An address to The Evolving Debates, Auckland
Mr Chairman, the title of our debate today is a very strange one. Who on earth could disagree with the proposition that it is time to apply commonsense? Of course it is time to apply commonsense! It is always time to apply commonsense. But I suspect the title was intended to imply that in recent years we have not applied commonsense to our approach to economic policy.
And this is perhaps designed to perpetuate the myth that the policies of the late eighties and early nineties were a failure. Recall the ridiculous and insulting challenge on the leaders’ television debate just prior to the election, when John Campbell offered Bill English the chance to apologise for the policies of the nineties. Or the equally ridiculous reference in the editorial of last Sunday’s Sunday-Star Times to “the horrors of the 1990s”. Or the reference by Nick Venter of The Dominion Post to the policies which National went into the election with as being “re-heated 1990s policies”, as if this was in some way a serious deficiency. Or the reference in the editorial of this week’s Listener to the “astonishing” fact that National went into the recent election campaign “pretty much unreconstructed at a policy level” from its past policies.
And of course the Labour Government has been keen to distance itself from the 1990s and what they have sought to portray as “the failed policies of the past”.
Well, let’s look at the facts. Almost none of the big changes of the late eighties and early nineties have been reversed by the Labour Government – the Reserve Bank Act has not been changed, the Fiscal Responsibility Act has not been changed, there has been no move to re-impose import controls, there has been no move to reverse the reduction in tariffs on imports, there has been no attempt to reverse the corporatisation of most government-owned trading operations, there has been no substantial reversal of the privatisation of many of those trading operations, there has been no reversal of the deregulation of the transport, retail or financial sectors. There has not even been any reversal of the reductions in benefit levels introduced in 1991, no doubt in part because the OECD still regards our benefit system as among the more generous among developed countries.
And why have these policies not been reversed? Essentially because they have served New Zealand well. Consumers have a much wider range of choice. Government-owned trading operations have become markedly more efficient, in some cases while remaining in government ownership and in some cases since privatisation. Inflation has been brought down from a level near the top of the developed-country range in the seventies and eighties to about the average of other developed countries. Public sector debt has been sharply reduced, relative to the size of the economy, by a combination of asset sales and fiscal surpluses. In the five years to 1996, the New Zealand economy achieved 4 per cent annual growth on average, while employment growth over the same period was the fastest in the OECD. Taking the nineties as a whole, growth averaged 3 per cent, despite the Asian crisis and two successive droughts at the end of the decade.
In the last few years, the economy has continued to move along – as a result of record-high meat and dairy prices on international markets, very good growing conditions down on the farm, low interest rates, the lowest exchange rate in New Zealand’s history, and the flexibility which is the direct result of the so-called “failed policies of the past”. In the 10 years to 2002, the growth of the New Zealand economy averaged 3.3 per cent per annum, the same average growth as achieved by the US economy over the same period.
So to talk of “the horrors of the 1990s” is to talk cattle manure. Why would we be better off if we had had high inflation and 20 per cent interest rates in the nineties? Why would we be better off to have continued with gross over-staffing in many government-owned trading operations? Why would we be better off to have continued to subsidise internationally-inefficient manufacturing operations? Why would we be better off to have continued with inefficient telephone services? Why would we be better off to have continued having to borrow expensive credit from finance companies instead of much cheaper finance from vigorously competing banks? Why would we be better off with inefficient and strike-prone ports? Those who talk of “the failed policies of the past” are relying on the fact that many of us simply do not remember how inefficient and frustrating things were back before the mid-eighties.
But there remains a huge task ahead of us. The New Zealand economy is still growing, but the gap between our living standards and those in, say, Australia continues to widen. In 1960, GDP per capita in New Zealand was closely similar to that in Australia, indeed perhaps even a little ahead of that in Australia. By 2000, Australia’s GDP per capita was about one-third greater than that in New Zealand.
Many observers expect Australia to grow at about 4 per cent per annum in the years ahead. By contrast, in his May Budget the Minister of Finance projected that the highest growth rate which New Zealand will achieve over the next 10 years is 3.1 per cent, next year, with growth expected to slow from that level to the point where, in 10 years’ time, growth is projected to be only 2.0 per cent. In other words, on the basis of present policies and information currently available to the Treasury, the New Zealand economy is expected to continue under-performing the Australian economy for as far ahead as the eye can see.
