This paper was prepared by Don when he was the Finance spokesman for the National Party. It was intended to provoke discussion and debate among the wider National Party membership, and indeed among the public.
Over the last decade or so, economic growth in New Zealand has been pretty good – certainly better than in most other developed countries – and as a result we have seen a huge increase in people in employment and a useful increase in our standard of living. We have been reaping the substantial benefits of the reforms of the late eighties and early nineties, helped along in the last two or three years by very good international prices for our main exports, good growing weather down on the farm, a very low exchange rate (until recently), and a strong upsurge in immigration.
But we can do better yet, and indeed we need to do better if we are to catch up to the living standards which Australians now enjoy. In 1960, New Zealanders and Australians enjoyed roughly similar standards of living. Today, the living standard of the average Australian is about 30 per cent higher than that of the average New Zealander, meaning that on average every Australian man, woman and child earns nearly $200 more, per week, than the average New Zealander.
If we don’t begin to reduce that gap – worse still if the gap continues to widen – an increasing number of our brightest and best will leave our shores, not just for a few years of OE but permanently. Certainly, they will return for holidays. Certainly we can replace those departing with immigrants. But the loss of skilled New Zealanders would be a substantial loss and a serious one. The longer that loss continues, and the greater it becomes, the more difficult it becomes to arrest – skill shortages mean that we are less able to provide high quality health care in our hospitals, and less able to provide world class teachers in our schools and universities, so families leave to get better quality services abroad. The whole process becomes cumulative, a vicious circle, as Tasmania and other similar regions can attest.
On the other hand, if we are successful in reducing the gap between our living standards and those in Australia, all New Zealanders can benefit – from higher real incomes, better quality health services, better schools for our children, higher paid jobs, better housing, and all the rest. New Zealanders overseas would be more likely to return. In other words, growth is not an end in itself – it is the way in which we achieve a better standard of living, and the opportunity to choose more of the things we want.
Where do we start? We are fortunate that we already enjoy many of the characteristics which international experience suggests are conducive to economic growth. We have a stable macro-economic environment, with the government running fiscal surpluses, public sector debt at a relatively low level, and inflation under control. We are substantially open to the international market, with low levels of investment-distorting protection and a policy which welcomes overseas investment in New Zealand. We have a judicial system, a bureaucracy, and a political system which are among the least corrupt in the world.
To its credit, the present Government has preserved many of the good things which were done during the late eighties and early nineties. They have, in particular, preserved the legislation which ensures that inflation remains under control; continued to run Budget surpluses; have not reversed policies to open the economy to international trade and investment; have not re-regulated the banking or retail sectors; and, with a few notable exceptions, have not moved to re-nationalise the operations which were privatised in earlier years.
But in a great many other respects, the present Government has been adopting policies which will impede growth:
There have also been some important sins of omission. They have failed to do anything to reduce the costly delays caused by the way in which the Resource Management Act is being applied, and indeed have made it easier for groups to object to new investments by offering them legal aid to do so. They commissioned a report on the compliance costs facing the business community, and especially those facing small and medium-sized businesses, and then proceeded to largely ignore the excellent recommendations in that report. They watched passively as the Australian company tax rate was reduced below the New Zealand company tax rate, and then made it clear that they had no intention of matching the Australian rate.
Still more obstacles to growth are in the pipeline.
The reality is that the present Government, made up of people with virtually no experience of the commercial world, has very little understanding of how best to create wealth in an open economy, so the risk is that they will continue to promote policies which can only impede our growth. Despite all their professed belief in the importance of growth, this Government has adopted, and continues to adopt, policies which are profoundly anti-growth.
The Treasury shares the view that there is nothing in present policies which is likely to raise the country’s sustainable growth rate. Underlying the December Economic and Fiscal Update published by the Minister of Finance in December last year, there was a projection which showed the economy slowing down steadily over the next 10 years from a peak of less than 4 per cent in the year to June 2003 to a growth rate of little over 2 per cent.
What is worrying is that the adverse effects of the anti-growth policies which have been adopted in recent years will not be evident immediately. Any major change in policy takes some time to have its full effect on growth. Just as it took years for us to reap the benefits of the sound policies adopted in the late eighties and early nineties, so it will take some years to see the full costs of the dopey policies adopted in the last few years.
New Zealand is a small country which is a long way from major markets. That has always been true, so we should not be unduly pessimistic about the implications of that. But it does mean that we can not afford poor or mediocre policies. Indeed, we can’t even afford “average” policies. We have to have first rate policies if we are to overcome the disadvantages of our small size and distance from major markets.
