Sir Roger Douglas,
Former Minister of Finance, Founder and Past President of ACT.

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Sir Roger Douglas
29 March 08
“Kids – it’s time to come home”

Thirty years ago, I told the Labour Party conference that New Zealand stood at the economic crossroads. That there were no soft options left. That unless we changed our ways, New Zealand was headed for disaster. That proved to be dead right.

When Labour became the government in July 1984, New Zealand was more or less broke. Yet within five years, by 1989, in many fundamental respects, we were ahead of Australia . We’d left them behind in a number of areas. We were making stronger progress towards a reliable growth economy than they were.

By 1995 and up until 2001, our growth rate was equivalent to, or higher than, that of Australia, thanks to the reforms of 1984-92.

By 2008 however, after 9 years of a Clark/Cullen government, we’ve fallen way behind Australia .

Per capita income is 30 percent lower than Australia. Soon our incomes will rise 1 precent but theirs will rise 2 percent. And in 10 years’ time we’ll be 40 percent behind. 40,000 Kiwis leave for Australia each year. When will it reach 100,000? What will New Zealand look like then? New Zealand wages are $100 per week lower than Tasmania’s. Why then have we fallen so far behind?

There are a large number of reasons, but one stands out. And that is New Zealand ’s pathetic productivity growth since this government came to power. Down from 2.3 percent from 1992-2000 to an average of 0.9 percent from 2000-2006. Nine-tenths of one percent – and still declining over 2007 and 2008.

Why has our productivity growth rate fallen so far behind Australia ?

This government has time and again deliberately sacrificed New Zealand’s economic growth at the altar of short-term political self-interest.

Government spending is up by over $20 billion since 1999. $10 billion in real terms. Even if the spending had been good value for money (which it certainly hasn’t been), the high costs of taxation have been a huge millstone around the neck of the economy.

There’s been so much poor value government spending: Corporate welfare; Interest-free student loans; KiwiSaver; Working for families; More and more bureaucrats. There’s never been a better time to be a commercial building owner in Wellington.

On average, we’re each $300 a week worse off than our Australian counterparts. Just the increase in poor value spending since this government came to power is probably costing each and every one of us more than $20 a week. Running state-owned enterprises will be costing you another $20 a week.

Given the disastrous position New Zealand finds itself in, what then has been the reaction of New Zealand’s main political parties – Labour, National, the Greens and NZ First?

They’ve all retreated to a dangerous do-nothing approach. Given this collective reaction, it can be fairly said that there’s virtually no difference between these parties, except to some degree in the social policy area. None of them have a clear vision of where New Zealand stands and where they want to take it. None of them have a 10 - 20 year goal for New Zealand. None of them have a well thought-out plan to achieve that goal. None of them have the guts to do what’s right for New Zealand.

Until we form a clear and coherent view of our destination, it’s pointless to plague ourselves with questions about how to get there. We need an exciting goal to spark our people into action.

And it shouldn’t be a vague goal. It must be a smart goal – that is, one that’s specific, measurable, achievable, right for New Zealand and time-bound.

My suggested smart goal is that New Zealand should aim to beat Australia by 2020!

In other words, by 2020, New Zealand would lead Australia in most of the important economic and social indicators, and be catching up fast in per capita income.

A by-product of achieving this goal is that it would send a very welcoming message to around 400,000 new Zealanders who now live in Australia . Our children, our grandchildren, 10 percent of our population - it would say to them, “kids, it’s time to come home.” And soon, every year we’d be faced with the very pleasant problem of having to cope with the tens of thousands of them who accept our offer to return. It happened in Ireland and it can happen here.

Since 1984 there’s been a moral shift in this country. It’s expressed in the moral foundation of the market. Markets are a hugely positive thing. Everyone who goes from shop to shop comparing the prices of dresses or books or power tools is using the market to get the best deal.

Markets work. Markets, as I have said, bring opportunity, variety and wealth to all of us. Monopolies on the other hand do the opposite

That’s the difference in a nutshell. State-run monopolies were the largest feature of the New Zealand economy when Labour came to power in 1984, and they were the single largest reason why we were headed for third world status.

You don’t have to be an economist or a financier to realise why monopolies are almost invariably bad, it’s a moral thing.

The reason is this. The people who run monopolies don’t have to please the people who are forced to use them.

They browbeat you. They tell you to take it or leave it. Under monopolies, you’re often not treaded as a customer, you’re a troublemaker.

