Just the facts, ma'am

By Donal Curtin

Friday 9th September 2005

The whys and wherefores of New Zealand's economic performance since the general election of 1999. Normally economists are as fond of reaching for a shillelagh and joining the fray as anyone, but on this occasion my contribution is strictly factual: what actually happened?

First of all, the size of the pie has become considerably bigger. Between the December quarter of 1999 (the general election quarter) and March 2005 (the latest data), the country's GDP grew by a strong 19.4%, equivalent to 3.8% a year over the past five years. That's consistent with the 3% to 3.5% growth rate that the economic modellers reckon is what New Zealand is capable of growing at over the longer haul.

Sustained growth has had significant side benefits. Over this same period employment grew by a strong 272,000. That was more than enough to absorb the new people entering the labour force, plus large numbers besides. The unemployment rate at the end of 1999 was 7.2%; it's 3.9% today. What's more, relatively disadvantaged groups have done especially well from the strong labour market: the Maori unemployment rate started at a dismal 14.4%, but ended the period at under 9%. There will be folks who will see this as a glass half empty, and I have sympathy for the view, but it's still real progress: as a reality check (and until I researched it I'd forgotten how bad things had got at our lowest point) the Maori unemployment rate was 27.4% in the first quarter of 1992.

The economy is producing roughly a fifth more than it did, which even growth sceptics (of which New Zealand has at least its fair share) should concede is a sizeable advance in the quantum of resources we've now got available to apply to our favoured uses. On the other hand, it's possible that every extra brass razoo got cornered by the already well-off: who actually got the extra income?

We don't have income distribution data that matches up neatly with general elections, but we do have suggestive data that broadly overlaps. A just-published report from the Ministry of Social Development (titled 'Social Report Indicators for Low Incomes and Inequality: Update from the 2004 Household Economic Survey') gives a variety of measures for the period 1998-2001 and 2001-04. If you take the after-tax income of the median household (the one bang in the middle of the country's income distribution), and you adjust for inflation, and you adjust for household composition ('equivalising' the living standards of families with different numbers of adults and children), you find, "The equivalised disposable income of the middle household rose 6.7% in real terms from 2001 to 2004, following a relatively flat period from 1998 to 2001".

While it's comforting to know that one measure of the 'representative family' shows that its purchasing power has gone up in recent years, that's obviously not the only way to look at who's gained how much. Most of the other measures of income distribution show that it has become more unequally distributed, with higher income groups getting a larger share. Before raising the red flag on the barricades, however, it's worth pausing to note two mitigating facts.

One is that nearer the bottom of the heap, things have improved: the proportions of households below a poverty level have been falling. As one example, in 2000-01 31.5% of family groups with any Maori adult were below a "60% of the 1998 median income" poverty line; in 2003-04, this had dropped to 23.6%. And two, we shouldn't start fingerpointing too hard at ourselves: the rising inequality of income distribution is a global phenomenon among developed economies, for reasons not yet fully understood (suspects include everything from cheap labour in the Third World to higher returns on education in the 'new economy').

The facts so far have looked at how people and their incomes have fared, and overall it's a tidy story. But readers with longer memories will recall previous bursts of "prosperity" in New Zealand that proved to have been built on flimsy foundations - notably the corporate paper-shuffling antics of the mid 1980s. Is it possible that, this time round, we've built another house of cards?

In short, no. The latest issue of the Reserve Bank Bulletin carries some research (titled 'Developments in the New Zealand corporate sector') showing what's happened to New Zealand corporates in recent years. These companies employ over 1.1 million New Zealanders, so it's an important issue whether they've binged on debt, or otherwise pushed their luck. The research is unambiguous: companies have genuinely become more profitable, with profits growing by some 11% a year over 2000-04, and their finances have improved. As the report concludes, "While the absolute level of debt has also been rising in the past few years, the debt to profit and debt to asset ratios have improved. The corporate sector seems to be funding the recent strong investment growth of the past year out of retained earnings or equity raisings, rather than via debt. This has allowed the corporate sector to strengthen its balance sheet while investing for future growth at the same time."

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