On the 5th of May 2021, during a pre-budget speech at the Wellington Chamber of Commerce, Finance Minister Grant Robertson signalled that government spending in certain areas would be reduced. Across various ministries, the “reprioritisation” of nearly $1 billion in previously assigned spending was announced. Shortly thereafter, the Ministry of Public Services ordered a three-year freeze on the wages of most public sector employees.
During the announcement of the wage freeze, Robertson argued that the policy was necessary in order to constrain government spending. Despite only accounting for 5% of the Government’s budget, the public sector wage bill supports the employment of 18% of our workforce.
Throughout both Robertson’s speech and the Ministry’s announcement, the case for curtailing some types of government spending was predicated on the need to reduce the level of public debt incurred during the pandemic. Between 2020 and 2021, New Zealand’s public debt to GDP ratio rose from 15.6% to 32.6% as a result of spending related to COVID-19 support packages and investments.
In the days since the announcement, the Finance Minister has reaffirmed the Government’s commitment to propose a Recovery Budget that is expected to include increases in overall spending, likely driven by strategic investments in the healthcare sector, later this month. Responding to concerns about the possibility of the Government initiating an austerity programme, Robertson stated that “[the 2021 budget] will invest in the future of New Zealand… We will not be cutting departmental funding. That is austerity.”
But this then raises an important question, with regards to the public sector wage freeze: If the Government recognises the need for continued spending, backed by increases in debt, why did it announce a wage freeze that would yield only meagre savings?
According to Robertson, the actions were necessary for the Government to “show leadership” in managing their finances and demonstrate “fiscal responsibility” in the years to come. Presumably, the Government viewed a wage freeze as a low cost means of appealing to some of the former National voters they attracted in the 2020 election, while avoiding the implementation of austerity policies that could weaken an economic recovery or undermine the Government’s wellbeing priorities.
The problem with this, however, is that the policy isn’t low cost. Even when isolated to the public sector, the consequences of a three-year wage freeze, which would amount to more than a 6% decline in real wages over that period if inflation targets are met, are both significant and varied.
When wages within the public sector stagnate during periods of consistent inflation, the resulting decline in the spending power of employees almost immediately spills over into the rest of the economy. In 2008, economists from the European Central Bank (ECB) conducted a study in which they examined the relationship between public sector and private sector wages. The economists found that, on average, a 1% decline in the real wages of public sector workers was associated with a 0.1% decline in the real wages of private sector workers, across the economies examined. The drop in private sector incomes that follows the public sector largely arises due to a drop in consumer spending.
In June of 2020, following the New South Wales Government’s consideration of a one-year public sector wage freeze, YouGov conducted a poll of front-line healthcare employees across the state. The survey found that the participants would reduce their monthly general consumption by 11% and their consumption on annual holidays by over 40%, on average, if the freeze were to occur. Nearly half of the employees surveyed noted that they would likely need to reduce the amount of money they save each month, with the portion rising to over two-thirds amongst young employees. Over 90% of respondents worried about their ability to afford a comfortable retirement; wage freezes only exasperate this.
The policy is also likely to undermine the Government’s priorities in education and healthcare. Prior to the pandemic, the Government was making good progress in reducing the shortage of teachers within our educational system; a wage freeze sets that back. Speaking to RNZ, Melanie Webber, president of the New Zealand Post Primary Teachers Association, warned that “shortages are going to be coming back” if the Government continued with the policy. Given the existing disparities between nursing salaries in Australia and New Zealand, many medical professionals have also expressed concern over the prospect of nursing shortages being triggered by the wage freeze.
Even if the Government were truly concerned about reducing their level of debt, addressing the issue by targeting the wages of civil servants, nurses, and other public sector employees would be deeply counterproductive at this time. Reducing the level of consumer spending within the economy reduces total tax revenues and undermining people’s ability to save only increases superannuation costs over time.
The Government’s wage freeze is a unique kind of policy; one that simultaneously undermines its own fiscal, economic, electoral, and wellbeing objectives. While the membership of the ACT Party and Taxpayers’ Union may be blushing, the policy improves neither the New Zealand economy nor the Government’s chance of being re-elected.