Hive News Wednesday: Tighter migration rules to hit Auckland building boom and export education; RBNZ still worried about low inflation

At a food festival in Newmarket. Copyright Lynn Grieveson / Hive News

The Government announced a significant tightening of its migration settings yesterday, moving to increase the skill levels of new permanent residents, suspend applications from parents and toughen the English language requirements. It is also reviewing temporary work visas and student visas, along with the work testing around those visas.

The changes will effectively dampen down a bow wave of applications for permanent residence coming from a pool of up to 180,100 overseas students and workers who arrived here with temporary work visas in the last three years. More than 70% of permanent residency applications come from people already here on temporary visas and over 20% of students and temporary workers have become permanent residents within five years under the old rules.

Permanent residency approvals jumped 23% to over 52,000 in the last year and were set to surge well over the Government's old planning range without a tightening of the rules because of this coming bow wave of applications. Treasury and MBIE have also been worried these approvals from a growing pool of lower skilled applicants were lowering the skill levels of migrants, dampening productivity, suppressing wage inflation and substituting for unemployed New Zealanders who could be moving off benefits.

The changes will make it much harder for New Zealand's Private Training Establishments (PTEs) to promote their courses as a pathway to residence and will make New Zealand less attractive for lower skilled migrants hoping to turn a one or two year job on a dairy farm or in a cafe or rest home into permanent residency for themselves and their families.

The Hospitality Association and Federated Farmers said they were concerned the changes would make it harder to find temporary workers and to create pathways to residence for them.

Labour and New Zealand First described the changes as a "poll-driven flip flop" that would not make much of a difference given the temporary work and student visa settings are unchanged -- for now. Michael Woodhouse was clear in comments to reporters that temporary work visas and the work test system around them were also under review.

Immigration lawyers said it would make it much harder for those already here to get permanent residency and disappoint many who came here in recent years with an eye on a pathway to residency.

Potential unintended consequences for Auckland building boom and export education

Auckland Immigration lawyer Alastair McClymont of McClymont and Associates told me one of the potential unintended consequences of the changes would be to discourage or stop potential building trade workers from migrating to Auckland to help with an expected surge of NZ$40 billion worth of construction work seen in the pipeline for Auckland over the next five years.

He said the toughening of the English language requirements to require a 6.5 score for reading and writing in the English Language Testing System (IELTS) would make it all but impossible for many tradies to get permanent residence. He said the 6.5 score was equivalent to requiring Year 13 or 7th form level English for reading and writing and he wondered whether many New Zealanders who were tradies would be able to pass it if they had to sit it.

"Unfortunately, if you’re a tradie from a non-English speaking country, it will now be almost impossible to qualify for residence," McClymont said.

"Frankly, I’ve met a number of tradies from New Zealand and other English speaking countries that wouldn’t meet the English Language requirements," he said.

"Without a pathway to residency, it’s going to be difficult to attract skilled tradies from non-western countries, and these are the people meeting the skills demand in the construction industry."

The increase in the points requirement to a record high 160 points for all skilled migrant applicants from 140 points would also rule out many younger tradies from achieving residence, unless they use the 30-40 bonus points on offer for moving out of Auckland -- which would defeat the purpose of recruiting for the Auckland building boom in the first place, McClymont said.

'Indian and Chinese students being targeted'

The changes to the points requirements, the suspension of parental applications and the new English language requirements appeared targeted at removing a pathway to residence for a certain profile of temporary worker and international student, he said.

"The strengthening of English language requirements will be a very effective instrument," McClymont said.

"Most students with level 6 business diplomas won’t pass the English test and can now no longer rely on work experience in New Zealand. That work experience was almost always in a business in which their native language was spoken anyway," he said.

McClymont said these students were predominantly from India and China and had finished low level diplomas in business, hospitality or IT through PTE’s with lower language requirements than Polytechnics and Universities.

'Bigger risk of fraud, exploitation and over-staying'

"These are the people who are represented in the high student visa numbers and are now applying for and obtaining residency under the Skilled Migrant category. They tend to get jobs in very marginally skilled professions, they tend to be at the coal face of fraud and exploitation and are working for low wages," he said.

McClymont said there was also a risk that many workers here on temporary work visas or student visas would find themselves even more vulnerable to exploitation and below-minimum wages. Many would roll over their temporary work visas or choose to over-stay, but feel vulnerable to removal or to further changes -- increasing their chances of exploitation.

He said he had some clients who had been in New Zealand for 15 years on temporary work visas, particularly in rest homes and in some kinds of factory work.

"It's these sort of changes that create these fears," he said.

