English rules out 4% wage increases for state sector

MPs might have been lined up for a 5.5% pay increase (until the PM headed it off with legislation for it to be trimmed to between 1% and 2%). But Finance Minister Bill English is in no mood to entertain state sector staff pushing for a pay rise of up to 4%.

"There’s not going to be a negotiation around 4% ... It's just not reasonable in the circumstances," Mr English said on TVNZ's Q+A programme this morning.

The Finance Minister said house price rises of 13% a year in Auckland is not financially stable.

“Well, it isn’t. We agree with that, and I think the frustrating thing for all of us here is that the pipelines are reasonably long. To start from a large, bare subdivision to get the houses on, there’s just some physical and procedural limitations. We’re trying to short-cut them," he said.

When asked whether the government could curb migraton or put a capital gains tax in place, Mr English said, “Well, measures like that may make some marginal difference, but I have to say, we don’t want to get distracted into trying to control demand, because we don’t believe it’s effective.”

He also told the programme that “Inequality is flat to falling. Incomes are rising moderately. That’s a pretty good sustainable outlook for Kiwis.”

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RAW DATA: Q+A transcript: Finance Minister Bill English

Watch the interview here

BILL I think, on balance, I think it’s good news. It’s a bit harder for Government because it’s not zero inflation it means the tax base isn’t pumping up as fast as would make our job easier to balance the books. But for households, it does mean the cost of living is not getting away from them, and when they get a wage increase, it’s a real wage increase. Now, the longer term issue is that if it’s a sign of poor performance in the global economy, that will, in the long run, affect our trade. If it’s a sign that the New Zealand economy might slow down, then that wouldn’t be good either.

CORIN But the Reserve Bank… I think something like 20 central banks around the world have cut interest rates. The Reserve Bank, surely, must be cutting interest rates in New Zealand now when we’ve had inflation going to zero. It’s been under the mid-point, the 2% mid-point, since September 2011. At what point do you say, ‘Hang on, they should be cutting here. That’s their job’?

BILL Well, that’s exactly the decision that the Reserve Bank Governor needs to deal with. He had something to say about it this last week.

CORIN But are you worried, though, that he… He has got an alternative scenario where he does cut if inflation goes lower. I know you can’t tell the Reserve Bank Governor what to do, and I don’t want you to, but what I want to know is, do you think he might have made the wrong call. Has he underestimated just how low inflation is?

BILL Well, if you look at what the Reserve Bank’s job – it’s to have inflation around 2%. Now, they keep forecasting it coming back to 2%, and that’s the forecast they’ve put out. By the middle of next year…

CORIN They’ve got it wrong for so long now. Even the Prime Minister pointed that out on Monday.

BILL And, look, that’s the nature of the debate. Is this temporary? So as to say, the drop in oil prices is a temporary thing or a permanent thing? And actually no one quite knows the answer.

CORIN And what do you think?

BILL Well, no one quite knows the answer.

CORIN But you must have a feeling on that issue. Is this a temporary blip? We’re going to get back to normal frequency, whatever you want to call it. Or is this actually something new that we’ve never had before?

BILL Well, it certainly is something new we’ve never had before. We’ve never had zero inflation before. The way I would put it is you need to work out what the cost of mistakes are. Let’s say you think interest rates are a bit high, well, if you had a scenario where inflation stayed very low and we had a number of years of low dairy prices, we would then look back and say the Reserve Bank Governor made the wrong decision. However, if the New Zealand economy grows at the rate the Reserve Bank says it does, dairy prices come back up, then he’s gonna look like he’s got it about right.

CORIN But there is so much at stake here cos it’s keeping our currency up, which is hurting our exporters, which means Kiwis, average Kiwis, aren’t earning as much.

BILL Well, the currency picture is a bit complicated. I mean, we’ve dropped from 86 cents to 73 cents against the US dollar. Probably further than we thought we would. However, we’re stronger against the yen and the euro, so I don’t think the currency is an issue that’s holding us back too much at the moment.

CORIN OK, can I just bring you back to… I think it was just before the election you talked about the average wage increases that you forecasted – a key pitch for your government ahead of the election. You said $7500 would be added to the average wage. I think it was $62,500 we’d reach. Are we still going to get that, though, with inflation at zero?

