The following comes from the Reserve Bank’s November Monetary Policy Statement, issued on Thursday morning.
There have been significant changes in government policy since the August Statement. In this set of projections, we have incorporated the estimated impacts of four policy areas that are expected to have significant effects on the business cycle. These are:
• government spending initiatives;
• the housing programme (‘KiwiBuild’);
• changes to visa requirements; and
• minimum wage increases.
The working assumptions outlined here are based on what we currently know of government policy given announcements to date. Consistent with the Bank’s standard practice, we have consulted with the Treasury on indicative estimates of policy impacts, and overlaid these with our own assumptions as to the business cycle and behavioural responses. The overall effects of these policies on the economy will depend on how private households and businesses respond. Taken together, the set of assumptions outlined below equates to more fiscal stimulus than incorporated in the August Statement.
Government spending initiatives
Nominal government consumption is assumed to be around 3 percent (or around 0.5 percent of GDP) higher than projected in the August Statement. The overall effects of this higher government consumption are uncertain, depending in part on the reaction of households. Increases in government consumption could be partly offset by a decline in household consumption if households assume increased government expenditure will necessitate higher taxes in the future. The degree of offset can vary with the strength of aggregate demand.
While the effects of tax changes announced in Budget 2017 have been removed from our projections, household consumption is supported by the Government’s Families Package. Taking together the effects of increased government consumption and changes to transfers and allowances, our working assumption is that household consumption is not substantially affected by higher government spending.
The Government has announced an intention to build 100,000 houses in the next decade. Our working assumption is that the programme gradually scales up over time to a pace of 10,000 houses per year by the end of the projection horizon. Given existing pressure on resources in the construction sector, the aggregate boost to construction activity from this policy will depend on how resources are allocated across public and private sector activities. The Government intends to introduce a ‘KiwiBuild visa’ to support the supply of labour to high-need constructionrelated trades. While accompanying policy initiatives may alleviate capacity constraints to some extent, our working assumption is that around half of the proposed increase will be offset by a reduction in private sector activity.
Changes to visa requirements
The Government has indicated its intention to strengthen requirements for work and student visas, with an estimated effect of reducing annual arrivals across these visa categories by 20,000-30,000. In light of this proposal, we assume a faster decline in permanent and long-term arrivals in our projections than in August. Changes to visa requirements do not affect arrivals and departures of New Zealand and Australian citizens. We continue to assume only a gradual normalisation of net flows between Australia and New Zealand.
Minimum wage increases
The Government has indicated its intention to raise the minimum wage to $20 per hour by 2021, beginning with an initial increase in April 2018. Increases in the minimum wage have a direct impact on labour incomes and wage inflation. It is uncertain how businesses will respond to the increase in minimum wage. The lift in minimum wage may spill over to workers in higher wage brackets, and could impact on businesses’ labour demand and hiring intentions.1
A higher minimum wage may also encourage workers currently outside of the labour force to enter, increasing labour supply, although labour force participation is already at a record level. In our projections, we assume the minimum wage rises by equal increments in each of the next four tax years. Allowing for only the direct impact, and accounting for the changes in the minimum wage already implicit in our projections, we assume this lifts annual wage inflation by 0.2 percentage points over the projection. We assume modest effects on labour demand and labour supply over the projection period.2
1 See OECD (2015), ‘OECD Employment Outlook 2015’, OECD Publishing, Paris. http://dx.doi. org/10.1787/empl_outlook-2015-en
2 The assumed effects are broadly consistent with estimates from MBIE (2017), ‘Regulatory Impact Statement, Minimum Wage Review 2016’, http://www.mbie.govt.nz/publications-research/publications/ employment-and-skills/ris-minimum-wage-review-2016.pdf, accessed 31 October 2017.