Should pay increases match inflation?

Posted By TEU on Mar 17, 2011 |

CTU economist Dr Bill Rosenberg says workers need to be wary of arguments by employers that they should not pay the full Consumer Price Index (CPI) adjustment to wages this year because most of it is due to the GST rise, and workers have been compensated for that by the personal tax cuts.

Dr Rosenberg notes that inflation estimates are rising due to the February earthquake in Christchurch. The effects may be localised (Christchurch people are already seeing sharp increases in rents and the cost of other items in short supply), but will not be totally localised as shortages, oil and exported food (e.g. dairy) prices affect the rest of the country.

“It is government spin that the 20 percent GST increase offsets the tax cuts – a ‘tax switch'” says Dr Rosenberg.

“The reality is that costs have gone up substantially for workers. In the past, employers would not have accepted that increases in income taxes should be compensated for in higher pay rates. Why should reductions in income tax be taken out of pay increases this time round?”

Dr Rosenberg notes that not all the increase in government charges and policy changes has been compensated for in tax cuts. The Reserve Bank estimates are that in the year to March 2011, inflation would be about 2.8 percentage points lower without the changes to GST, tobacco tax and emissions trading. About 2.0 percent of that was compensated for as being due to GST, so another 0.8 percent remains for those other charges. In addition there is the increase in ACC levies adding around another 0.4 percent, totalling 1.2 percent other than GST


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