CTU Economic Bulletin No. 92

Food price rises are hitting low income families hard. Overall food prices are up by 6.8 percent while grocery food prices rose by 11.8 percent. And there could be more to come. The price of grain is expected to rise 60 percent next year which also impacts on poultry prices. The combined effect of the credit crunch, a much slower housing market, the drought, electricity supply problems, fuel and food prices and high interest rates is considerable. For workers who, in general, had a couple of better years on the wages front in 2006 and 2007, this is a dismal scenario. With the Reserve Bank predicting inflation of 4.7 percent in the September 2008 year and with the prospect that the fuel price spike could actually be a high and rising plateau, there is a likelihood of some workers facing real wage cuts in this period.

And of course it is election year. As I have said before, the National Party delights in giving the Labour-led Government no credit whatsoever for the economic good times that the country experienced for several years since 2000 but all the blame for any bad times. It is hard for the Government to provide a sense of perspective about the economy when the bad news keeps on coming. And it is also difficult to campaign on their considerable achievements when economic circumstances are worsening. For example, it is great to have an extra week’s holiday but if travel costs are soaring then it is harder to celebrate that particular improvement.

Nevertheless – it is important to put things into perspective without trying to underestimate the very real impact high food prices for instance are having on people. To a great extent these food prices are an international problem. In the UK for instance annual food price inflation is at 8.7 percent – worse than it is here. And we have had high food prices in New Zealand in the recent past with an increase for example of 7.8 percent in the September 2001 year at a time the adjusted labour cost index for that period was up by only 2.0 percent.

And it is much easier to cope with higher prices if you have a job - despite the fact that many are on low incomes. The number of people on an unemployment benefit is down from 161,128 in December 1999 to 17,465 at the end of May this year. And in case you think it is all due to the number on Sickness Benefits - in the last twelve months to May those numbers have declined by 1,542. And if you have a job now the minimum wage is over 70 percent higher than it was in 1999. Also family tax credits act for some as an automatic stabiliser. If your family income falls, your family tax credits go up.

The Government has also pointed out that real household incomes went up by 25 percent from December 1999 to June 2007. Real wages using the analytical unadjusted labour cost index were up by 14.8 percent. Real wages using the quarterly employment survey over this period show an increase of 7.9 percent. Not so impressive is that real wages using the official adjusted labour cost index fell by 1.3 percent. All these statistics are correct – but they all measure different things. While many economists believe that the non-adjusted labour cost index is a more accurate measure of wage movements, the adjusted index is still the official measure. And household incomes are up partly due to more employment rather than higher wages.

Many households in recent years have been able to sustain increased spending due to any one or a combination of several factors - more jobs and more hours per household, family tax credits, and adding a bit more to the mortgage while house prices were rising. In addition there have been improvements in the social wage – huge cost reductions for visits to the doctor and prescription charges, free early childhood education for 20 hours a week, paid parental leave and so on. But to some extent all these options are now constrained. Most households are already bulked up in terms of jobs and hours. Expecting family incomes to keep rising in real terms because of people working more and more hours is unrealistic. Family tax credits are being lifted in October – but that is basically a 5 percent inflation adjustment brought forward. There is little prospect of a huge increase in family tax credits any time soon. And as for topping up the mortgage to pay for a car, fridge or holiday – that is most unlikely with falling house prices. So that leaves – wages and taxes. And for some - benefits.

Tax cuts are coming. Of course the National Party has already started a bidding war on that front. But in my view that still leaves wage increases as the most likely source of increased income for households in the coming year. Already the Reserve Bank Governor has said that if he is going to ‘look through’ the spike in inflation so should employers, unions and workers. In other words he wants to constrain wage growth in order to discipline inflation expectations. We simply cannot accept that real wages should fall. Our main arguments about embedded low wages are not actually based on short-term inflationary considerations – but we will need to keep the pressure on over the coming period without losing the huge public support that has been generated for decent wage increases.

Everything is harder when the economy is contracting. There are however many things that can be done including greater assistance for beneficiaries and others on low incomes, monetary policy that can lower interest rates, and so on. There are two things that can be done at a general level. The first is stay on course with investment in people, building infrastructure, lifting productivity, investing in new technology, encouraging exports, boosting R&D and so on. The economic transformation programme should continue to be rolled out as that is about the long-term benefit to the overall economy.

The second thing is to avoid talking the economy down even further. This does not mean unionists should attempt to paint a rosy picture in an election period when the economy is in worse shape now than it was last year. That is not only wrong – it is clumsy. But there will be plenty of people who will want to portray things as worse than what they are. We should challenge those who deliberately exaggerate the extent of the economic decline.

