2011/12 (and $450 million in 2012/13). That will be partly offset by $200 million a year raised from the change in the "thin capitalisation" threshold. This raises the tax on overseas investors who pile high levels of debt onto their New Zealand subsidiaries, thereby avoiding company tax, raising debt levels, and giving them an advantage over New Zealand investors.

So the Big Question is whether this reinforcement of patterns of poverty and privilege is going to pay off as promised: "lift economic growth by improving incentives to work, save and invest". There was in reality no problem in the incentives to work. New Zealand has had particularly high workforce participation rates for the last decade. We could much more directly encourage saving by expanding Kiwisaver compulsory superannuation payments and other focussed incentives. The depreciation and other tax changes relating to property are likely to have a small beneficial effect in moving investment out of property, but all the signs are that the effect will be minor. The lost opportunity of a capital gains or other assets tax (exempting primary homes) to wean investors off capital gains would have been much more effective.

Even the government doesn't believe that all this will lead to significant growth in the economy. The Economic and Fiscal Update estimates that the tax package will increase GDP by 0.4 percent in four years time (by June 2014) and 0.9 percent in six years (by June 2017). That is an increase in annual growth of about 0.1 percentage point - a number that will get lost in the margins of error.

While government debt is onto a sounder track, the government is still persisting with cuts in public services, and a stated intention to reduce government expenditure from the 34.7 percent of GDP forecast for the year to June 2011 down to 32.4 percent in 2014, signalling continued cuts in public services. The reason is no longer desperate times but political: the operating balance is now expected to be in surplus in the June 2016 year - three years earlier than projected in the 2009 Budget. Net debt is expected to peak at 27.4 percent of GDP in the June 2015 year, not so far above the government debt target of 20 percent.

Despite the government being willing to borrow a further $460 million in order to finance the tax package in the 2010/11 year, public services will continue to be under stress. Education's vote increases by less than 2 percent, well under inflation at a time when we should be boosting skills. We are still analysing the Health vote, but from our pre-Budget analysis, we can see that District Health Boards, which provide the bulk of "front line" services", have received approximately $100 million less than the $454 million they required to just stand still. And that stand-still was already one of deficits and service cuts before the demand and cost increases of the new financial year. The government has boasted of new services, but they are paid for by cuts in the quality or quantity of other ones. It seems inescapable that there will be severe financial difficulties or obvious deterioration in services in parts of the sector.

So we are left with a Budget with much pain, timid steps to rebalance investment in the economy, and backward steps on social equity, yet virtually nothing to show from it in terms of its main objective: economic growth.

Reader survey

Thanks to all readers who completed the survey. We will be making use of its findings in coming months.

Welcome back

Andrew Chick, CTU Research Organiser, is now assisting with the statistical section of the Bulletin, as he has done in the past. Thanks Andrew.

Bill Rosenberg

NZIER Consensus Forecasts¹

These consensus forecasts were published on 23rd March 2010. Items marked "*" are actuals from Statistics New Zealand rather than forecasts.

Eonomic 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 fell 0.5 percent for the month but have increased 0.4 per cent for the year to April.
• Unemployment was at 6.0 percent in March 2010. M?ori unemployment was 14.2 percent, Pacific unemployment was 14.4 percent, Asian unemployment was 9.8 percent and European/Pakeha unemployment was 4.4 percent. Youth unemployment (15-19 year olds) was 25.2 percent. In March 2009, 60,211 people were on an unemployment benefit.
• The total number of people in employment decreased in the year to March 2010 by 0.1 percent to a total of 2,177,000
• 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 March 2010, were up 2.2 percent in annual terms (1.6 percent in the private sector and 3.7 percent in the public sector). The average hourly wage is now $25.27 ($23.35 in the private sector and $32.56 in the public sector). The average female wage is $23.50 which is 87.7 percent of the male wage of $26.79. The Labour Cost Index (LCI) shows that ordinary time wages went up by 1.5 percent in the March 2010 year (1.3 percent in the private sector and 2.3 percent in the public sector). For those workers who received a pay rise in the year, the median increase was 3.3 percent and the average increase was 3.9 percent.
• On 29 April, the Reserve Bank left the official cash rate at 2.5 percent for the 9th consecutive review. The next review will be on 10 June 2010.

Food Prices

The food price index fell 0.5 percent for the month of April 2010 but had increased 0.4 per cent in the year to April. For the month of April prices of meat, fish, poultry, non-alcoholic beverages, fruit and vegetables fell. Restaurant meals and ready-to-eat food was unchanged, but grocery food rose. The biggest individual rise came from strawberries (up 22.4 percent). The biggest individual fall came from kiwifruit (down 36.4 percent). Food prices are 8.1 percent higher than they were 2 years ago.

