Doing hard labour

Photo / NZH

The RMA has seen million-dollar projects cancelled, but the skills shortage is a bigger bind, say business leaders

Regulation is the No 1 bugbear among business leaders' domestic concerns.

Overhauling the Resource Management Act remains in the Government's "We're working on that" pile. An RMA reform bill is half-way through the legislative process.

A recent Statistics New Zealand survey found that a third of firms see the RMA as a constraint on their business performance; in the farming, fishing, forestry and mining sectors it is 50 per cent of businesses or more.

Nearly one firm in six reported cancelling projects worth $1 million or more over the past two years because of it.

But that survey also found more firms citing employment regulation than environmental regulation as a constraint.

Skilled labour shortages are the second most pressing domestic concern in the Mood of the Boardroom survey.

This is consistent with the New Zealand Institute of Economic Research's quarterly surveys of business opinion, in which a steadily rising proportion of respondents have been saying it is getting harder to find skilled labour - though the levels indicate it remains easier than it was during the mid-2000s, when the unemployment rate was at or below 4 per cent.

The Ministry of Business, Innovation and Employment, which monitors job advertisements, says vacancies for tradesmen and technicians have risen 20 per cent over the past year. The steepest rises in skilled vacancies is, unsurprisingly, in Canterbury.

Infrastructure is almost as big a concern as skill shortages among the survey's respondents.

That is despite central government's plans to invest $12 billion in land transport infrastructure between 2012 and 2015, Transpower's $5 billion upgrade to the national grid and the $1.6 billion the Government is investing in high speed broadband. Their concern about labour productivity, by contrast, is something chief executives can do something about themselves, by way of training and investing more capital per worker in their businesses.

Since 1996, the statisticians tell us, the capital-to-labour ratio has risen at an average annual rate of 2 per cent, or about half the pace it has across the Tasman. Capital deepening contributed the majority of the improvement in labour productivity over that period, which averaged 1.4 per cent a year, the rest coming from businesses getting smarter at using inputs of labour and capital.

Level-pegging with labour productivity as a concern is insurance costs in the wake of the Canterbury earthquake. Repricing and reapportioning risk after an event of that magnitude is only to be expected. It is a reassuring sign that the Earthquake Commission has been able to renew its reinsurance without a material increase in rates. But Chris Gudgeon of Kiwi Income Property Trust says the tax system acts as a disincentive to earthquake strengthening. "There is no recognition in the eh tax system for the cost to businesses of earthquake strengthening at a time when New Zealand is waking up to the need to deal with structural obsolescence in much of our building infrastructure."

Construction cost pressure arising from the rebuild is also a widespread concern in the survey. The June consumers price index recorded a 4.1 per cent rise in construction costs nationwide over the past year, the fastest annual pace since 2008, driven by a 12 per cent rise in Canterbury.

"The Reserve Bank has taken the view that housing-related inflation will be relatively contained this time, due to the localised and co-ordinated nature of the Christchurch rebuild," Westpac economist Michael Gordon says. Westpac's economists beg to differ.

Among the macro-economic concerns, the high New Zealand dollar looms largest. Though retreating relative to the US dollar since May, the kiwi has been strengthening against the Australian dollar and on a trade-weighted basis remains very high by historical standards. Some of the reasons for that are good things: advantageous terms of trade and an economy growing more strongly than most developed countries'. But it is also driven by extraordinarily loose monetary policy across much of the rest of the world economy and relief on that score will depend chiefly on when the US Federal Reserve feels able to power down its printing presses.

Wage inflation ranks surprisingly high (No 8) among chief executives' concerns, given the statistical measures of wage growth are subdued, CPI inflation is just 0.7 per cent and the unemployment rate at 6.2 per cent is well clear of the rate that might be expected to put upward pressure on wages.

By contrast, rising house prices, about which the Reserve Bank is increasingly fretful, ranked just 15th among respondents' concerns.

That might reflect expectations of a repeat of the mid-2000s boom when businesses chasing the consumer dollar benefited as the wealth effect from rising housing equity turbocharged household spending. It took an official cash rate of 8.25 per cent and a lot of collateral damage to exporters and import-competing firms to get on top of the inflationary consequences.

Respondents are evidently supportive of the weight the Government has given to reining in its spending and borrowing. The Budget reaffirmed its commitment to return to surplus with two years and then to press on with reducing net debt to 20 per cent of GDP by 2020.

The result is the fiscal policy will be contractionary over the next few years, that is, the net effect of tax coming in and government spending going out will be to subtract demand from the economy. All else equal that would allow the Reserve Bank to keep interest rates a bit lower.

In any case, reducing Government borrowing, at least relative to the size of the economy, is important in the context of boosting national savings and limiting the size of the current account deficit - the chronic issue which rounds out the top half of business leaders' concerns.

The deficit was $10 billion in the March year just past and the Treasury forecasts it to climb to $16.5 billion or 6.5 per cent of GDP in four years' time - provided foreign savers are willing to go on funding that big a gap between what we spend and what we earn.

• Brian Fallow is the Herald's economics editor