By Alex Tarrant
Finance Minister Bill English has come under fire for his suggestion that the 30% wage gap between New Zealand and high-flyer Australia is a way of competing with our Tasman neighbour.
Over the weekend, English said the gap should help encourage capital investment into New Zealand as the workforce here was cheaper than in Australia, making New Zealand "much more competitive than most of the Australian economy". That increase in capital investment would then lead to higher wages, English said. (For a brief look at wage-fund theory, see here.)
Despite the fact English could be theoretically correct, the National Party campaigned on closing the wage gap with Australia, and in a coalition agreement with the Act Party, set up the Don Brash-led 2025 Taskforce to look at ways of closing that gap by 2025.
However pretty much every suggestion in the two reports from the Taskforce has been cast aside by National as being politically too unpalatable, leaving the reports as nothing much more than doorstoppers in the Beehive and pillows for Act Party members.
Labour has attacked English's comments as showing the current government has no plan for raising New Zealand wages and catching up with Australia.
Another take on the Finance Minister's comments could be that what changes they have made with their plan (if any) to make New Zealand a more productive, high wage economy, have failed to encourage capital investment (domestic or foreign) over the last two-and-a-half years into areas where the government wants it (tradable sector rather than the housing sector).
What's more, English's comments suggest the government would welcome more foreign capital investment into New Zealand, which would see profits/dividends repatriated offshore at a time when the government is saying New Zealand has too much private sector debt owed to the rest of the world. It is also worried about the outflow of capital from these shores (worried about our current account deficit).
So has the government so far failed in its plan to catch up with Australian incomes, or should we give them the benefit of the doubt and some time to see if their changes (tax, regulatory) will actually do the job they campaigned on doing?
Also, should we be welcoming the government's desire to attract more foreign capital to New Zealand, rather than looking for ways to better use the domestic capital we already have, a lot of which is tied up in property?
Have your say below.
Here's Labour leader Phil Goff's comments on the issue this afternoon:
Here are English's comments on the issue from TV1's Q&A on Sunday morning:
GUYON Can I talk about the real economy for people? They see the cost of living keep going up. They see wages really not— if not quite keeping pace with that, certainly not outstripping it much. I mean, you said at the weekend to the Australia New Zealand Leadership Forum that one of our advantages over Australia was that our wages were 30% cheaper. I mean, is that an advantage now?
BILL Well, it’s a way of competing, isn’t it? I mean, if we want to grow this economy, we need the capital – more capital per worker – and we’re competing for people as well.
GUYON So it’s part of our strategy to have wages 30% below Australia?
BILL Well, they are, and we need to get on with competing for Australia. So if you take an area like tourism, we are competing with Australia. We’re trying to get Australians here instead of spending their tourist dollar in Australia.
GUYON But is it a good thing?
BILL Well, it is a good thing if we can attract the capital, and the fact is Australians— Australian companies should be looking at bringing activities to New Zealand because we are so much more competitive than most of the Australian economy.
GUYON So let’s get this straight – it’s a good thing for New Zealand that our wages are 30% below Australia?
BILL No, it’s not a good thing, but it is a fact. We want to close that gap up, and one way to close that gap up is to compete, just like our sports teams are doing. This weekend we’ve had rugby league, netball, basketball teams, and rugby teams out there competing with Australia. That’s lifting the standard. They’re closing up the gap.
GUYON But you said it was an advantage, Minister.
BILL Well, at the moment, if I go to Australia and talk to Australians, I want to put to them a positive case for investment in New Zealand, because while we are saving more, we’re not saving more fast enough to get the capital that we need to close the gap with Australia. So Australia already has 40 billion of investment in New Zealand. If we could attract more Australian companies, activities here, that would help us create the jobs and lift incomes.
GUYON The last headline I saw said Australian had dropped its unemployment rate to 4.9%, added 37,800 jobs. Unemployment here pushing 7%, wages 30% higher over there – why wouldn’t you go?
BILL Well, some people will, and that’s fine, but why would we sit round being mesmerised by the fact that some Kiwis go to Australia? We’ve got a long-term plan to lift the performance of this economy, because we need higher incomes and we need more jobs. This is an economy that’s taken a few knocks in the short term, and Kiwis are being remarkably resilient about it. But this is really a matter of attitude. I think Kiwis have shown a very resilient and positive attitude with all the unexpected events that have occurred. We are going to get through that, and I think we can have a very positive attitude about the direction our economy’s going in. One indication of it is I think we are going to be, in many respects, outside of the resources sector, a more competitive economy that Australia. And over the next four or five years, we should take advantage of that by attracting Australian capital to New Zealand.
And here are Key's comments from Breakfast this morning:
Petra: Were you surprised to hear Finance Minister Bill English saying that this is something that we should take advantage of, the wage gap?
