Bill English has done this handy table comparing the last two years, to the previous two years. National needs to do more stuff like this:

Price and wage changes over comparable periods

Incredible that food prices went up 15% over the last two years of Labour’s term. Now this is not their fault, but it shows how meaningless their no GST policy on fruit and veges is – the price movements from season to season are far greater than the GST. For example vegetables went up 21% in Labour’s last two years and have dropped 6% since Sep 2008.

And most damning, a NZer on the average wage had a 1% drop in their real after tax wages from Dec 2006 to Sep 2008, while under the most recent seven quarters that worker would be 9% better off. And that is before the 1 October tax changes which will make then even better than 9%.

The average weekly earnings went up 27% in the 90s, 37% under Labour and 7% since Sep 00. The average increase per year is 3.0%, 4.1% and 4.0%.

But if you take account of tax paid, to look at what someone on the average earnings/wage gets to take home, then the increases are 33%, 33% and 11% – or annualized it is 3.7%, 3.7% and 6.3%.

Finally thought you want to look at the purchasing power – has someone earning at the average (mean) had their purchasing power increase during each of those periods, and by how much. Now inflation during each period was 16%, 29% and 2% Annualised this is 1.7%, 3.2% and 1.2%. This is worth remembering when Labour talks about cost of living.

So what was the increase in real after tax average earnings. They were 15.5% from Sep 90 to Sep 99, 3.0% from Sep 99 to Sep 08 and since Sep 08 8.7%. On an annualized basis, real wages went up 1.7% a year under National, then only 0.3% a year up until Sep 08, and a massive 5.0% a year since Sep 08.

This table above shows the difference. I’ll update it after we get the Dec 10 figures which will include the latest tax cuts, but also the GST impact.

The moral of the story is wage growth by itself is not enough. You also need low inflation and tax cuts to offset fiscal drag.

The Australian data only goes back to 1994, so the first time period compared is Sep 1994 to Sep 1999 – the final quarter before Labour took office.

During those five years the real net income for a FT worker on the average wage rose 13.2% in New Zealand and 6.2% in Australia.

Then over the next nine years from September 1999 to September 2008, the increase in New Zealand was 3.0% and in Australia it was 19.3%. Yep six times greater in Australia. They had high wages, low inflation and tax cuts. We had no tax cuts, higher inflation and lower wage increases.

From Since September 2008, to June 2010, the increase in New Zealand has been 8.7% vs 4.8% in Australia.

If one translates this to average annual increases, then the comparison would be:

• Sep 94 – Sep 99 – 2.6% NZ vs 1.2% Aust
• Sep 99 – Sep 08 – 0.3% NZ vs 2.1% Aust
• Sep 08 – Jun 10 – 5.0% NZ vs 2.7% Aust

Now the time periods used are slightly cheery picked, in that the latest period includes both the April 2009 tax cuts and the October 2008 tax cuts – so they do not correspond exactly to Government terms. But on the other hand Labour did the Oct 2008 tax cuts most grudgingly, because of the election, and probably would ave cancelled them if they had retained office.

The stat that stands out to me is that during those nine years from Sep 99 to Sep 08, the average after tax income only grew 0.3% a year. Fiscal drag mean someone on the average wage paid more and more tax as their salary increased.

Labour’s Phil Goff and his inner circle had settled on attacking over the forecast spike in inflation, figuring there was a ready market for suggestions the tax cuts would be swallowed by rising prices.

But the case Labour has tried to make risks backfiring, because frankly, the evidence looks a bit fishy.

I had planned to write along these lines, but glad Vernon has done it for me.

The Treasury forecasts that inflation will surge to 5.9 per cent next year before falling back and staying at 2.4 per cent for three years; well within the Reserve Bank’s 1 per cent to 3 per cent band. It also notes that “underlying” inflation would remain relatively subdued and have a limited impact on interest rates

Next year’s spike includes 2 per cent from the rise in GST, which is compensated for by tax cuts and increases in superannuation, benefits and support for others on state-supported incomes.

More than compensated for.

It also includes a contribution of 0.5 per cent from the rise in tobacco excise (that Labour enthusiastically supported in Parliament)

Which will only affect smokers, and for those whom quit smoking will save them money.

and another 0.4 per cent from the fuel and power prices associated with the Emissions Trading Scheme, which Labour would implement with bells on, pushing inflation much higher. (In any case, the inflationary impact of the ETS was already included in the December half-yearly update.)

