CTU Economic Bulletin No. 85
October 2007
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Comment
With the National Party these days it seems that no matter what the question is - the answer is always tax cuts. Take their recent comments about a person they called Joanna Average who earns $44123 annually. In order to make this a story about tax rather than income and well-being they ensured that Joanna had no children. This meant that the very significant tax cuts as part of Working for Families were left out of the calculation. That also meant any benefits from 14 weeks paid parental leave and hugely reduced costs of early childhood education could also be excluded from consideration. Part of Joanna’s income has also moved into a higher tax band, whereas most workers will be in the same bands now as they were 7 years ago. They didn’t mention that there were 16,000 more women who were unemployed in 2000. Fair enough not to mention KiwiSaver in terms of the period considered but any commentary would have surely recognised that the $1000 kickstart, the $20 a week (which is $1040 a year), and the potential of $582 extra a year due to the removal of Specified Superannuation Contributions Withholding Tax on the first 4 percent of employer contributions would add up to a significant benefit to Joanna in the long run. If this story was not just about tax, what other relevant factors to Joanna Average would be mentioned? Try – four weeks’ annual leave and cheaper doctor’s visits and prescription charges for a start. If Joanna did have children and they were in the workforce perhaps the fact that the minimum wage for an 18 year old in 1999 was $4.20 an hour compared with $11.25 an hour today might also get a mention. The National Party also have said that higher inflation has eaten away at wages. That is an argument unions also use. Inflation from 2000 to 2007 was 20.2 percent compared with 12.7 percent from 1993 to 2000. But economic growth in the later period was 2 per cent higher than in the 1993-2000 period. So inflation is a concern – but monetary policy that strangles economic growth is no way to sustainably lift real incomes either. But let’s look at the figures the National Party used for Joanna Average. They pointed out that average income rose from $33968 in June 2000 to $44123 in June 2007. This is an increase of $10,1551. But tax had gone from $6623 to $9430. And inflation also had an impact meaning that real annual income had only gone up by $506. Actually, the National Party got their calculations wrong. They adjusted the effect of inflation on the difference in gross income when in fact we pay for goods and services out of net income. Once the calculation is done correctly, the increase in real annual income was $1825 a year. This is a 6.7 percent increase in real net income over the last 7 years. Now no-one is saying that is a great result – least of all the CTU. But it just shows what some massaging of a story does. How about a headline of Real incomes up by 7 percent? Same figures (with correct calculations) – but a different take. And the Government pointed out that if Joanna Average was a mother in a two-parent, single-income household with two children under 12 and she was working more than 30 hours a week and earning $41,000, then she would pay no tax at all - thousands of dollars less in tax than in 1999. It is also interesting to use median income rather than average pay which is skewed upwards by those on very high incomes. In June 2000 the median wage was $14 an hour. In June this year it reached $18. In annual income that means an increase from $29120 to $37440. After tax the increase was from $23442 to $30139. After adjusting for inflation income was up by $1962. So the real net wage for a median worker rose by 8.4 percent in that period. No surprise that when the National Party talks about tax they avoid any focus on those with high incomes. I guess they are not keen on reminding people that their tax policy at the 2005 election would mean a tax cut of $29.75 a week for Ms Joanna Average on $44,123 but a tax cut of $91.73 a week for Mr Joseph Above-Average on $104,123. The disturbing part of all this is that it appears the National Party want the issue of decent incomes to be about tax – and only tax. Remember the last National Government attacked wages and conditions as well as benefits. The 1992 benefit cuts were worth approximately $1.3 billion – about the same size of each of the tax cuts handed out in 1996 and 1998. Over 70 per cent of those tax cuts went to those in the highest incomes bands. And if for instance Joanna had been a supermarket worker in the 1990s her income over that period would have been down by 11 per cent in real terms if she worked Monday to Friday and reduced by up to 44 percent if she worked also some evening and weekend hours. Those reductions were due to employment law. A familiar tactic which we see across the Tasman now – promise tax cuts while also planning to attack pay and conditions. The National Party supports a 90 day no-rights period of employment. If