The National Party believes that increasing New Zealand’s growth potential should be the central focus of the Government’s economic policies. In the past, we have indicated that we want the economy to grow by at least 4 per cent per annum, not just two or three times in a decade when we have a tail-wind, but on average all the time. We averaged about 4 per cent per annum in the middle years of the nineties. Then we were hit by two successive droughts and the Asian crisis. But we again grew at more than 4 per cent in 1999. Some other small countries, such as Ireland and Singapore, have achieved average growth rates of well above 4 per cent for significant periods of time. It is clearly not impossible for us to achieve 4 per cent growth, and indeed we should be able to achieve higher growth rates than that.
But it is important to remember that there is an important difference between aggregate growth and growth on a per capita basis. Clearly, it would be possible to get faster growth simply by using large amounts of foreign capital and large numbers of immigrants. But what must be the focus of policy is how the economy can grow to the benefit of the living standards of New Zealanders.
Unfortunately, when we look not at total growth but at growth in per capita incomes, recent growth does not look so impressive. In 2001, a Treasury paper suggested that if New Zealand wished to raise its living standards to the average of other developed countries within a decade, we would, on reasonable assumptions about the rate at which those other countries would grow over the decade, need to improve incomes per head by over 4½ per cent per annum. At the present time, per capita incomes are not achieving more than about half that rate of growth. In short, there is absolutely no sign that we are likely to recover the average living standards of other developed countries over the next 10 years, and almost all the policies being put in place by the present Government are taking us in the wrong direction.
The National Party understands that most New Zealanders work hard and are committed to the success of their families and their businesses. We understand that many people and most small businesses feel under a huge amount of pressure, notwithstanding the buoyant economy. In arguing for faster growth, therefore, we want to promote policies which will reduce some of those pressures and remove some of those obstacles. We want to promote policies which are consistent with the National Party’s core values – freedom of choice, personal responsibility, a supportive but not over-bearing government, private enterprise, one standard of citizenship for all – because we think those core values are shared by most New Zealanders.
We also think that those core values are the ones most consistent with economic growth. Indeed, much recent research on the factors most relevant to growth suggests that it is not specific policies which are most relevant to growth but rather the values, the culture, and the institutions which flow from those values and that culture.
It is therefore vital that we do everything we can to reinforce those values and that culture – a culture which enhances freedom, which respects property rights, which respects the rule of law, which provides incentives consistent with effort and enterprise and not with sloth and dependence.
And in important ways this is precisely what the present Government is eroding. When the Government makes it easier for people to get a benefit without working; when the Government threatens to heavy Telecom for acting in a perfectly legal and rational way; when the Government ignores the gradual increase in bribery and “greenmail” around the procedures of the Resource Management Act; when the Government allows small groups of protesters to block the construction of a roadway or a prison; when the Government allocates research funding on the basis of race; when the Government proposes to use its narrow Parliamentary majority to ram through important constitutional changes – these are all actions which warn people away from investing in New Zealand and damage the prospects for raising our living standards.
The National Party is committed to doing everything possible to restore the culture on which economic growth ultimately depends. Alas, there is no single policy which will quickly rebuild the culture or increase the country’s growth potential. We will need to improve policy across a whole range of areas, much as the crew of the America’s Cup defender needs to assess every single aspect of the boat – the design of the hull, the configuration of the sails, the tactics at the starting line, and all the rest – to make the boat go faster.
None of the policy changes which we advocate will have an immediate impact on potential growth, though some will probably impact on growth more quickly than others. The most important areas for policy change seem to us to be the following:
Reduce the size of government
Reducing the size of the public sector is not something which can be done quickly or easily, but should be achievable over a period of years by holding government spending to a rate of increase below that of the economy as a whole, as Ireland has proved rather dramatically.
Improve the tax system
With a smaller government sector, it would be possible to reduce the total tax burden on the private sector, and that is one of the major benefits of a smaller public sector.
It is particularly important that the tax system does not discourage investment in productive enterprise or add to the compliance costs facing the business sector.
This suggests that the decision taken in 1988 to harmonise the company tax rate and the top personal tax rate was a sound one, and the “un-coupling” of these rates by the present Government in 2000 was a mistake. It also suggests that we should be looking to reduce that top rate, not increase it, and that is especially true given that Australia’s company tax rate is now 30 per cent and our 33 per cent rate is the highest in the Asia-Pacific region. In the last election campaign we committed to reducing both the company tax rate and the top personal tax rate to 25 per cent over a 10 year period. It should be possible to reduce both rates to some extent fairly quickly, with further reductions as the fiscal position permits.