Now this is crucial. Quite a few people are unhappy at the impact of the modified ETS scheme, which adds 0.4% on 1 July to overall costs through higher petrol and power charges, but what Labour have not mentioned is their unmodified ETS would add 0.8% to inflation. They had passed a law which would have doubled the price increase due to the ETS.

Take those and the impact of GST away, and underlying inflation next year would be about 3 per cent, close to the top of the Reserve Bank’s 1 to 3 per cent band, but not so unusual.

The other thing Labour has not mentioned is they have constantly called for more government spending. This would mean a higher deficit and more borrowing, which would be inflationary. So their crocodile tears over inflation are less than convincing – their stated policy is to spend more, and to have an ETS which doubles the impact on power and fuel prices at 1 July.

On the other side of the ledger, as the economy improves, the Treasury expects wages to increase by 2.6 per cent next year (the year Labour chooses, because of the unflattering comparison with the 5.9 per cent inflation spike) and then rise by 3.5 per cent, 3.7 per cent and 3.9 per cent in subsequent years, while inflation is tipped to stay at 2.4 per cent.

These are just forecasts, and should be taken with the usual shaker of salt. But if you take one year into account you should be prepared to take them all.

On that basis, wages could well outstrip inflation in the next four years, and beat underlying inflation by even more.

As is generally the case.

Does Labour really want to argue that, as well as compensating for any GST rise, the Government should offset all the effects of inflation? That was above 3 per cent in 2001, 2006 and 2008 – when Labour was in power – and there was no similar call then.

Personally I would be delighted if Labour adopted a policy of giving people tax cuts every year to compensate for inflation. But somehow I don’t think they intend to.

Now let’s see how that compares to the CPI increases under the last two Government’s.

In December 1990 the CPI was 731 and in December 1999 it hit 837. That was an increase of 14.5% over nine years – an average of 1.5% a year,

From December 1999 to December 2008 the CPI went from 837 to 1072 – an increase of 28.1%, and an average of 2.8% a year.

The difference between inflation under Labour and under National is around 14% – or seven times greater than the one off 2% increase caused by a GST increase.

Now if one takes just food prices, it is even worse. The food price index increased only 9.9% under nine years of National. Under nine years of Labour it shot up a massive 37.1%.

So if you hear a Labour MP talking about the impact increased prices will have on families, remind them of the 37% increase in food prices and the 28% increase in all prices that occurred under Labour.

The idea that New Zealand can ignore inflation and grow faster through easy money and a lower exchange rate is a tempting, but short-sighted view. It ignores the fact that higher domestic prices would ultimately undermine rather than promote international competitiveness. Economic growth and export success must ultimately be built on real factors such as productivity growth, not easy money and exchange rate depreciation.

It is like cheating on an exam – only works for a while

The Reserve Bank’s primary focus on inflation recognises that monetary policy needs to be based on a single instrument and policy objective. Pursuing multiple objectives with multiple instruments, as Labour now suggests, is a recipe for incoherent policy and poor economic performance such as New Zealand experienced before its path-breaking reforms of the 1980s.

TVNZ is a good example of having multiple conflicting objectives. Either none of the objectives are achieved particularly well, or some of them are just ignored.

It would also undermine the transparency and accountability that were important objectives of the Reserve Bank of New Zealand Act. Under the current framework, the governor of the Reserve Bank is personally accountable for realising the inflation target under a policy targets agreement with the finance minister. Sustained breaches of the inflation target can result in the non-executive members of the Reserve Bank board recommending dismissal of the governor to the minister. This is no idle threat, but it would be difficult, if not impossible, to hold the governor accountable for achieving multiple objectives instead of a clearly defined inflation target.

An excellent point. More objectives will mean less accountability. The Governor will always have a get out of jail card.

Since the first PTA was entered into in 1990, the inflation target has been progressively watered down. Most notably, the inflation target has been relaxed from 0-2 per cent to 1-3 per cent and given a medium-term focus, so there is now greater tolerance of short-term breaches.

I actually believe it should go back to a 0% to 2% range. Over time even 3% inflation is too much.

A gains tax on housing would not reduce inflation. Inflation is an ongoing increase in the general level of prices, not a one-off change in some prices.