you are one of the 175,000 workers who at any one time are in their first 3 months on the job, imagine how much harder it is to support union claims for a wage increase when you know that if the boss sacks you there is no right of appeal. What is the CTU saying about incomes? We have said consistently that New Zealand now has embedded low wages. The 30 percent income gap with Australia is primarily about wage levels – not taxes. We want a lift in the minimum wage to $15 an hour (about two-thirds of the average wage) and strengthening of collective bargaining on an industry and multi-employer basis. We are not opposing tax cuts. In fact our submission way back in March 2001 to the Tax Review called for a more progressive tax scale and noted that "there is clearly a case for lowering the tax rate for income below $20,000 per annum, or having a tax-free band for income below that level. The tax rate of 15% could be lowered to 10% as applies in the United Kingdom, and/or the bottom threshold could be significantly increased from the current $9500." Clearly tax cuts are coming. The timing, design, magnitude and so forth will continue to be debated. We are not arguing against any tax cuts. We are simply saying that in our list of priorities, tax cuts are some way down the list. They come after decent wages, maintaining and improving our public services, meeting the new challenges around issues such as climate change, and also investing in the skills and infrastructure required to modernise our economy in order to lift incomes on a sustainable basis. A survey released this week showed that almost half (48 percent) of New Zealanders would prefer the government to spend the current surplus on public works or services, while 35 percent want the surplus spent on tax cuts. Another consideration for the CTU is that if there are tax cuts we are very concerned about fairness as usually tax cuts benefit those on the highest incomes. It is not in the interests of workers to allow all income issues to be reduced to a debate about tax? Will the National Party for instance support the CTU call for a minimum wage of $15 an hour? Will they (and others) support tax policies that will make housing more affordable in the long run – such as a more comprehensive capital gains tax on investment housing? Now that they are focussed on Joanna rather than Joe – will they support pay equity? What about a call for higher pay on an industry basis to address skill shortages after the ShapeNZ poll conducted on behalf of the New Zealand Business Council for Sustainable Development? It showed that 74% of business owners agree poor pay was the major factor behind difficulties in finding skilled workers. For all these reasons I hope that as the debate continues about the tax cuts which are inevitably coming, the focus remains on overall wellbeing and all the of the wage, benefit, public services and investment issues we need to consider – and not a presumption that only one issue (tax) matters when we look at ways to lift incomes.
Consensus forecasts2 published by NZIER
The consensus forecasts were updated in September 2007.
March Years %
2007
2008
2009
GDP
1.7
2.4
2.0
CPI
2.5
3.0
2.8
Wages (QES)
5.3
4.0
4.0
Employment
1.7
1.2
0.7
Unemployment
3.8
3.9
4.2
Economic Snapshot
Consumer prices rose 0.5 percent in the September 2007 quarter, and were up by 1.8 percent annually. The next CPI update is on 17th January 2008. Food prices rose 0.4 percent in the month to September 2007, and 3.4 over the past 12 months. 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 figure as in the June 2006 year. The next GDP update is on 21st December. The Official Cash Rate (OCR) is 8.25 percent.
CPI
The Consumers Price Index rose by 0.5 percent in the September 2007 quarter and by 1.8 percent in the year to September 2007. The main factors in the annual increase were higher prices for the purchase of new housing (up 5.8 percent), actual rentals for housing (up 3.1 percent), electricity (up 6.2 percent), local authority rates and payments (up 6.6 percent) and poultry (up 26.9 percent). But health prices were reduced as a consequence of increased Government subsidies, with pharmaceutical products (down 18.1 percent) and general practitioner fees (down 12.5 percent). Education prices fell by 2.4 percent with a 33.4 percent fall for early childhood education costs. Ongoing pressures on food prices and also petrol are a significant concern as they impact severely on low income families and also higher fuel costs can flow on to increase the prices of many other goods and services. Annual CPI of 1.8 percent is made up of -0.2 percent for December 2006 quarter, 0.5 percent for the March 2007 quarter, 1.0 percent for the June 2007 quarter and 0.5 percent for the September 2007 quarter. When the CPI is next updated in January 2008, the -0.2 percent for the December 2006 quarter drops out and will be replaced by (say) a figure of around 0.8 percent. Annual CPI could be 2.8 percent or more by then. The BNZ forecast 2.8 percent for calendar year 2007 with Westpac higher at 3.1 per cent.
