An Accord Or Simply Over A Barrel?

Gareth MorganEconomics

Gareth Morgan, Director of Gareth Morgan Investments

The Growth Agreement stitched together by the CTU and the Government was heralded as an overdue moderation of Rogernomics. Dispassionate examination suggests that it is little more than desperate cobbling by two parties of dissipating consequence. The Accord is belated recognition by CTU leaders that jobless figures will continue to soar, and by the government that fiscal largesse and events in the Middle East can easily lay NZ over a barrel.

Six years ago the sort of real wage cut that the CTU has deemed appropriate for its members would have been unheard of. Ken Douglas stipulated a number of conditions that he wished to see fulfilled as a result of the 2% base agreement. Included was a 10% cut in the exchange rate. With underlying inflation running at around 5% in NZ, and a 10% depreciation likely to boost that by 2.5%, then the CTU body has in mind for its members a 5.5% (2% less 7.5%) real wage cut. Any boost to inflation from the oil price shock would be on top of this. Conservatively, the oil price influence- both direct and indirect- can be expected to raise inflation by a further 1.5%. So CTU members are looking down the barrel at a 7% cut in real wages.

Then to be considered is the fiscal mess Caygill has left. With that deficit likely to be $3 bn, the government is faced with either covering this by borrowing- an activity unlikely to bring forward the day when interest rates retreat, or having to raise taxes. Expenditure cuts are most unlikely to be achieved, given that governments in NZ have consistently failed in this area over the last 20 years despite frequent pre-election macho rhetoric. An increase in GST to 15% or an equivalent boost in income taxes must be contemplated. If it is the former then the real wage cut becomes more like 8.5% (7% before oil).

How much of this could have been avoided ?

Firstly, the CTU leadership have been singularly successful in leading their troops through a period of massive job losses, now to be followed by substantial real wage cuts for the remnants. If wage cuts are now the answer to preservation of CTU membership, why weren’t they in 1985 when Rogernomics began ? Could it be that the personal reality of membership decline has provided the incentive for the CTU intellectuals to accept the RB research finding, that in an economy where the size of the cake isn’t growing, wage rates and employment numbers are inversely related. If so, their previous nescience has proved incredibly expensive to their constituents.

Secondly, the insanity of the relentless growth in government expenditure and its crowding out of the private sector, must be coming home to the staunch State socialists in both political parties. Ultimately the expenditure has to be financed by the private sector. If the amounts are so large as to crowd out funding productive investment, the ability to generate the income to pay for the generosity of the State, fails.

Unfettered government, unenlightened labour leaders- two drags on economic performance.

An Accord Or Simply Over A Barrel? was last modified: December 15th, 2015 by Gareth Morgan
About the Author

Gareth Morgan

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Gareth Morgan is a New Zealand economist and commentator on public policy who in previous lives has been in business as an economic consultant, funds manager, and professional company director. He is also a motorcycle adventurer and philanthropist. Gareth and his wife Joanne have a charitable foundation, the Morgan Foundation, which has three main stands of philanthropic endeavour – public interest research, conservation and social investment.