The introduction of the Goods and Services tax resulted in a one-off increase in the consumer price index – it did not lead to ongoing inflation.

Similarly, a capital gains tax might reduce property prices initially but it would not affect longer-term inflation.

True, and any increase in GST would be a one off bump.

Moreover, if such a tax on housing were applied only to realised gains as is likely, house prices could even rise. This is because of the lock-in effect, with owners holding on to homes to defer the tax on gains. Anything that reduces supply is likely to lead to an increase, not a decrease, in price.

One could do it on unrealised gains, but that would be pretty draconian.

Evidence confirms what theory suggests: the inflation performance of countries with a capital gains tax doesn’t differ systematically from countries that don’t.

Australia, the US and Britain, which tax capital gains, have all had large and volatile house price movements this decade.

I always like a look at empirical evidence.

A second mistaken assumption is that investment in rental housing enjoys tax privileges.

As the deputy commissioner of Inland Revenue, Robin Oliver, told a select committee in 2007: “Rules about expenses for deducting costs such as interest, upkeep and maintenance, as well as paying tax on income, are the same for investments in shares or anything else. In fact under the housing case … there are tighter rules regarding what is a capital gain.”

People are misled into thinking that rental housing is tax-preferred since highly geared rental property may record tax losses. This is because the full economic income (including the change in the market value of the assets) earned on rental property is not taxed.

However, this is a quite general feature of the taxation of real assets, including plant and equipment and farms.

A real issue though is whether it is sensible to allow property owners to claim 3% depreciation on their property annually, when the empirical evidence is that almost no residential property depreciates in value – in fact it appreciates.

It is 10.2 quadrillion precent. That is 10.2 million billion or 10,200,000,000,000,000%.

That makes me feel better about NZ hitting 5.1%. But only slightly.

This is the biggest ever single movement – previous moves had been as high as 50 basis points but never a 75 or a 100 before.

The Governor says:

“With weaker short-term growth and sharply lower oil prices we now expect that annual CPI inflation will return to the target band of 1 to 3 percent around the middle of 2009. However, we still have concerns that domestically generated inflation (particularly in labour costs, local body rates, electricity prices and construction costs) is remaining stubbornly high.

The domestic inflation is what causes the risk of stagflation.

“Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation. Should the outlook for inflation evolve as projected we would expect to lower the OCR further. However, the timing and extent of OCR reductions over the coming months will depend on evidence of actual reductions in domestic cost pressures as well as how the global financial developments play out.”

I can think of some domestic costs that could be reduced!

Stats NZ reveals that inflation for the year to September 2008 was 5.1% – its highest level since June 1990. Major contributors:

• Household Energy 7.5%
• Hospital Services 7.1%
• Private Transport 21.5%
• primary and secondary eduction 5.7%

The monthly food price index also came out today – and it is also at an 18 year high of 10.8%. Major contributors:

• Vegetables 22.3%
• Mutton/Lamb 17.3%
• Bread 16.5%
• Pasta 18.2%
• Cheese 42.3%

All fairly common items, to say the least.

Reserve Bank Governor Alan Bollard said: “The New Zealand economy is experiencing a marked slowdown, led primarily by the household sector. The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil. In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand. While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below-average growth.

I almost feel sorry for Bill English, if he becomes Minister of Finance in a few weeks.

I also remain concerned that inflation will remain too high for years to come.

Okay this oen isn’t an official one. I got it from Paul Walker.

This one however is real, but alas it may be short lived. The Herald reports:

A Tui billboard saying “When Winston says no, he means no – Yeah, right” has brought a warning that it may breach the Electoral Finance Act.

The billboard is in the Tauranga electorate Winston Peters is desperate to win, and the Electoral Commission told the Herald it would write to brewers Tui saying it could be “election advertising” against him.

I am not surprised. It was pointed out during the hearings on the then EFB that commerciakl advertisements could be caught up. And alas satire is also covered.

Tui brand manager Jarrod Bear said the brewer had not received any correspondence from the Electoral Commission and was not considering taking the billboard down.

Asked if Tui was aware of the legislation when it came up with the billboard, Mr Bear said, “Not particularly, no, not the finer details of it.

“It sounds a little bit crazy and it’s definitely not our intention to be campaigning in favour of one or the other.