Income Survey
The New Zealand Income Survey is released once a year by Statistics New Zealand. This year’s survey shows that the average weekly income from all sources was $667, up 9.4 percent from the June 2006 quarter. Average weekly income from all sources was up 10.4 percent for males (to $832) and up 7.8 percent (to $510) for females from the June 2006 quarter. Average weekly wage and salary income for people receiving income from wages and salaries was $796 in the June 2007 quarter, an increase of 7.7 percent on the June 2006 quarter (note that this includes extra hours worked as well as higher pay). The average hourly rate in the June 2007 quarter was $21.41 and the median was $18.00. Average weekly household income from all sources was $1,445 in the June 2007 quarter, an increase of 9.4 percent from the June 2006 quarter average of $1,321 whereas median weekly household income from all sources rose 6.5 percent, to $1,203. Meanwhile this month Statistics New Zealand staff held a lunchtime rally in support of their field interviewers, who are paid a starting rate of $14.00 per hour.
Are the regions catching up?
Median hourly earnings in the provinces have increased by more than the cities (on a percentage basis) since 2001, according to the Ministry of Social Development’s 2007 Social Report. Between 2001 and 2006, the hourly rate rose 13.5 percent in Marlborough, 14.4 percent in Canterbury, 15.2 percent in Southland, 15.5 percent in Southland and 12.7 percent in Taranaki and Bay of Plenty compared with 9.8 percent in Auckland.
Maori employment
The unemployment rate for Maori fell to 7.6 per cent in the year to June 2007, (now 7 percent) while the Maori labour force participation rate reached nearly 68 per cent, the highest ever recorded. Figures from a recent Labour Department report show that growth in Maori employment accounted for half the total growth in employment in the June year - of the 32,500 extra people employed than at the same time the previous year, 16,400 were Maori. The M?ori wage growth of 4.2 percent over the past five years has not kept up with the 5.1 per cent overall average growth. The report says this is partly attributed to M?ori having a relatively high number of new entrants in the workforce compared with non-M?ori, which means M?ori workers will be less experienced and so often lower paid.
Work Stoppages
There were 35 work stoppages in the year to June 2007, consisting of 28 complete strikes and seven partial strikes. Of these stoppages, 13 were in manufacturing, 8 were in health and community services, and 3 were in construction.
Student Debt Keeps Rising
Student debt rose from $7.4 billion to $8.4 billion during 2006/07. There were 11,951 borrowers who repaid their loan this year compared with 16,287 last year. At June 30, 499,259 students had loans, compared with 470,507 last year. The median value of a student loan was $11,087 in 2006/07 compared with $10,652 last year.
Housing and Property
REINZ figures show that the median house price in September was $351,500, up 12.3 percent for the year. Quotable Value reported a 13.2 percent growth in national property values over the past year. The average sale price for New Zealand residential properties increased to $404,089. However, property sales in September slipped from 6,394 in August to 5,894 in September; the lowest since the 2001 sales of 5,550 and almost half the September 2003 sales of 10,686. Meanwhile Statistics NZ advise that there were 2,032 new housing units authorised in September 2007, 513 fewer units than in September 2006. This is a further indication that the housing market is cooling at last.
Housing Affordability
In Auckland, 93.7 percent of take-home pay from one median income is now required to be able to afford the mortgage on a median priced house. In Wellington it is now 79.6 percent. A home loan is considered "affordable" when it costs 40 percent or less of take-home pay. The three key influences over home loan affordability are: house prices, after-tax income, and interest rates. The median weekly take-home pay for a typical buyer was $686.32 in September, up from the $658.34 in September 2006. When mortgage payments are deducted from wages, approximate weekly disposable income equates to only $137.13 in September, $74.31 lower than the $211.44 in September 2006. This measure shows clearly why current property prices effectively exclude so many potential buyers. Alongside this, a recent survey by Research New Zealand has revealed that nearly 70 percent of New Zealanders with mortgages are concerned about keeping up with mortgage repayments.