Meanwhile, on another topic, some business lobby groups are in full scale attack mode on the Climate Change (Emissions Trading and Renewable Preference) Bill since the National Party withdrew its support for the Bill. Unions have shared some of the business concerns and the CTU submission pushed hard for a longer time period for trade-exposed firms and for the inclusion of intensity measures so that new investment could occur at world best practice. But the Government has now agreed that the 90 percent free allocation will remain in place until 2018 rather than 2013 and the phase out would be completed in 2030 rather than 2025. There will be provision for an intensity-based mechanism. In addition there will be five-yearly reviews. The 50,000 tonne threshold for firms that could get allocation of credits is also likely to drop considerably.

It is true that there is considerable uncertainty about many aspects of climate change and how emissions trading would work – including what the post-2012 rules will be, the carbon price, extent of business opportunities, likely abatement, how other countries will react, and a key issue for us which has not been included in the economic modeling used by business groups - the extent to which New Zealand goods will be disadvantaged in Europe and elsewhere if we do not take action. But the Bill establishes a framework with considerable flexibility to adjust and the real debate can happen over the actual allocation plans.

It is starting to look like some sections of the business community will continue to oppose any reasonable measures to respond to climate change. They say there should be more time. I remember when the Employment Contracts Act was introduced. It was the biggest change in employment law in a century and was announced on 18th December 1990 with submissions closing on 11th February 1991. Given the Christmas break that left just weeks for submissions. I can’t remember business complaining about a rush then!

So is there plenty of time? Not according to the Intergovernmental Panel on Climate Change (IPPC). Last year Rajendra Pachauri who is the chair of the IPPCC said "If there’s no action before 2012, that’s too late. What we do in the next two to three years will determine our future. This is the defining moment." The National Government signed the Kyoto Protocol over 10 years ago in May 1998. This Government ratified the Kyoto Protocol in 2002 and announced a carbon tax policy, nearly 6 years ago. The carbon tax was to have come into effect in 2007 but was scuttled because business and farmer opposition undermined parliamentary support. New Zealand would not have been anything like the first country to have a carbon tax. Finland has had a carbon tax since 1990.

The business groups are now arguing that there needs to be an intensity measure. I agree. But as stated above, the Government has agreed to include such a measure. Back in 2005, the carbon tax proposal also made provision for intensity measures via negotiated greenhouse agreements (NGAs). But those same business interests also opposed the climate change package incorporating the carbon tax so the NGAs fell over.

Then in September 2007 the Government announced its revised climate change policy including an emissions trading scheme. In addition to the legislative process there has been a Climate Change Leadership Forum and technical advisory groups – both with business representation. There have been a huge number of meetings yet Business NZ has claimed that "the only significant changes (to the Bill) have been decisions made by government without consultation with stakeholders". Business had their say – they got a result as have we. But now they continue to dump on the Bill. It is now 9 months since the Government announced the emissions trading scheme and 10 years since the National Party signed up to the Kyoto Protocol. Looks like some sections of business will never be ready.

The CTU has consistently argued that there needs to be a broad range of climate change responses including regulation, mitigation, investment and education. As well as the need for a just transition for affected workers, our focus has been on union involvement in education and other programmes with the business sector to directly reduce emissions and conserve energy; developing the skills base for sustainable development; and advocating for those on low incomes impacted by increased fuel, electricity and other charges as a result of emissions trading. It is time to get on with it.

Even more worrying was this quote from Statistics NZ saying that "the proportion of profits distributed overseas as dividends rather than reinvested in New Zealand was 90.4 percent in the year to March 2008, compared with 63.8 percent in the year to March 2007 and 42.0 percent in the year to March 2006."

Latest trade figures show that the total value of merchandise exports rose 11.2 percent from May 2007 to May 2008, to reach $3.7 billion, while merchandise imports were up 17.3 percent to $3.9 billion over the same period. Crude oil and other petroleum products led the increase for both exports and imports in the May 2008 month. We know that a lot of stock have been through the meatworks due to dairy conversions and other factors so no surprise that the next largest increase in exports came from meat and edible offal which rose $117 million from May 2007, with sheep meat the main contributor to this rise. Export quantities of milk powder, butter and cheese were down 29.7 percent compared with the previous May, although values were still up 3.9 percent. According to the Reserve Bank’s Trade Weighted Index, the New Zealand dollar fell 1.4 percent in May 2008 compared with April 2008, and was 2.7 percent lower compared with May 2007. For the three months ended May 2008 exports of merchandise goods were valued at $11.0 billion, up 11.6 percent on the equivalent 2007 period.

Recently, however, migration patterns have been changing. In 2001–2006, the region with biggest net gain (8,200) was to Canterbury, and the region with the biggest net loss (18,100) was not Southland but Auckland.

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

2 If the worker is however supervising or training other workers the $12 minimum applies.