And if that happens, the kind of society which we all want for New Zealand simply will not survive. We are not talking here about some abstract concept which concerns only economists, statisticians, and policy-wonks in Wellington. We are talking about our ability to afford first-world health care – where 15-year-olds with a broken collar-bone do not have to wait in hospital for six days for an operation, in vain. We are talking about our ability to afford first-world education. We are talking about our ability to provide decent housing to the whole population. We are talking about our ability to provide well-paid and stimulating jobs for our people. We are talking about our ability to retain a reasonably equitable income distribution. We are talking about our ability to fund an appropriate level of armed forces. We are talking about our ability to protect the environment. We are talking about our ability to compete effectively in international sporting events. We are talking about our ability to survive as an independent country. All of these things are at risk without a higher rate of economic growth.
Achieving faster economic growth is absolutely fundamental to our survival as the kind of society that our kids will want to live in, and is certainly a more important issue than many of the peripheral issues which were the focus of so much attention during the recent election campaign.
Well, what does “commonsense” suggest we do to achieve that growth? Assuredly it does not suggest nationalising the Accident Compensation scheme to increase the cost of accident compensation to the business community. Assuredly it does not suggest retaining the highest company tax rate in the Asia-Pacific region. Assuredly it does not suggest increasing the risks facing the business sector by making companies liable for the “stress” caused by employment. Assuredly it does not suggest failing to reduce the obstacles and delays caused to businesses both large and small by the Resource Management Act – let alone funding objectors from the government purse. Assuredly it does not suggest increasing the tax rate on those most likely to build a business, invest, and take an entrepreneurial risk.
Rather commonsense suggests that we do everything in our power to increase the rate at which productivity is growing – which is of course ultimately the only way of improving living standards. Nobody has a magic formula for doing this. One thing we know for sure is that we can’t increase the rate at which productivity is growing by telling the Reserve Bank to be more tolerant of inflation. As Business New Zealand said in a press release last week,
“The key, critical role of monetary policy is to underpin sustainable economic growth through the maintenance of price stability. Essentially, effective monetary policy enables the Government’s other policy levers to work more efficiently and encourages the private sector to invest, spend, and save with confidence. This is because price stability provides economic certainty and stability, encourages the efficient allocation of resources, results in lower interest rates, and provides a sound platform for businesses to invest with confidence.”
And the Minister of Finance should know that. Certainly he has been told that by one of the world’s leading experts on monetary policy, Professor Lars Svensson, who said in his review of monetary policy in New Zealand, released last year, that “It is beyond the capacity of any central bank to increase the average level or the growth rate of real variables such as GDP and employment, or to affect the average level of the real exchange rate.” Targeting a higher rate of inflation, as Dr Cullen seems to want the Reserve Bank to do, will do nothing positive for economic growth, and will simply lead to higher interest rates.
Fundamentally, improving the rate at which productivity is growing is about improving the skills of the workforce, about giving the workforce more capital to work with, and about ensuring that the workforce has the most appropriate technology available.
It is therefore about the quality of the education system – ensuring that all our kids come out of school able to read, able to write, able to do basic arithmetical functions, able to think for themselves, able to relate to others.
It is about having a tax system which encourages investment, encourages the acquisition of skill, encourages risk-taking.
It is about having monetary policy which credibly anchors inflation, and expectations of future inflation, so that investment is allocated in the most efficient possible way and interest rates do not discourage investment.
It is about having a social welfare system which provides for those in need without locking them into soul-destroying dependency.
It is about ensuring that the transport infrastructure does not cause needless costs and delays, whether that means improving Auckland’s motorways, or improving the road systems in the Bay of Plenty and in Gisborne and in Nelson and on the Kapiti Coast.
It is about ensuring that the Resource Management Act does not stifle investment, or add to its cost.
It is about ensuring that small businesses are not put off hiring staff by the risks of ending up in court if the employment relationship does not work out, or the employee becomes stressed from “over-work”.
These are the things which a National-led Government could have delivered – commonsense policies all, indeed essential policies if we are to lift our growth rate. Sadly, there is not much evidence that a Labour-led Government will do so.
Copyright © 2024 Don Brash.