John: Well I think he was just really making the point that there is a wage gap. The government's been working hard on trying to narrow that, and actually we're making progress in terms of real after tax wages, but he's simply saying looking that is a strategic advantage theoretically at the moment that it's lower. Over time if we do our job properly actually that gap will narrow and so the advantage will go away. But it's a bit like we have an advantage with the exchange rate at the moment which is in good shape.
Petra: Over the time period that wage gap would narrow if you do your job properly. Has it narrowed so far?
John: Yeah it's started to do that, so in real after tax terms the reason being we've been cutting taxes faster than Australia, and so effectively in after tax terms yes it is narrowing.
Petra: Have the tax cuts put us in better shape economically?
John: Yeah I think so, I mean they’ve been neutral, so we've you know changed taxes in certain areas and reduced taxes in others, and look we are in a competition. I mean actually the person you had on earlier was right, I mean we're in the competition for skilled workers, and the reason we worry about Australia, because I mean Australia's in great shape, it's the number one performing economy in the OECD because of its mineral resources.
Petra: So then why do we constantly compare ourselves to it? Why have you set yourself this aim of closing the wage gap when we're such a different kind of a nation?
John: We are and look they have a lot of minerals they can go and dig up and export to China and that makes their life very easy, but on the other side of the coin every New Zealander has a free option, like they can get on a plane and go to Australia, and they can get a job there, because technically speaking there are no immigration issues like you would have if you went to the United States or the UK or other parts of the world. So we can't ignore Australia, and I mean to Bill's point, we are actually seeing some investment on that front. I opened Cannon's call centre on the North Shore last year. So they service all of their Australasian clients on the North Shore. Now that’s partly because the quality of workers are really really good, and the wages are a bit lower, but over time we want to eliminate that advantage if you like.
Petra: But in comparison to Asian countries we can't compete on a low wage front and don’t aim to?
John: No don’t aim to. I don’t think he's seriously arguing that. I mean there's a big difference between some sort of call centre they might run in Delhi, but you see those kind of call centres – well let's take Telecom when they outsourced their 018, that’s a relatively low skill job, and so they pay very low wages in those countries.
Petra: Are you annoyed that this topic's come up?
John: Oh look it's just a statement of fact that he's made, but our main game here, and the main aim for the government is how you lift those wages, and lift them relative to Australia, and when you narrow that gap, that is when you see migration coming the other way, and the only other time we've had more people coming from Australia than New Zealanders going to Australia in about 40 years was when our wages were above theirs.
Petra: And this is an aim that we're going for, but a 30% gap is just absolutely massive. I feel like saying look let's not even try to do that, because we're not all getting on a plane and going and living in Australia.
John: And for a lot of very very good reasons. I mean the quality of living in New Zealand is great and not everything's rosy on the other side of the Tasman by any stretch of the imagination, but the government has to have an ambition of saying in my view, we're gonna produce the best conditions for New Zealanders and that’s because those higher wages let you have more choices and better lifestyle, better things you can do in life.
Petra: So Bill English is making the best of a bad lot?
John: I mean it's taken a big out of context. He was just simply making a point that at the moment we are seeing investment because of those wages, he's not arguing.
Petra: It's not a new strategy?
John: It's not a new strategy, he's not arguing that’s the right thing to do, he's just saying that leads to some investment at the moment, just like the very low exchange rate with Australia leads to some greater exports at the moment, but our aim over time is actually to eliminate those advantages, because that means our economy's growing faster.
Petra: All the best with that aim.
John: We'll keep working on it.
And Labour Leader Phil Goff's response to English's comments over the weekend:
The New Zealand economy is in trouble with no plan from the Government to address the worsening outlook, says Labour Leader Phil Goff.
“With the rising cost of living and more people worried about their job security, middle and low income earners are worse off.
“There is growing pessimism about the economic outlook and recent surveys show business confidence dropping.
“The best Bill English can do is trumpet that New Zealand wages are 30 percent below Australia’s giving us an ‘advantage’. This from a Government which campaigned at the last election on closing the gap with Australia,” Phil Goff said.
“New Zealand’s depressed position despite record highs in export prices will only get worse, with National planning cuts in the Budget which will further reduce demand.
“It’s hard to understand why National’s plan on behalf of the New Zealand taxpayers is to sell off successful assets like power companies producing a total average return of 17.5 percent while bailing out failed private companies.
“The extensions of guarantees to failed South Canterbury Finance and continuing protection for other at risk finance companies and bailing out foreign owned Mediaworks collectively sends the wrong message,” Phil Goff said.
‘What this country needs is a real plan for the future, not gimmicks.
“It needs a strategy for up-skilling New Zealanders including for the Christchurch recovery. It needs a plan for a clever and innovative economy through research and development. It needs changes to monetary and taxation policy that promote growth in the productive and export sector and growth in real wages.
“And if savings have to be made, then John Key needs to look at hauling back some of the windfall tax cuts he gave himself and his wealthy mates of $1000 per week,” Phil Goff said.