BILL Well, let’s see. I mean, wage increases could be a bit more moderate than was expected, but the expectations weren’t that strong. What’s been surprising in New Zealand is that in a growing economy, we have found more people to do the work. Now, at some stage… We’ve got the highest proportion of New Zealanders in the workforce we’ve ever had.

CORIN Now, that’s from net migration, right?

BILL Well, the net migration, but also women and older New Zealanders are more available for work…

CORIN That’s great. That’s great. But coming back to my point, can you guarantee, as you did before the election, that people will get that $7500 extra in the average wage, because with inflation at zero, they’re not going to get the benefits of that growth in the economy that’s 3%?

BILL Well, if they get a 2% wage increase, that’s 2% real wage increase rather than 1% of inflation…

CORIN And this is the point. Do you think they will, or can they expect 2%, because the Reserve Bank Governor is warning and watching very closely, and thinking, ‘Maybe they might only get 1%.’

BILL Well, that’s up to the employers and the employees, but they will sort that out. The point we were making before the election is the pretty unique opportunity we have in New Zealand for consistent, moderate growth over the next three to four years. That will deliver consistent, moderate wage increases for New Zealanders. Because the fundamentals in the economy are pretty sound. A lot of businesses have had a big sort-out in the last few years. They’re productive. They’re well organised. They should be able to deliver.

CORIN So your message to Kiwis today is, you should be getting 2% at least.

BILL No. I’m not putting any number on it. The point I’m making is that when inflation is zero, what used to look like a low wage increase, around 1% or 2%, actually now has some significant gain over the cost of living.

CORIN But you can’t rule out that you’re not going to be able to deliver on that promise of the $7500 over the next three years, can you? Because it’s just not going to be there.

BILL Well, those are the forecasts. They haven’t changed much from what I’ve seen. And whatever the details of the numbers, the general picture is a pretty sound one. Remember, that was in a political debate where some people were claiming New Zealand was going backwards, no one was getting ahead of the cost of living, growing inequality – none of which was true. Inequality is flat to falling. Incomes are rising moderately. That’s a pretty good sustainable outlook for Kiwis.

CORIN All right. What about your employees – the state sector? What can they expect? Because there are some big wage rounds coming – police and teachers and a big chunk of the state sector.

BILL They can expect to be treated fairly by their direct employers. I mean, we don’t negotiate it. We do set some parameters.

CORIN You’ve only got a billion dollars to play with, though, haven’t you?

BILL Well, it will be… The Government is still running pretty tight on spending. But, look, we want to deal fairly with our employees. Over recent years, those groups have done a great job under financial pressure to deliver better services. We’ve got more health services than ever. The nurses are at the heart of that. Crime rates are dropping. The police are at the heart of that.

CORIN Yes, I’ll pick you up on that point because we spoke to members of these groups, and they’ve said they’ve been very restrained, that they had made productivity gains and that they had held their tongue, if you like, about getting some pay rises over the last few years, and they’re looking for things up around 4%. Now, can you deliver that sort of a pay rise in the state sector?

BILL I think I can say 4% sounds a bit high, but it’s a matter for negotiation.

CORIN Well, you’ve just entered into that negotiation, because the teachers say anything under 4% would not be fair. They are catching up in their view, and you’re just saying today, forget it.

BILL Well, there’s not going to be a negotiation around 4%.

CORIN Are they not worthy of 4%?

BILL Well, it’s just not reasonable in the circumstances. But a fair, negotiated settlement that respects their professionalism and their contribution, and enables us to get on with the things that really matter, like lifting achievement, reducing crime, that’s how the government’s going to… We want the people on the front line to feel satisfied that their contributions are being recognised, they’ve been professionally rewarded, consistent with the rest of the community.

CORIN They’re pretty fired up about this, though. Do you think this is the sort of situation where we’re heading into strike action? You could have a tough sell here.

BILL I’m sure there will be some tension in the negotiations. That’s pretty normal. I’m sure there will be a bit of positioning before we get to negotiations. But we’re pretty confident we’ve got a positive environment in the public services. People know what’s required of them. They’re doing a good job. We want to see them adequately rewarded for that.

CORIN The problem with all of this, of course, is housing. And let’s start first with the inflation. Great for consumers that they aren’t paying big prices for their flat-screen TVs or whatever, but rents are going up quite a bit more than the rate of inflation and house prices are going up 13%. So for a lot of the community locked out of the housing market, they’re not going anywhere.