Also intentions have little to do with the application of the law.

The possibility that Tui billboards making satirical political references would breach the act was raised while it was being put through Parliament last year. Whether the Tui billboard is an election advertisement depends on whether it can reasonably be seen as trying to persuade people either to vote for Mr Peters, or against him.

Let us look at the exact clause – good old s5(1)(a)(i):

means any form of words or graphics, or both, that can reasonably be regarded as … encouraging or persuading voters to vote, or not to vote, for 1 or more specified parties or for 1 or more candidates or for any combination of such parties and candidates:

Now note the test is not what the intention of the creators is. The test is simply whether that particular form of words or graphics ends up encouraging or persauding people not to vite fir Winston.

And it is hard to argue that a billboard which suggests he does not tell the truth, or is evasive or deceptive does not have an effect in encouraging people not to vote for him. It is a very negative attribution.

So alas the end result maybe that all of election year, Tui can not do billboards which take the piss out of a politicans. Says who? Well the politicians who passed the law.

I have absolutely no view on the suitability of Dr Eichbaum’s appointment. I do note however that the Minister forgot to mention that Dr Eichbaum worked in the Ministerial offices of Steve Maharey, Mike Moore and Geoffrey Palmer. That would have been useful to disclose.

The Government has been busy with over a hundred appointments in recent times – they also just appointed four Labour/left people to the new Land Transport Board.

Anyway back to the official announcement:

“Recent oil and food price increases mean that annual CPI inflation should peak around 5 percent in the September quarter of this year. However, we expect that inflation will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.

So the cash rate dropped 25 basis points to 8.00%. I would like to know exactly when the Reserve Bank thinks inflation will drop back to under 3%? 2009? 2010? 2011?

TVHE comments:

Even ignoring inflation, it appears that the Reserve Bank values the livelihood of those who have mortgages above people who are struggling to pay their food and fuel bills (which will go up, as a lower exchange rate will increase the New Zealand price of both).

I predict inflation will remain outside the target band for some years.

Labour will be happy that this week’s truly horrible inflation data came out during the Parliamentary recess.

After all, the highest inflation in 13 years and the biggest quarterly increase in food prices since June 1990 isn’t something either Prime Minister Helen Clark or Finance Minister Michael Cullen particularly wishes to be quizzed on.

It’s amazing how quickly things have turned. It seems like only yesterday that ministers were asking each other patsy questions in the House so they could in turn stand and brag about record low unemployment, growth rates higher than Australia’s, or some other positive fiscal indicator.

It never ceases to surprise me how quick any government is to claim the credit when things are going well, and how fast it is to distance itself when things are not.

Take Cullen’s prepared lines yesterday: “It is important to remember that our economic challenges are not of New Zealand’s making. The global increase in the prices of petrol and food are outside New Zealand’s control.”

Now whether you agree with Cullen or not depends, I guess, on whether you subscribe to the free trade market economy we operate in. But assuming he’s right, it’s still ironic. Can you imagine Cullen saying, after delivering one of his whopping surpluses of yesteryear: “It is important to remember that our economic good fortune is not of New Zealand’s making. The global rises in commodity prices are outside New Zealand’s control.”

Um. Don’t think so.

So true. The reality is that international forces will always have more of an impact than anything we do domestically. However Governments can and do make a difference around the margins – especially by focusing on increasing productivity and havign sensible fiscal and monetrary policy.

However, Cullen can distance himself all he likes from the causes of inflation running at 4% and heading for 5%. He can blame all the Middle East unrest and growth of developing nations he likes for the fact that petrol is up a whopping 25% in the last year. He can moo about the rise in the value of dairy prices that has seen milk up 22% in a year and cheese 62% until the cows come home.

The fact is it’s happened on his watch and voters, rightly or wrongly, expect him to do something about it. Cullen recognised this yesterday, referring to the October 1 tax cuts package which, he said, “will provide some relief”.  Actually, as Cullen knows only too well, it will deliver very little.

The cruel reality of inflation is that the value of his $16 a week for the average wage-earner is eroding by the day. By the time October 1 rolls around, the increase in the price of petrol alone since the Budget would have accounted for half of the extra Cullen has promised. Fresh increases in the price of milk, bread, cheese, and fruit and vegetables will take care of the rest.