Some people have suggested to us that a future National Government should be looking to reduce income taxes on low income New Zealanders, or perhaps even reduce the rate of GST to achieve the same effect, instead of reducing the company tax rate and the top personal rate. We want to reduce the tax burden on all New Zealanders, but with limited scope to cut the total tax burden in the short term we will have to choose between providing further help to low-income New Zealanders and changing the tax rates in order to maximise future growth.
It is important to remember that most low income New Zealanders with dependents pay almost no income tax now. A person earning $25,000 per annum, for example, with a dependent spouse and two children under the age of 13, pays less than $27 in income tax after taking account of the various tax credits available to the family. It is also worth recalling that, over the 1996 to 1998 period, a previous National-led Government reduced the marginal income tax rate applying to somebody earning $35,000 per annum from 33 per cent to 21 per cent.
Obviously, it would be possible to use available resources to reduce taxes still further for low income New Zealanders. The issue is what we want to achieve: modestly higher after-tax income for low income New Zealanders now or much higher after-tax incomes for all New Zealanders a bit further down the track, by using available resources to encourage additional growth. There is no doubt which is of greater benefit, to New Zealanders of all income levels.
We have on the other hand also been told that we should reduce just the company tax rate, to encourage further investment. This is certainly something which can be looked at, and of course the fiscal costs of cutting just the company tax rate are substantially less than the costs of cutting the company tax rate and the top personal tax rate together. Indeed, it would be possible to cut the company tax rate quite substantially if that were the only rate which was being reduced.
But though we are open to being convinced to the contrary, so far we are not persuaded that reducing this tax alone (which is, after all, simply a withholding tax for shareholders in the New Zealand tax system) would have any materially beneficial effect on growth, while it would continue to impose the compliance costs introduced into the system in 2000 when the present Government un-coupled the company tax rate from the top personal rate. It is also relevant that many small businesses in New Zealand continue to be unincorporated.
Improve the education system
Education is vital in the context of the economy in that it is the quality of the work-force which is a crucially important determinant of the productivity of our people, and therefore of the income which they can earn. Those with a poor education, unable to read and write effectively, unable to do basic arithmetical functions, are almost inevitably condemned to a life of low wages and, potentially, of unemployment. And sadly, more than 40 per cent of adult New Zealanders have a level of literacy which is inadequate to allow them to participate fully in a modern economy. So while we have some very good schools and universities, too many New Zealanders are managing to get through the system poorly educated.
Tertiary education is very important for our future, but in terms of economic growth the quality of pre-school, primary school, and secondary school education is arguably even more important.
Worryingly, the school system is not failing because it is being substantially under-funded. If that were the case, it might be a relatively simple matter to increase the level of funding. But government funding of education already consumes a larger percentage of our total national income than is the case in all but two other developed countries. It seems likely that the way to reduce the “long tail” of under-performers coming out of our education system lies in greater emphasis on pre-school education, in changing the way that reading is taught (as the Education and Science Select Committee of Parliament unanimously concluded in 2001), and in improving the quality of the teaching system by giving parents greater opportunity to choose the kind of education they want for their child.
For this reason, a future National Government would again abolish school zoning, devolve more control of spending decisions to school principals and local boards of trustees, and encourage a wider range of educational institutions to compete for the attention of parents.
Reform the benefit system
If we want to encourage an enterprise culture, it is important that we take firm steps to attack the culture of dependency which has steadily increased over the last 30 years.
A future National Government would take steps to reduce long-term welfare dependency for able-bodied adults of working age. At the present time, there are nearly 400,000 adults of working age dependent on a benefit. Some of these people are quite unable to work, being sick or otherwise incapacitated, and no New Zealander begrudges people who can not work the support of the state. But those on the sickness and invalids’ benefit make up only about one-quarter of the total. For the sake of the self-esteem of the other three-quarters of the total, for the sake of the willingness of the tax-paying population to continue providing support for those who actually need it, and for the sake of the growth prospects for the economy as a whole, it is vitally important that we together find ways of getting most of those people into productive employment.
Reduce compliance costs
Among those policies which might be expected to have a relatively quick growth dividend are those related to the compliance costs facing the business sector. Those costs constitute a dead-weight loss to the economy and in many cases have few offsetting benefits. Compliance costs weigh particularly heavily on the small companies which make up the great majority of New Zealand businesses – operations which can not afford to employ full-time personnel, legal or accounting staff. The Report of the Ministerial Panel on Business Compliance Costs, chaired by Mr Al Dunn, identified a very large number of recommended changes which would help to reduce current compliance costs. Business New Zealand has estimated that the increased costs imposed by recent and prospective Government policy changes add about $44,000 to the annual costs of a company employing just 20 staff.