BILL The house prices are only rising at 13% in Auckland, and the rest of the country they’re fairly moderate, and, if anything, getting a bit more affordable because interest rates haven’t risen the way people expected. And in Auckland it’s the same argument, I think, we’ve had for a number of years. I mean, today I was talking to a developer who’s run absolutely flat-out. It takes two and a half years to get from the start of his development to get his first houses up. So we are working with Auckland City…

CORIN It’s not happening fast enough, is it?

BILL Well, we all agree with that. It isn’t happening fast enough, but it can only happen as fast as they can get the developments through council.

CORIN But there’s general agreement that the efforts you are making with supply are going to be good, but it’s not working in the short term. Don’t you need to do more to really get on top of this, because, surely, 13%, 14% a year is not financially stable?

BILL Well, it isn’t. We agree with that, and I think the frustrating thing for all of us here is that the pipelines are reasonably long. To start from a large, bare subdivision to get the houses on, there’s just some physical and procedural limitations. We’re trying to short-cut them. We’ve got the special housing areas, we’ll have further legislative short-cuts coming, the Government’s cranking up the development of its own estate, because we’re a big landholder.

CORIN And let’s hope that kicks in, but how much longer can this continue, what we’ve seen. Another surge back in February, how much longer can you sit there and let this continue?

BILL Well, we’re not letting it continue.

CORIN Well, you are.

BILL We, along with the whole industry, are running as hard as possible to get through the planning constraints.

CORIN You are doing nothing to curb demand.

BILL No, I don’t agree with that. The planning constraints are determined by the community who elects the councils. We don’t actually run the plans. The councils do. And instead of attacking the councils, we’re getting alongside them, working hard…

CORIN I come back to my point, though. That’s a medium-term goal. It’s an admirable goal, but what are you doing in the short term to deal with something which, as you said yourself a few minutes ago, is causing financial stability risks? What are you going to do?

BILL Well, you can’t just conjure houses out of air.

CORIN You could curb migration. You could put in capital gains taxes, you could encourage the Reserve Bank, perhaps, to actually follow through with its property investor moves.

BILL Well, measures like that may make some marginal difference, but I have to say, we don’t want to get distracted into trying to control demand, because we don’t believe it’s effective. The only way to make progress on supply is to be absolutely focussed on it, and take every step to move it along, precisely because it takes a while to build the pipeline and to get momentum. We’re open to any suggestion that is going to help us get more houses on the ground faster. Now, in Christchurch, that’s happened to a significant extent. We may not be too far away from where supply matches demand there, and we might get some of the pressure out of that market. In Auckland, it’s just going to take a bit longer.

CORIN Just on the Reserve Bank. So they said they’re looking at property investors – making it a separate class. So the upshot is that it would be more expensive to borrow for property investing. But they also didn’t rule out that they’re talking about income ratios matching that with the borrowing. Isn’t it about time we looked at something like that, given that’s what they’re doing in England to try and rein… And that would work in Auckland, wouldn’t it?

BILL Well, it may do, and you know it’s been looked at because the banks are talking about it. Back in 2013, we put in place a framework that enabled them to do that. They followed with LVRs. Now they’re talking about the investor…

CORIN Why are they taking so long?

BILL Well, you’d want to talk to the bank about that.

CORIN Do you think they’re taking too long?

BILL I think they’re going about as fast as they can to make sure they understand all the issues, because bear in mind, every time you intervene like this, it has some unexpected consequences or consequences you’re trying to minimise. So the LVRs, for instance, made it harder for first-home buyers, and so the Government’s got a scheme coming out…

CORIN Now, credit to you there, because you took that. It was unpopular politically, but you wore that cos you saw that there might be some benefit. Surely, you must be desperate for the Reserve Bank to step in here and do something? You need them to help you.

BILL Well, you know, at the margin, they can make some difference. But again, they do their job, which is come up with those rules related to financial stability – that’s a different purpose to our purpose, which is get more houses on the ground faster and work with the people who can make that happen. So we stick to our job, they stick to theirs, and they’re doing a reasonable job.

CORIN Bill English. I’ll leave it there. Thank you very much for your time.

BILL Thank you.