Teachers are demanding a 15 to 16 percent pay rise over the next one to two years. The government is staunchly resisting. If it relents on the teachers’ pay claims it is likely to unleash a tsunami of public sector pay claims. They can little afford to do so.
Teachers and other public servants have had almost a decade of meagre pay increases under a National-led government. The current government is the unfortunate recipient of this pent up frustration. The much vaunted government budget surpluses were largely won at the expense of public servants and the quality of public services.
While inflation has appeared benign over the past decade (up 16 percent) the reality is that the cost of essentials such as accommodation (up 80 percent), rates, insurance and electricity have far exceeded wage increases over this period. Inflation has been kept low by falls in the prices of non-essentials such as electronics and entertainment. It has become much harder for the average Kiwi to pay the basic bills. Teachers, nurses, police and many other Kiwis have an uneasy feeling they have been going backwards, particularly if they prefer indoor living.
But there is a much larger theme underpinning public sector wage demands and this government’s staunch response. It exposes a fundamental fault line in our economy. A shared delusion about our economic reality. We just aren’t doing particularly well, despite what we have been told.
I have great sympathy for the pay demands of teachers and other public servants. Yet their intransigence in their pay demands could expose the myth of the “rockstar New Zealand economy”. This delusion is based on the myth of our apparent prosperity. This has been largely based on rising debt levels, mass immigration and housing inflation. The statistics relating to household debt levels in New Zealand highlight the extent of this collective delusion. We have used borrowed money to bid up our own house prices thinking we are getting richer as a nation in the process. This has been happily facilitated by politicians of all persuasions.
If the current government relents to the demands of teachers and other public servants, our economic success story could easily be exposed as a well-crafted fable. A very astute exercise in political marketing. The question we should be asking is “if we are doing so well, where are the new industries with heaps of well paying jobs?” The answer is they don’t exist. Our economic growth over the past decade has largely been the result of an illusionary trifecta of mass immigration, ultra-low interest rates and housing inflation.
There are no major new high paying growth industries. Success stories such as Xero and A2 milk are well hyped minor players in the scheme of our wider economy. Tourism is generally a low income industry. There has been no surges in worker productivity or average pay rates.
Headline GDP did grow at around 2 or 3 percent per year for a number of years. But that was because mass immigration meant there were more people living here and spending and generating more output and incomes. Mass immigration also pumped house prices creating a feel good wealth effect for home owners. But on average we were little better off in our real incomes. Mass immigration is a steroid to headline economic growth. Steroids aren’t a long-term success story.
If this government relents and provides teachers and other public servants with double digit pay increases the likely outcomes will be a budget deficit and increased inflation.
The scenario from there will be higher domestic interest rates as the Reserve Bank raises interest rates to quell inflationary pressures. Higher interest rates will serve to further decrease housing inflation and wider demand in the economy. The economy will stall.
The public sector was the whipping boy for the previous government. The pent up frustration this created is now being unleashed on a supposedly sympathetic administration. The current government is likely aware that catering to public sector pay demands could quickly unravel the New Zealand economic fable of the past decade. They are on a hiding to nothing. We are definitely living in interesting times.
Peter Lyons teaches at Saint Peter’s College in Epsom and has written several Economics texts.