A future National Government would be committed to reducing compliance costs, particularly those related to the tax system, the Resource Management Act, the Employment Relations Act, the Human Rights Act, the Health and Safety in Employment Act, and the Hazardous Substances and New Organisms Act.
Improve infrastructure
It is vitally important that growth not be inhibited by inadequate infrastructure. At the present time, the roading system is almost literally groaning under the strain in some parts of the country, particularly in Auckland. If New Zealand grows at 4 per cent annually on average, it is quite likely, given past experience, that the Auckland region will grow at 5 or even 6 per cent per annum, and this growth will require major investment in roading. There is also an urgent need for improved roads in the Tauranga/Mount Maunganui/Te Puke area. Problems will emerge in other areas as the “wall of wood” reaches maturity, while there may soon be a case for converting much of State Highway 1 into a four-lane highway, if not a motorway. A future National Government would give much higher priority to upgrading the road network, passing legislation to speed the approval process and using public-private-partnerships where appropriate.
Another area of infrastructure which must be ready if New Zealand is to increase its growth rate is electricity generation. There is a growing risk of electricity shortages in a dry year, and it is not at all obvious that the Government (which still owns most of the generating capacity in the country) is adequately prepared to meet this challenge. Part of the problem is inherent in the fact that New Zealand’s hydro storage is quite limited and the Maui field is rapidly reaching the end of its useful life. But the problem is exacerbated by the long-drawn out procedures required by the Resource Management Act and, in one or two cases, by the Government’s inflexible attitude to the construction of new hydro plants on land owned by the Department of Conservation. A Government which is really committed to growth would deal with both issues quickly.
Review the Crown balance sheet
Related to the need to ensure that deficiencies in infrastructure do not impede the economy’s growth, a future National Government would review the Crown’s balance sheet with a view to selling those commercial operations which do not need to remain in government ownership and investing the proceeds to better effect. It is not at all obvious, for example, why the government needs to continue to own three separate and competing power generating companies: selling them would raise billions of dollars, which could be used to improve the road network or retire government debt. New Zealand is currently the only developed country in the world which has a blanket ban on the sale of government-owned commercial operations, and that despite the fact that every study which has been done on these sales, in New Zealand and internationally, shows that they have been of benefit to the country concerned. This is a point worth stressing, given the ill-informed commentary on the effects of past privatisation which has recently been promoted by the present Government.
Improve biosecurity
One area of policy which successive Governments have given insufficient attention to in recent years is the need to protect New Zealand from the accidental or intentional introduction of dangerous pests and animal diseases. Urban New Zealanders have too little understanding of how vulnerable our standard of living is to a breach of our present relatively disease-free status.
Recent studies by the Treasury, the Reserve Bank, and the Ministry of Agriculture and Forestry have suggested that the introduction of, say, foot and mouth disease into New Zealand would quickly drop our living standards to a very substantial degree.[1] This in turn suggests that we have been under-spending on the systems which can reduce the risk of such a breach. Recent improvements have considerably reduced the risk of the introduction of a pest or animal disease through our major airports, but there are still substantial risks in the relatively sparse scrutiny of cargoes entering New Zealand by sea, and of passengers entering New Zealand through smaller airports.
A future National Government will be committed to significantly strengthening our defences in this area.
Improve market access
One of the things which depresses our standard of living as compared with what it might be is the great difficulty we have in selling many of the products we produce so efficiently in the markets of the world. While the barriers to trade in manufactured goods have been substantially reduced over the years, the barriers facing trade in agricultural products, and especially dairy products and meat, remain very high.
A future National Government would commit every effort to gaining greater market access for the products of our farms, orchards and forests – ideally on a multilateral basis, but if necessary on a regional or bilateral basis.
Improve immigration policy
There is some debate about how valuable a contribution immigration makes to New Zealand. There can be no doubt that most kinds of immigration increase the size of the economy, and can ease specific skill shortages. What is more contentious is whether immigration improves the living standards of New Zealanders, that is, whether it increases per capita growth.
On balance, we are firmly of the view that a well designed immigration policy can materially enhance the living standards of New Zealanders – partly because there is some evidence that a somewhat larger economy would actually itself enhance per capita incomes (with the fixed costs of expensive infrastructure such as ports spread across a larger population), partly because many immigrants bring skills and contacts which can assist us to develop markets overseas, and partly because many immigrants bring attitudes to work, saving, family and education which New Zealanders would certainly do well to emulate.