Wages and Salaries

For the second quarter in a row the Quarterly Employment Survey (QES) reported that average hourly earnings had fallen. The average ordinary time hourly wage now stands at $25.27 per hour, 0.4 percent down on the December 2009 figures and just 2.2 percent higher than March 2009. To put this in perspective, it grew by 5.3 percent in the year to March 2009. The average ordinary time public sector wage is now $32.56 per hour and annual growth in this sector was 3.7 percent growth compared to just 1.6 percent growth in the private sector. The ordinary hourly wage in the private sector is now $23.35. The average male hourly wage has increased by 2.6 percent this year to $26.79, whilst the female wage has increased by only 1.8 percent to $23.50 per hour. The female wage currently sits at 87.7 percent of the male wage.

The March quarter's Labour Cost Index showed a greater deterioration in wage growth than the QES³, with ordinary time wage rates increasing 1.5 percent for the year and 0.3 percent for the quarter (compared to an increase of 3.4 percent in the year to March 2009). Statistics NZ say this is the lowest growth since September 2000. For the March 2010 year, 1 percent of the working population saw their wages decrease, 56 percent experienced no change, and 43 percent saw an increase in wages. This is the lowest proportion since the year to September 1999. For this 43 percent, the median wage increase for the year was 3.3 percent and the average increase was 3.9 percent. These figures were down from 4.2 percent median and 5.7 percent average recorded in the March quarter of 2009.

Unemployment

The seasonally adjusted unemployment rate dropped from 7.1 percent in December 2009 to 6.0 percent in the March 2010 quarter and represents 25,000 fewer people who are considered unemployed. Although this figure represents the largest quarterly fall in unemployment since the Household Labour Force Survey began in 1986 many commentators are warning against over optimistic interpretations. The figures are seasonally adjusted, which means they try to take account of seasonal patterns such as fruit-picking and students returning to tertiary education during the three months covered. If there was an abnormal pattern this year the adjustment could exaggerate an improvement. In actual numbers there were 153,500 people looking for work in March 2010 (or 140,000 in seasonally adjusted terms) and the unadjusted unemployment rate was 6.6 percent compared to 6.8 percent in December 2009. It is also important to note that (in seasonally adjusted terms) there are 19.3 percent (or 23,000) more people unemployed than in the same quarter in 2009, with the number of females unemployed rising 28 percent, over twice the rate of males, up 13 percent. The Māori unemployment rate is at 14.2 percent compared to 10.7 percent a year ago and unemployment among Pacific peoples remains high at 14.4 percent (13.6 percent a year ago). Youth unemployment (15-19 years) has fallen slightly from 26.5 percent in December 2009 to 25.2 percent, but is still considerably higher than the 19.1 percent a year ago. Including those who are discouraged from looking for work, or not immediately available, there are 263,000 jobless people. In addition there are 99,900 people who are employed part time but would like to work more hours, though there is some welcome rebalancing of the workforce with a 1.6 percent increase in numbers in full time work and a smaller decrease of 0.6 percent in part time work, following a rise in the proportion of people in part time work during the year. The number of long-term unemployed (26 weeks or more) has also increased by 81.5 percent in annual terms. As such, the recession is far from over for many workers.

Employment

The Household Labour Force Survey reported that seasonally adjusted employment increased by 1.0 percent (or 22,000) to 2,177,000 in the quarter, but was down 0.1 percent for the year. This quarterly rise was driven predominantly by an increase in male full time employment (up 19,000). The labour force participation rate remained at 68.1 percent of the total New Zealand population. The QES for the March 2010 reported that the number of full time equivalents (1.31 million) had fallen by 0.5 percent since March 2009. There was a 0.1 percent annual increase in filled jobs (to 1.67 million), but this incorporated a 0.9 percent fall in the most recent quarter. The number of people in full time employment has been increasing for the last 2 quarters, but fell 1.2 percent annually, whilst part time employment decreased in the last quarter, but rose 3.2 percent in annual terms. In the year to March employment in the manufacturing industry had fallen 7.7 percent. Seasonally adjusted total paid hours had decreased by 0.1 percent since March 2009, but had increased 1.1 percent for the quarter. Paid hours had been in decline since December 2008 and today's figures are on par with mid 2005 records. After falling 13.0 percent in the March 2009 year, the amount of overtime worked per week had dropped by another 6.3 percent in the March 2010 year.

