Friday, May 20, 2011

Treasury's nonsensical projections

Yesterday, I highlighted Treasury's rather heroic prediction of 4% annual wage growth for the next six years [PDF; Table A3.1]. The prediction allows the government to project the higher future tax revenues which underpin its projected return to surplus. Unfortunately it doesn't seem very likely. Why not?

Well, firstly, there's the problem of the policy signals pointing in exactly the opposite direction. A browse through past editions of the Quarterly Employment Survey (which is the statistic they are projecting) will show you that annual wage rises are driven by the (highly unionised) public sector. But the government has just put the screws on them, meaning job cuts and pay cuts. So they won't be dragging the average up. As for the private sector, the government has just legislated for pay cuts through higher KiwiSaver contributions, and of course there is the strong downward pressure on wages created by their labour market and welfare policies.

Secondly, there's the historical record:

While this shows a period of prolonged 4%+ annual wage growth from 2006 - 2009, its worth noting what underlay that: an engineered labour shortage, which reduced unemployment to below 4%. The government's projections meanwhile show this wage growth during a time of high (4.5%) unemployment (in fact, its projected to start while unemployment is still at 6%!). Either Treasury thinks the law of supply and demand no longer applies to the labour market, or they've juked their projections to give the Minister the numbers he wants. Either way, those projections are simply nonsense, and the policy decisions which rely upon them doomed.