"All the students who are here already, who have now had their pathway to residency cut off are not going to shrug their shoulders, pack their bags and go home. They will stay and continue to apply for long term work visas hoping to eventually gain enough points through accumulated NZ work experience and improve their English language level on the way. They will continue working for low wages and continue to be exploited in the long term. If they don’t get residency, they will overstay."

Big risks for lower level PTEs

The changes would make it harder for the export education sector to recruit students, particularly to the lower level PTEs, McClymont said.

"The requirements to achieve higher approval rates, their obligation to control agent fraud, the English language requirements and the difficulties of obtaining residency will long term see a reduction in the numbers of these schools in New Zealand," he said.

"The market will be left to higher quality schools, Polytechnics and Universities who, unfortunately, have traditionally struggled to attract large numbers of foreign students. The goal of NZ$5 billion in export education earnings seems like a pipe dream now and I would expect the figure to reduce over the next few years."

See a lot more detail below on the announcement in the Hive News alert I sent out yesterday.

RBNZ still worried a lot about low inflation

The New Zealand fell almost a cent towards a three-month low of 70.4 USc yesterday afternoon, partly following the migration announcement and partly after John McDermott's speech to the Bay of Plenty Employers and Manufacturers Association in Rotorua, which showed the Reserve Bank remained concerned about very low inflation and was almost certain to cut the OCR at least once more time.

McDermott said September quarter inflation figures due next Thursday were expected to be in line with the bank's August forecast for an annual rate of 0.2%, but that annual inflation would rebound to the bottom of the Reserve Bank's 1-3% target range in the December quarter "as previous petrol price declines drop out of the annual calculations and housing-related goods and services prices continue to increase strongly."

“As described in the September OCR review, monetary policy will continue to be accommodative. Interest rates are at multi-decade lows, and our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range," he said.

The New Zealand dollar dropped around 20 basis points to 70.77 USc immediately after the speech was released, and had fallen earlier in the day from as high as 71.4 USc. It has fallen from as high as 73.5 USc over the last three weeks on growing expectations of a US interest rate as soon as December, and on doubts that central banks will be able or will want to be able to keep interest rates at near 0% or even negative levels for much longer.

McDermott said there were several reasons for low inflation, both domestically and globally.

"In New Zealand, tradables inflation, which accounts for almost half of the CPI regimen, has been negative for the past four years. Much of the weakness in inflation can be attributed to global developments that have been reflected in the high New Zealand dollar and low inflation in our import prices," he said.

"Strong net immigration and increased labour market participation have also boosted the supply potential of the economy, meaning that New Zealand has been able to grow at a robust pace without generating significant inflation.”

McDermott said there also appeared to have been changes in how inflation is generated in New Zealand

"The drivers and composition of net immigration influence the degree of associated inflationary pressure for any given migration flow, and inflation expectations appear to now place more weight on past inflation outcomes than they did prior to the global financial crisis," he said.

'Deflation carries important costs'

McDermott gave his most detailed comments yet about the risks of deflation.

"Although we do not see any significant risk of deflation in New Zealand, deflation carries important costs. Deflation would likely lead to consumers and businesses significantly delaying purchases or investment, in the expectation that these will become cheaper in the future," he said.

"By delaying purchases and investment on a large scale, demand in the economy as a whole is reduced. This then leads to even lower prices. Deflation is particularly concerning as monetary policy eventually reaches a point where it cannot go any lower in order to stimulate the economy (known as the effective lower bound). A buffer above zero inflation is also needed to account for any measurement error in the price index."

He again talked about the bank's focus on inflation expectations, which have been falling in recent years and which prompted the surprise cut in March.

"The Bank responds to low inflation outcomes if these outcomes are expected to have an effect on medium-term inflation," he said.

"If households and businesses respond to low inflation outcomes by reducing their expectations for future inflation, and wages and prices are set accordingly, then these lower inflation expectations would weigh on future actual inflation over the horizon relevant for monetary policy. We carefully monitor developments in inflation expectations, at various horizons."

It is a very useful speech to give an insight into the bank's changing thinking on the causes of low inflation and the potential dangers. It certainly suggests the bank will push ahead with its November MPS forecast for at least one and possibly two more OCR cuts over the next 6 months or so.

Further to the migration debate above, McDermott also made a comment that contrasted with Michael Woodhouse's view (below) that wages were not being suppressed by record high net migration.

"More people entering the New Zealand workforce acts to dampen labour costs, and general inflation as a result," McDermott said.

That's enough detail on migration and inflation for now. No doubt these inter-connected debates will bubble on for some time to come, with both more rate cuts and yet-tighter migration settings in the offing.

Have a great day.

cheers

Bernard

12 October 2016