Online Job Vacancies

The Department of Labour's job tracking tool, Jobs Online, reported a 8.6 percent rise in vacancies over the three months to the end of April 2010, and an 8.5 percent increase in skilled vacancies for the same period. Advertising for skilled vacancies increased in Wellington (up 15.6 percent), Auckland (up 8.5 percent), the rest of the North Island (up 8.8 percent) and the South Island excluding Christchurch (up 7.3 percent). Only Christchurch saw a decline, down 3.4 per cent. Since January, the biggest increases in advertising by occupation occurred in construction and engineering (15.1 percent) and sales, retail, marketing, advertising (11.4 percent). Health and medical vacancies had the only fall, decreasing by 1.7 percent. Despite this growth, advertisements are still down 36.2 percent on the peak of March 2008, though up 19.0 percent on a year ago (April 2009). Skilled vacancies have been increasing at a slower rate than vacancies as a whole: they were up by only 14.3 percent in the year.

Migration

Seasonally adjusted, there were a net 770 permanent and long-term (PLT) arrivals into New Zealand in April 2010, the lowest since the net 500 in December 2008. That was made up of 6,550 arrivals and 5,780 departures. In unadjusted terms, there were 5,259 PLT arrivals and 5,852 departures, a net outflow of 593 people. The year to April 2010 brought 83,620 PLT arrivals and 63,666 departures, creating a net gain of 19,954 migrants. The highest net gains were from the U.K. (8,000), India (5,600), and China (3,700), and falls for South Africa (1,900), the Philippines (1,700), and Fiji (1,700). There was a net outflow to Australia of 14,800, under half the 32,000 in the previous (April 2009) year. There were 30,500 departures to Australia and 15,700 arrivals. Almost 9 in every 10 departures to Australia were New Zealand citizens (26,300) and two-thirds of the arrivals were New Zealand citizens (10,700).

Manufacturing Sector

In April 2010 the Performance of Manufacturing Index (PMI) to show expansion with an index of 58.9⁴, up from 56.7 in March 2010. This was the highest PMI value since 2004. The employment index (52.2) strengthened somewhat but still didn't match continued robust expansion in production (63.0) and new orders (61.0). Deliveries (58.7) and finished stocks (53.4) indexes also grew. All the industry sub-groups were in expansion for April with Metal product manufacture (57.1), food, beverage and tobacco (56.7) and machinery and equipment manufacture (56.3) showing the highest indices. All regions were also in expansion with Canterbury (58.0) leading Central (56.6), Northern (54.3) and Otago/Southland (53.4). Internationally, the global PMI was 57.8, with the USA at 60.4 and Australia's index bouncing back to 59.8.

Service Sector

The Performance of Services Index (PSI) was 51.4⁴ in April 2010, down 2.6 points on March. The new orders index fell to 57.1 and deliveries fell to 50.2, whilst indices for stocks and inventories showed slight contraction, hovering just below the 50 mark. The employment index rose to 54.3. Central and Northern regions experienced growth, but Canterbury/Westland and Otago/Southland were in contraction. Property and business services (58.3) and wholesale trade (54.8) expanded. The cultural, recreational and personal services sector was steady (58.3). Retail trade (46.3) and accommodation, cafes and restaurants (41.4) fell.

Retail Sales

Total retail sales rose 0.5 percent in value (up $86 million) for the March 2010 quarter, based on a 0.2 percent increase in volume. This was despite a 0.7 percent fall in the value of core retail sales (that is, retail sales excluding motor vehicle related sales, service and fuel sales), down $87 million, and a 0.5 percent fall in their volume. But this was compensated for by an $82 million increase in automotive fuel retailing and an increase in motor vehicle retailing of $81 million. Accommodation was the other industry with a large increase, up 3.7 percent or $24 million. The largest decreases were in appliance retailing (down 3.5 percent or $29 million), cafes and restaurants (down 3.5 percent or $37 million) and supermarket and grocery stores (down 1.0 percent or $82 million).

