Government to plead for more time as voters face election-year blues

Press, 14 January 1987, Page 14

Government to plead for more time as voters face election-year blues

MARTIN FREETH

A September election this year will come too soonforthe Government While a recovery from recession is widely forecast for 1987, the New Zealand public will still very much be feeling the pain of economic restructuring inflicted by Government policies. The main economic indicators may be heading in the right direction as the election approaches, but it is also likely that more voters will be worse off than they have been for the last 2% years. Without policy changes improving the short-term prospects of many New Zealanders — and there are none in sight — the Government will rely heavily on the electorate’s faith that enough progress has been made to justify a second term for Labour during which living standards will improve. The Deputy Prime Minister, Mr Palmer, conceded that last week when he said the party’s job this year was to convince the country the Government needs more time. Labour will most likely face an electorate in which unemployment is at an historical peak, the spending power of wage and salary earners is on the way down, and everyone is still gritting their teeth over high interest rates. As was expected, unemployment took off last year to its highest level since the 19305. By November, the registered jobless (not including students) hit 74,673 or 5.6 per cent of the work force. Economic forecasters now say it will grow further to about ’BO,OOO by March, with little decline throughout the rest of the year. Relatively low settlements in the latest wage round should help restrain unemployment growth. On the other hand, the heavy flow of New Zealanders out of the country, without which unemployment last year would have been much higher, has recently shown signs of slowing. Unemployment this year will certainly be higher than in previous election years. For comparison, the November unemployment rates in 1978, 1981, and 1984 were 1.65 per cent, 3.4 per cent and 4.2 per cent. Furthermore, it is likely to

in Wellington

become increasingly significant as an issue with the electorate. Unemployment emerged as by far the biggest public concern In last month’s “New Zealand Her-ald”-Natlonal i Research Bureau poil u For Labour, there will be particular concern about unemployment rates in its marginal, provincial seats — much higher than the national average. Gisborne, Hastings, Hamilton, and northern Otago are among the areas especially hard hit. For New Zealanders in jobs, this year is also likely to be less comfortable. Their real incomes actually showed a healthy rise last year, under the impact of the high wage round in 1985 and of falling consumer price inflation. ; ,

Labour will face electorate with unemployment up, interest high, real wages down

However, real incomes have recently shown signs of a decline which forecasters think will continue this year. Lower pay rises in this round and price increases more than offsetting the benefit of lower’ personal income tax rates since October are expected to lead to a fall in wage and salary earners’ spending power. The goods and services tax should have been absorbed into the level of prices by about now and economists have forecast that a falling trend in inflation will become apparent in the middle of 1987, aS it did a year ago. Nevertheless, inflation will probably still be very high in September —• more than 17 per cent as an annual rate. For the public, living costs will be jerked up by price increases for which the Government is directly responsible. Postal charges will rise substantially from February 1 and electricity from April 1. The latter may go up again if the Government further reviews its bulk tariff to supply authorities, as it has suggested. There will

also be cost imposts on the , publid from more implementation this year of departmental “user-pays” policies. The prospects for a rapid fall in inflation are also clouded by international portents of a significant rise in world oil prices and the widely expected moderation of New Zealand exchange rates this year. Domestic price increases in 1985 and 1986 were eased because a strong kiwi dollar held down import costs. Exchange rates have jumped up again at the moment under the impact of a sharp reversal to last year’s fall in interest rates in New Zealand. Banks and other retail lenders have lifted their rates in recent weeks as a rising money market has pushed their funding costs up again. Mortgage rates are still generally lower than their peak in the early months of 1986, but the market is expected to rise further before rates come down again. Householders are getting a taste of what the Minister of Finance, Mr Douglas, likes to refer to as “volatility around a downward trend.” They will probably recall a reduction in their borrowing costs last year lagged some months behind the fall in wholesale interest rates faced by financial institutions. Higher rates now come at a time when consumers are paying for a spending spree that started before GST and apparently lasted until Christmas. Retail sales before October 1 were dramatic, and many New Zealanders must have used all their credit capacity by the end of 1986. Certainly, American Express and the Bank of New Zealand reported last week huge pre-Christmas surges in card usage. Bankcard rates are this month back to their peak levels of last year. Higher debt servicing costs are a particular blow to fanners. Their economic plight dominated headlines for much of 1986 and 1987 will hold no dramatic improvement. Farm accounts after March are expected to show dairying has generally nosedived into the red for the first time, although Ministry of Agriculture advisers have forecast a slight improvement in the deficit trend of typical sheep and beef farmers.

A fall in the Kiwi dollar during 1987 will help farmers’ earnings but bring tittle respite tor rural servicing communities. Still preoccupied in many cases with survival, fanners are not forecast to lift their business expen-

diture out of the slump it has firmly settled into, ip ji. Even the glamorous element ‘of the economy — thei shared

market — is unlikely to provide the comfort to New Zealanders it , did in 1986. Analysts are npw widely tipping a flat period tor the sharemarket after the spec-

tacular price rises of the recent past However, earlier fears of some kind of crash in the market this year have now dissipated and share investment should continue an active and fruitful activity. While all of the above suggest

this year will be particularly tight for many people, the Government will have some signs of economic recovery to point to, if current forecasts are correct.

Economists say some signs of recovery will appear by the end of the year

The quarterly inflation statistics are expected to continue to show a downward trend, putting the rate of price increases for the 12 months to next December 31 about 10 per cent. Deficit figures, although stubbornly high over the last year, are also expected to show gradual improvement The external current account deficit started to decline in the last months of 1986 and the Government’s fiscal deficit in the coming financial year should be a marked improvement.

It will need to be as the final result for 1986-87 now looks certain to reach 6 per cent of gross domestic product, under the cost of last October’s tax reforms, heavy debt servicing costs, and an unforeseen surge in social-welfare expenditure. Before the election, Mr Douglas will announce a 1987-88 Budget with a new deficit projection greatly assisted by savings from his creation of eight new State

corporations, “user pays” in other departments, moves to hit business tax avoidance, and an upturn in theeconomy benefitting Government revenue. The Institute of Economic Research recently forecast a fiscal deficit back to about 4 per cent of GJDJP. and hence on target with Mr Douglas’s longstated aim. ?■ )<•; !i Perhaps most important tor the Government will be how decision-makers elsewhere in the economy“have adjusted to, the rapid policy changes since 1984. Some of the signs are encouraging. .-7-7 The latest surveys the institute and The National Bank point to an improvement of confidence among business people at the end. of 1986’ The downturn in national output in the current financial year has apparently not been as sharp as earlier expected and a one per cent growth is predicted in 1987-88. Furthermore, the latest; low wage round may suggest a hew willingness, among unions to see pay rises tied to greater productivity and business efficiency. That the high 1985 round appears to . have been partially absorbed by businesses implies a break from the past practice of simply pushing costs through into prices. Both are attitude changes prescribed-by Mr Douglas as the key to a prosperous market-led economy. The farm sector may also have buckled down to the new realities. Farm mortgagee sales have been far fewer than foreseen a year ago as thousands of farmers have picked up Government-led debt restructuring opportunities to trade their way out of trouble. However, there are still other decision-makers whose sensitivity to the proximity of an election will shape the course of the economy.'

Uncertainty about policy changes should Labour lose is likely to bring volatility to the foreign-ekchange and interestrate markets unwanted by the Government. Labours appeal to the electors for more time to “finish the job” is likely;to be matched by firm assurances to the markets as the election ‘ approaches that a second term in power will mean no deviation from its economic policies.;: .