On the other hand, markets make the individual important. Companies have to care about individuals, otherwise they go broke. If they don’t care, they don’t exist.

In an open economy, companies exert themselves to give you what you want, when you want it, and at a price you can afford.

In the ten years following the 1984 election, monopolies were swept away.

As a result we are today literally spoilt for choice across a whole range of goods and services from motorcars to household furnishings, you name it, we have it (unless the government has a monopoly in that area) and often at prices cheaper than say Hong Kong .

If the effects of doing away with monopolies have been so good in these areas, why shouldn’t the same be true for the last remaining big four monopolies that are still dragging this country backwards?

Why shouldn’t we expect the same enormous gains in service, technical innovations and value for money in health, education, social welfare (unemployment, sickness and accident) and in superannuation?

It is only by treating people as individuals, by making them important, will these services come right. Now, every political party says they’re going to make this happen – but when it comes to what they’ll actually do, it comes down to giving a whole lot more money, power and resources to the current system – a system that is clearly not working.

The fact is that competition makes things work better for people. Why then have we, as a country, given so much of our personal power and our personal substance over to politicians?

Perhaps part of the reason is the fear people have of making a mistake.

Our fear of making a little mistake which could easily be corrected with little consequence has led us to make one big one. We’ve handed over our money and sovereignty to the politicians and in return we’ve got a health, education, social welfare and superannuation system that can’t deliver. Why? Because they’re monopolies and monopolies make mistakes, like we all do – but the crucial point is they don’t have the mechanisms or the incentives to correct them quickly (if at all).

You can see this difference most clearly in agriculture. New Zealand agriculture is probably the most successful in the world and it certainly isn’t dictated to from Wellington .

Innovators are free to discover new ways to fence paddocks, better ways to hang a gate or more productive land uses.

New ideas when they work spread through New Zealand agriculture within a season or two. And mistakes are quickly downsized.

That’s the essence of how free markets, competition and choice operate.

When the state monopolies run things they don’t expose their ideas to competition and that has a very real effect on our lives.

So we had a reading programme pushed by advocates through all New Zealand that was based on the debatable idea that children should recognise whole words rather than work them out from the letters. We’re still debating its effectiveness. What we do know however, is that 40% of our young people leave school without adequate reading skills. In these circumstances, how we will ever catch Australia is beyond me.

Remember, monopolies breed arrogance while markets bring opportunity, diversity and wealth.

One example of a policy which would move education, health, risk insurance (sickness, accident, unemployment), superannuation to a market model is as follows: Between the ages of 18-65, every New Zealander would be able to earn an income of $30,000 tax free. This would reduce the amount of tax they pay by $6,000 thereby increasing their net income in the hand by the same amount.

This tax free income level of $30,000 would be increased by an amount that ensured the following extra income on top of the $6,000: For a non-working spouse $5,000, for every dependent child $500.

In addition, an educational scholarship equal to the cost of public education today would be made available to every child in the family. This educational scholarship could be spent at any approved school parents choose.

How would the extra income be spent?

First on risk insurance: Accident insurance; Sickness; Unemployment; Healthcare; Out-of-pocket healthcare costs. Any balance would go towards retirement savings (until savings reached a level sufficient to provide for the needs of individuals in retirement – health insurance and retirement income), thereafter it could continue to be saved or spent.

It would be paid for from the existing fiscal surplus, a transfer of the existing super fund into individual accounts, the reduction in welfare payments, changes in the area of tertiary education, savings in existing government expenditure, savings in government interest payments, increases in government revenue (growth), efficiencies in the health and education sectors, and increased tax revenue from the move back into the workforce of students and beneficiaries.

The Clark/Cullen government has increasingly labelled opponents who seek change as seeking heartless efficiency at the expense of equity. The reality is that without efficiency, equity is impossible. Waste consumes resources, people’s time and energy that would otherwise be used to improve outcomes throughout the community. Wasting people’s time and ability is of no use to anyone. Yet that’s what we do now.

It is a nonsense to pretend that a change in the status quo is a reduction in the overall level of equity. That’s simply putting the politics of doing nothing ahead of everyone’s wellbeing. We can and we should do better. But we won’t do better with the same old failed policies.

If New Zealand is to succeed, we need to implement programmes designed to go to the root of the country’s difficulties, and give lasting benefit to New Zealand . We need to do that without fear or favour, we need the guts to do what we know is right.