Cullen warns against large pay rises after getting 8.1pc

Michael Cullen

Finance Minister Michael Cullen has backed Reserve Bank Governor Alan Bollard's call for wage restraint to curb inflation, despite both men receiving large pay rises last year.

Dr Cullen received an 8.1 per cent pay increase last year and Dr Bollard apparently received a pay rise of close to 7 per cent.

Inflation had been just above 3 per cent at the time of the increases.

Last week Dr Bollard warned he might push up interest rates if workers get "extravagant" pay rises.

The Reserve Bank has held the Official Cash Rate at 7.25 per cent, despite predicting inflation would nudge 4 per cent this year and remain outside its comfort zone of 1 to 3 per cent for the next 18 months.

The bank could ignore the inflation breach as long as it did not flow on to wages and prices, he said.

Dr Cullen told the finance select committee yesterday that there was a potential risk of inflation going past 4 per cent, but people should not automatically expect their pay rates to compensate for that.

"You can't expect wage and salary increases to compensate you for what are major shifts in relative prices over which we ourselves have no control," Dr Cullen said.

"If we try to compensate ourselves for those then there is a serious risk that we move into a more strong inflationary cycle which the Bank will have to counteract by tightening monetary policy and then that will obviously lead to further problems."

Last December the Remuneration Authority granted senior politicians large pay rises.

Most ministers got pay rises of between 4 per cent and 9.6 per cent, backdated to July 1.

The Remuneration Authority gave the biggest pay rise to Prime Minister Helen Clark, with a 9.6 per cent rise, taking her pay from $317,000 to $347,000. In 2002 her pay was $244,100.

On top of her pay, the Prime Minister is entitled to $17,900 in expenses.

As Deputy Prime Minister, Dr Cullen's pay rose 8.1 per cent from $226,700 to $245,000.

The Reserve Bank's annual report last year showed the highest paid person at the bank was on between $480,000 to $489,000.

In the previous year the highest paid person at the bank was on $450,000 to $459,000.

It is believed that person is Dr Bollard and this means he received an increase of about 6.6 per cent.

The Reserve Bank uses the labour cost index to measure wage increases and it is currently growing at 3 per cent. The bank predicts this trend to continue.

Wage and price growth in excess of this could lead to Dr Bollard considering increasing interest rates.

Engineering, Printing and Manufacturing Union National Secretary Andrew Little said it was unrealistic for the Government to ask workers to curb their pay expectations in a bid to control inflation.

"Workers will look at their needs, at what they think they are worth and negotiate accordingly," Mr Little said.

Dr Bollard's spokesman would not confirm Dr Bollard's salary level or pay increase in the previous year, but said it was about 4 per cent.

The Reserve Bank Governor's pay is set by the Finance Minister in consultation with the Reserve Bank's board.

- NZPA