Trade
The seasonally adjusted value of merchandise exports for the September 2007 quarter increased $215 million (2.5 percent) to reach $8.7 billion this quarter. Exports were boosted by Tui oil sales. Meanwhile the seasonally adjusted value of imports fell $184 million (1.8 percent) in the September 2007 quarter. The seasonally adjusted trade balance for the September 2007 quarter is a deficit of $1.3 billion. The Trade Weighted Index (TWI) shows that the NZ dollar fell 2.6 percent in the September 2007 month but was still 4.1 percent higher than a year ago. The trade balance for the September 2007 year is a deficit of $6.3 billion.
Government Accounts
Figures for the twelve months ending June 2007 show an operating surplus of $8.7 billion, $2 billion more than forecast in the Budget. Core crown expenses were $800 million below forecast while profits from crown businesses were $700 million higher. The OBERAC (Operating Balance Excluding Revaluations and Accounting Changes) stood at $7.9 billion, $540 million above the Budget forecast. The cash surplus of $2.6 billion was $0.9 billion ahead of forecast. These figures of course fed in to the tax debate and the Government acknowledged that there is now a structural surplus rather than a cyclical one.
KiwiSaver
In its first three months, nearly 213,000 people have enrolled with KiwiSaver, which is more than twice the rate at which Treasury had forecast. It had expected 345,000 people to enrol in the first year - about 30,000 a month - but people are signing up at a rate of about 70,000 a month. Of the 213,000 nearly 102,000 actively chose a provider and went directly to a scheme to enrol, 67,000 actively chose to join KiwiSaver and enrol via their employer, and 44,000 new employees were automatically enrolled. Nearly half of those joining are aged under 45, while those under 20 account for 8.6 percent of the total. A NZ Herald story claimed that just 7 per cent of people between 20 and 45 have enrolled since KiwiSaver was introduced on July 1 and that 42 per cent are aged under 20. IRD advise that this story is totally incorrect. Although enrolments are up on forecast, the CTU still has some concerns. For instance, 44,000 employees being automatically enrolled sounds a lot – but when you consider that there are around 300,000 instances every 3 months of someone starting a new job, that figure looks too low. And we do not have an income breakdown of those joining. The CTU continues to advocate strongly for a 2 percent minimum contribution and the continuation of the 2+2 transition arrangements beyond April 2008.
Retail Sales
Although annual sales were up by 5.6 percent, monthly sales for August 2007 increased only 0.2 percent compared with July 2007 prompting the comment from the BNZ that "…retail sales figures provide further support to our supposition that the retail sector is already in recession". Excluding the vehicle-related industries, sales for the core retailing group increased 0.8 percent in August 2007, following a decrease of 0.1 percent in July 2007.
Productivity growth
Statistics New Zealand has gone back a further 10 years in their productivity statistics. They now go back to 1978. From 1978–2006, the average annual growth in labour productivity was 2.2 percent. Since 2000, the average increase has been 1.4 percent.
Migration
In the year ended September 2007, there were 83,000 permanent and long term arrivals, up 2 percent from the September 2006 year and there were 74,700 departures, up 9 percent. As a result, net migration was 8,300 in the September 2007 year, down from 13,200 in the September 2006 year. There was a net outflow of 30,500 New Zealand citizens in the year ended September 2007. There was a net inflow of 8,200 from the United Kingdom, down from 11,000 the previous year. There were also net inflows from India (3,300) and Fiji (2,400) in the September 2007 year. The net outflow to Australia was 30,100 in the September 2007 year, up from 20,600 in the September 2006 year.
The 8 hour day – myth or reality?
To acknowledge Labour Day, the Families Commission recently asked respondents on their website about their experience of paid work and its affect on family life. 29 percent said their employer did not provide any recognition for the extra hours they worked. A third of respondents worked 40 to 50 hours a week and 14 percent worked more than 50 hours a week. A Labour Department work-life balance survey found almost half of all respondents working between 40 and 50 hours a week, and 19 percent worked more than 50 hours. The Census puts it even higher, with a quarter of employees - 35 per cent of men and 13 percent of women - saying they work more than 50 hours a week. For further information contact Peter Conway on 04 802 3816 or peterc@nzctu.org.nz
Notes
1 I am leaving aside the issue of different measures of wage increases. This is a 29.8 percent increase whereas the Labour Cost Index shows that wages rose by 19.8 percent from June 2000 to June 2007. 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.