Building Consents

In the month of April 2010, seasonally adjusted building consents were up 15.5 percent, the highest since April 2008, after falling 8.3 percent in March. There were 1,309 consents for new dwellings excluding apartments, and 91 consents for new apartments. Statistics New Zealand say that the trend for the number of new dwellings authorised, excluding apartments, has been increasing since March 2009. In unadjusted terms, however the value of all residential building consents in the month fell 9.1 percent however, with $480 million approved in April compared to $528 million in March. For the year to April, the number of residential building consents was up 6.1 percent to 15,772 compared to the previous year and the value was up 3.7 percent to $5,540 million. This value is still 28.1 percent down from the April year peak of $7,701 million in 2008. The value of non-residential building consents fell 5.2 percent to $327 million in the month of April 2010 from $345 million in March and 38.3 percent from $530 million in April 2009. For the year to April 2010, the total value of non-residential building permits fell 10.5 percent.

Housing and Property Prices

The Real Estate Institute of New Zealand's (REINZ) Monthly Housing Price Index showed median residential property prices and the number of sales were down in April 2010 to $356,000 (a fall of $4,500 from March) on 5,207 dwellings sold (down 954 on March). But this was still 4.7 percent up on the median price for April 2009. In total value, residential sales including sections fell 18 percent to $2.24 billion from $2.73 billion in March.

Government Accounts and Debt

The Government accounts for the 9 months ending in March 2010 showed that tax revenue was $530 million (1.4 percent) lower than forecast in the December 2009 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 $930 million (2.4 percent) below forecast. Corporate tax receipts were $349 million (8.2 percent) below forecast, source tax deductions were $537 million (3.2 percent) below forecast due to a lower effective tax rate than anticipated, and other personal tax receipts were $309 million (12.8 percent) below forecast due to lower business profitability reducing provisional tax receipts. These trends are expected to continue to the end of the financial year on 30 June. GST revenue, on the other hand, bucked this trend due to higher consumer spending and was up $314 million on forecasts. Core government expenditure was $809 million (1.7 percent) lower than forecast partly due to Treaty settlements of $385 million being delayed until the new financial year, but also due to "individually small items (all less than $30 million) across a number of departments". ACC compensation payouts were $242 million lower than expected because of "lower claims costs", reflecting the tightening of criteria for compensation. The operating balance before gains and losses (OBEGAL) was $5.27 billion in deficit and $522 million smaller than forecast. The operating deficit of $1.33 billion was $2.0 billion smaller than forecast mainly due to gains from the ACC and New Zealand Superannuation investment funds which increased in value by $466 million and $891 million above forecast respectively. Net debt, the Government's main debt indicator has increased 57.8 percent since March 2009 ($9.38 billion), but it still sat in line with HYEFU forecasts at $25.63 billion or 13.8 percent of GDP. Gross debt, at least as important from a credit rating viewpoint, was $2.40 billion lower than forecast at $50.44 billion (or 27.2 percent of GDP) and 23.6 percent higher than a year ago.

Overseas Goods Trade

For the month of April 2010, increases in exports and a fall in imports resulted in a merchandise trade surplus of $656 million or 16.5 percent of the value of exports. A surplus of $161 million for the year to April 2010 was the first annual trade surplus since July 2002. Merchandise exports were up $329 million or 9.0 percent to $4.0 billion in April 2010 compared to April 2009 while imports were down $5 million to $3.3 billion in the same month. Statistics New Zealand says that there has been a strong rising trend in export values since September 2009 but the trend is still 3.6 percent below its November 2008 peak. The rise in exports was driven by increases in milk powder, butter and cheese (up $202 million or 28.9 percent), and wood and wood products (up $68 million or 34.0 percent), and exports of these product groups increased in both price and quantity. Meat and edible offal exports (up $63 million or 11.6 percent), and aluminium and aluminium articles also increased significantly in value while exports of apples, kiwifruit, casein and caseinates fell. China and India had the largest increase in exports, mainly due to dairy products, China up $141 million (44.4 percent) and India up $82 million (112 percent). Australia was next (up $61 million or 8.9 percent), crude oil being the largest contributor. Germany, Indonesia and the U.K. all imported less in the month than the same time last year. Imports fell because of decreases in petroleum and related products, and electrical machinery purchases, all but offset by increases in the values of vehicles, parts and accessories (car imports being up $84 million or 55.4 percent), and the importation of the naval ship HMNZS Otago. However the import value trend has risen 10.7 percent since September 2009, though it is still 17.5 percent lower than its September 2008 peak.

Correction

In the last Bulletin (April 2010), under Government Accounts and Debt, in the last line "$9.38 billion" should read "$49.38 billion".

For further information contact Bill Rosenberg billr@nzctu.org.nz or Andrew Chick andrewc@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 The difference between the LCI and the QES is that the QES reports average earnings which include compositional and other changes in the paid workforce on top of the changes in pay rates that the LCI reports.

4 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.