Not all immigrants bring these benefits however, and some immigrants have had considerable difficulty in settling into the New Zealand way of life, sometimes deciding to move on to other countries after a relatively brief period, and sometimes becoming dependent on social welfare for a considerable period.
A National Government would support continued immigration, believing that a carefully designed immigration policy can add a great deal to our economy and to our society, but would restrict the access of immigrants to the social welfare system for a period after their arrival.
Improvements in policy in those ten areas would, we believe, enable New Zealand to improve its standard of living at a faster rate than in recent years, with resultant benefit for all New Zealanders.
There are two other important policy areas where we still have work to do and where, for this reason, we have not yet reached firm conclusions.
The first of these relates to the optimal currency regime for New Zealand. We are acutely aware of the problems faced by those in export industries (and indeed by those in import-competing industries) as a result of the fluctuations in the New Zealand dollar. This has led some to suggest that we should abandon the New Zealand dollar and adopt some other currency, probably the Australian dollar or the United States dollar, in order to reduce the risks facing exporters and, perhaps, reduce the cost of capital to New Zealand business. We can see the arguments for this course of action.
But unfortunately, as the recent case of Argentina illustrates clearly, adopting the currency of some other country is not some easy route to prosperity. It is indeed a very dangerous route to take unless the domestic economy is extremely flexible – which is coded language for “unless local wages and salaries are able to be reduced as easily as they can be increased”. Changes in the exchange rate produce changes in real wages relatively easily (for example, a fall in the exchange rate reduces the wage rate in New Zealand relative to that overseas, thus improving the competitiveness of New Zealand production). If the exchange rate is no longer able to move (as is the case when the currency of another country is adopted), the only way to improve the competitiveness of New Zealand production is to reduce nominal wages – or suffer higher unemployment. It is also clear that, contrary to public perception, the New Zealand dollar is not noticeably more volatile than the currencies of much larger economies.
So at this stage, we have not formed a final view on whether we could improve our standard of living by abandoning the New Zealand dollar or not.
Second, there is an issue about how activist the government should be in encouraging “the new economy”. To what extent should the government provide special tax incentives for research and development? To what extent should government subsidise commercial risk-taking to help the development of high-tech ventures?
Those who favour tax incentives for research and development point to the importance of new technology in the growth process, the prevalence of such subsidies in many other countries, and the relatively low level of spending on research and development, relative to GDP, in New Zealand. Those who do not favour such incentives argue that innovation is more important than research and development (and New Zealand is strong in innovation), that the international figures on research and development are totally spurious given that, in countries which provide tax incentives, companies have a strong incentive to classify spending as being on research and development, and that in any case spending on research and development in New Zealand has been growing since the economy was opened up more than a decade ago and is now closely similar to that in Ireland.
There is similar debate about government’s role in encouraging investment in high-risk ventures, with those in favour of a substantial government role highlighting the benefits to the whole economy of a vital high-tech sector and those against asking why it is the government’s role to take those risks, given that, if successful, the benefits of such ventures rightly accrue primarily to those most directly involved. Opponents can point to some embarrassing failures in recent Government programmes to support particular ventures. There is also lack of unanimity about how difficult it is to find venture capital to back high-tech ventures.
We have no doubt that there is an important role for government in supporting strategic public good research, both in Crown Research Institutes and in universities. It is likely that we are still spending too little on such research, and certainly the present level of research funded by the public sector is well below the 0.8 per cent of GDP target suggested for 2010 by the Ministry of Research Science and Technology late last year. It is also likely that research is being increasingly hampered by the bureaucratic and time-consuming controls imposed by the Hazardous Substances and New Organisms Act and by the Environmental Risk Management Authority. It is obviously important that unnecessary impediments to research are removed. What is less clear is what government’s proper role is beyond providing an appropriate level of funding for strategic public good research and removing unnecessary obstacles, and we plan further work on this issue.
What is very clear is that no single policy will “make the boat go faster”. Lots of improvements will be needed, in lots of policy areas. Much has been accomplished already – the basic hull design is sound. But more is needed if we Kiwis are to win. The present Government seems intent on attaching limpets to the hull. A future National Government would scrape off those limpets and, using the very best of Kiwi ingenuity, aim to win the race.
[1] One scenario, which might be regarded as optimistic in many respects, suggested that GDP would drop by about 5 per cent, or $6 billion, within one year of an outbreak of foot and mouth disease in the North Island. The macroeconomic impacts of a foot-and-mouth disease outbreak: an information paper for Department of Prime Minister and Cabinet, Treasury and the Reserve Bank, February 2003.
Copyright © 2024 Don Brash.