Facts on the wage comparison with Australia

The Prime Minister has on several occasions, including TVNZ's Breakfast this morning asserted that the after-tax average wage has gone up 16 percent since October 2008 because of tax cuts, and that as a result New Zealand’s after tax average wage has risen faster than Australia’s.

In fact, during this government’s term, using its own comparison, after tax cuts and price increases are taken into account, the average weekly wage has risen only 5.3% (that is, since December 2008). The comparison is even worse if we look at the average hourly ordinary time wage (reflecting the rate at which people are paid). It has risen only 3.4% since December 2008. We also need to remember that about two thirds of wage and salary earners get less than the average wage, and so got even less from the tax cuts and were hit harder by the GST increase.

Comparing directly with Australian wages and adjusting for purchasing power parity we see that in June 2009 the Australian average wage was 35% ahead of New Zealand. In June 2010 it was 41% ahead. This compares average weekly full time wages as best we can, but takes no account of the generous superannuation contributions (at 9% of income) that Australians receive from their employers.

The facts are as follows.

Given that the latest wage data is to December 2010 and the present government took office in November 2008, a more natural comparison is with December 2008. We give that as well as a September 2008 comparison.

Before Tax

• Prices (CPI) have gone up 5.6% since September 2008 – and 6.1% since December 2008. Almost half of the increase (2.6%) is due to government policies including GST according to the Reserve Bank.

• The average weekly wage has gone up 8.1% since September 2008 – but only 6.9% since December 08.

• So before tax, the average wage has kept well ahead of inflation since September 2008 (by 2.5%) but by only 0.8% since December 2008. It peaked in real terms (that is, after inflation) in March 2009 and is now 1.2% lower than then.

After tax

The government states that the after-tax average wage has gone up by 16% since September 2008. Our calculations* put that at only 15.4%, of which 3.3% occurred in the quarter to December 2008 due largely to the 1 October 2008 tax cuts under the previous government. Since December 2008, the after-tax average wage has risen 11.7%.

However any real increase is entirely due to tax cuts rather than increases in real wages. That is unsustainable: we cannot tax-cut our way to higher wages. Tax cuts are a large part of the reason for the increasing government debt.

But two-thirds of income earners earn less than the average wage. The lower their income, the less proportionate benefit they got from the tax cuts (and the more the GST increase has reduced what they get for their spending). Most people got far less benefit from the tax reductions than the Prime Minister’s figures suggest.

Finally, if we look at the real after-tax average weekly wage (that is, after taking account of rising prices), it has risen only 9.3% since September 2008 and only 5.3% since December 2008. Again, that increase will be even lower for those many people with lower incomes than the average wage.

Alternatively, if we look at the real after-tax average ordinary time hourly wage, it has risen only 7.0% since September 2008 and only 3.4% since December 2008.

* The calculations use the tax tables in 2008 prior to the 1 October 2008 tax cuts and ACC levy for 2008, the tax tables in 2008 after the 1 October 2008 tax cuts and ACC levy for 2008, and the tax tables in 2010 following the 1 October 2010 tax cuts and ACC levy for 2010.

ENDS

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