And people know deep down Dr Cullen is not giving tax cuts to help people out. He cancelled tax cuts just over a year ago, and his u-turn on tax cuts was poll driven. Now u-turns are part of politics, but to then claim the u-turn as a virtue goes too far with some people. It would be like National trying to take credit for income related state rentals, when everyone knows they prefer market rentals.

We could always have a debate about it, if the Opposition would engage. Yet all I know of National’s plans for the economy is that it will reduce taxes, “cut red tape”, spend more on infrastructure, reduce government spending “so that interest rates track downwards” and improve education standards.

There’s almost enough apple pie in those statements to feed a starving family of five for a week. But the polls show voters are still happy with this level of detail from National, for the meantime anyway.

That’s a great line – enough apple pie to feed a starving family of five. And some truth in Colin’s criticism. He has however overlooked the fibre to the home policy which is a major point of difference with Labour, and is intended to be a significant foundation for lifting NZ’s productivity and economic growth.

He finds that average wage in the public sector has increased a staggering 9% (hence high inflation and high interest rates) compared to 4.6% for all sectors.  He also finds the gap between public and private sectors wages has grown from $4 and hour to $8 an hour.

NZIER has just put out its quarterly survey of business opinion.

Statistics New Zealand recently reported that real Gross Domestic Product (GDP) fell by 0.3% in the March 2008 quarter. Indicators of domestic trading activity from the latest QSBO suggest economic activity declined further in the June quarter and is likely to decline again in the September quarter which will make it three quarters of negative economic growth in a row.

That takes it beyond a technical recession to a full recession. They says firms are more negative abotu their own activity and their trading activity since 1998 and 1982 respectively.

Now what about inflation:

The net balance of firms intending to increase selling prices in the next three months has increased. The balance was 45% in the March survey and 49% in the June survey. The 49% figure is the highest since March 1987. The net balance expecting an increase in costs has increased from 62% in March to 71% in June. The 71% figure is the highest since December 1986.

This is why their press release refers to stagflation.

Stats NZ released the May 2008 monthly food price index results today, and it confirms what everyone knows. I’ve graphed below food inflation since the last election. It has been trending up almost constantly for the last three years.

[Wellington] office vacancy rates are around historic lows. Encouragingly, vacancies are low across the board with the prime and secondary vacancy rate at 1.4% and 3.5%, although some low quality buildings are struggling to find new tenants after being vacated by large government occupiers.

Bernard explains this means they are going from $197 a square metre buildings into $330 a square metre ones.

This is not a one off either, rents have gone up a staggering 66% in the last five years. Why? Because of the massive growth in the public service.

There are few people who qualify better for the label rich prick, than Wellington commercial property owners. And one of them told me a few months ago that since Labour came to power he had made $400 million just in Wellington.  Yes $400 million. He said it was almost enough to make him vote Labour!

The sad thing is these massive profits have not just come from the taxpayer, but all business owners in Wellington are getting clobbered as rentals keep increasing.

I suspect there is also a flow on effect to the costs of residential tenancies in the inner city as property owners can convert from business to residential and vice versa.

Steven Price points out to the Ministry of Justice that their site for court decisions of public interest, is missing all the interesting ones. To be fair I think it is up to the Judge to tick the box on whether it should go there, but regardless someone in the Ministry should use their common sense and make sure the EFA judgements and the abortion law one go up asap. The latest EFA is here for those who want it.

JafaPete asks whether people are just voting for change for change’s sake. He agrees with Chris Trotter that the anti-smacking bill may have been a turning point. He also says the EFA may have had an impact on the Government’s unpopularity.

No Right Turn covers the abortion debate and High Court decision. I am not surprised with the High Court ruling – it has been apparent for some decades that we have a de facto abortion on demand regime, despite a legislative framework that reserves it for serious danger to physical or mental health. Now I support abortion (up to a certain date) on demand and even though it would probably be a very heated debate, the proper way to change laws is through public vote or the legislature – not through the back door. The issues were covered on this blog back in March, and in a sign of hope it was a reasonably rational debate with analysis, not just name calling.

Graeme Edgeler covers issues in the Criminal Procedures Bill, and does a summary of each of the dozen or so changed. Excellent.

Colin James is not a blogger (in fact I would call him an anti-blogger!) but his op ed on inflation is worth reading.