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25 July 2009 Closing the Gap

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Wednesday’s announcement that former Reserve Bank Governor Dr Don Brash will head the ‘Catching up with Australia’ taskforce is good news for New Zealand. Closing the income gap with Australia by 2025 was a key part of the ACT-National confidence and supply agreement. The taskforce is expected to provide policy advice on how to grow the economy and bridge the gap.

In the early 1990s, Australia was in 19^th place in the OECD, but has advanced up to 12^th place with a goal to move to the top 5 OECD countries by 2012. Meanwhile, New Zealand has gone into reverse , slipping from 20^th place in 1999, to 22^nd. Our income per capita is now some 31 percent lower than that in Australia. That is a reflection of our economic stagnation since the days of financial reform in the 1980s and early 1990s, and a sorry reflection on the calibre of our political leaders and the lack of priority they have given to our economic well-being.

At the top of the list of priorities for the taskforce will undoubtedly be a reduction in the size of government. The government sector in Australia, with its three layers - federal, state and local - accounts for 35 percent of gross domestic product (GDP). In comparison in New Zealand, central and local government spending has blown out to 45 percent of GDP. This wasteful use of our national wealth is largely the result of Helen Clark’s obsession with “big” government. Done under the guise of “building capacity”, Labour’s objective was pure socialism – expanding the power of the state at the expense of the freedom and autonomy of the public, through higher taxes, increased regulation, and a massive expansion of the welfare state. As a result, core Crown spending increased by almost $25 billion a year during Labour’s term in office.    

Between 2000 and 2008, government administration was the fastest growing sector in the New Zealand economy with the number of bureaucrats growing by 37 percent compared to the front line state sector, which grew by 10 percent. In health, the bureaucracy that has grown so big that if all the managers fell ill, there wouldn’t be enough hospital beds to put them in! In education, the fact that one in five children leave school without the most basic reading, writing or maths skills demonstrates that much of the money is simply not getting to the front line services where it is needed the most.

The “state sector” now has 247,500 employees and a total wage bill of over $18 billion a year. It comprises 41 government departments (like the Treasury, Ministry of Social Development and the Department of Inland Revenue), 84 Statutory Crown entities (like ACC and District Health Boards), 11 Crown entity companies (like Radio NZ and NIWA), 17 State Owned Enterprises (like Tanspower and NZ Post), various “Schedule 4 entities” (like the NZ Lottery Grants Board and the NZ Fish and Game Council), and 31 Tertiary Education Institutions including polytechnics, universities and wananga.[1] A Cabinet sub-committee which considers government appointments to the boards of all significant government agencies deals with 420 such boards.

Over the last few months, the Secretary to the Treasury, John Whitehead, has provided some useful guidance on the priorities for public sector reform.[2] In a speech delivered last Monday, he explained why major public sector reform is so urgent:

 “Over the past 5 years, output in the non-tradable sector, which includes government, grew by 15%, but the tradable sector – the part of the economy that really drives competition and national productivity – contracted by around 10%. To help New Zealand compete internationally and lower costs to exporters, we have to raise the quality of public spending and ensure the lion’s share of increased national resources goes not to the public but to the private sectors. Every dollar that is spent by the public sector is a dollar that is not spent on business investment, or left in taxpayers’ pockets, or saved.”

He believes it crucial that the public sector raises productivity and provides better value for money, by not only adapting the ideas, techniques and experiences of the private sector, but by also contracting out more government services to the private sector.

Importantly, John Whitehead estimates that the lion’s share of this year’s $62 billion budget – some $40 billion - could be better spent. He questions whether policies introduced five, ten or fifteen years ago remain effective - or even fit with the present Government’s objectives.

While government departments have often been described as the nearest thing to eternal life that we will ever see on earth, it was Professor C. Northcote Parkinson, who first developed the theory around this. He identified that once launched, Government programmes almost never disappear, but grow at a rate of five to seven percent a year, "irrespective of any variation in the amount of work (if any) to be done".

In his article, “Parkinson’s Law”, which first appeared in the Economist in 1955, he explained that work expands so as to fill the time available for its completion, driven by officials who do everything in their power to avoid competition - employing multiple subordinates rather than equals or someone better - and who focus their efforts on making work for each other![3]

Cutting back the public sector will take great courage and commitment. As John Whitehead says, “Redundancies attract headlines, creeping growth doesn’t”.

In order to properly assess how much of the $40 billion worth of spending identified as needing thorough investigation can be cut, past spending decisions will need to go under the microscope. But given the dire state of the economy so too will new ones. That means that rigorous cost benefit analyses in the form of comprehensive Regulatory Impact Statements will need to be prepared as a matter of course, in order to build a strong case to justify the spending of taxpayers’ money. 

In particular, such discipline and rigor is absolutely essential when it comes to something as major as the proposed emissions trading scheme, which Infometrics estimated could ultimately lead to a doubling of electricity prices, a 50 percent rise in petrol prices, an increase in costs to households of some $19,000, and the complete devastation of some of the country’s key industries, including agriculture.[4]

The problem is that although the Select Committee investigating this matter was indeed charged with producing a “high quality Regulatory Impact Analysis” their report has been soundly criticised for not being detailed enough to provide proper policy guidance.[4] That means that unbelievably, the Committee is effectively flying blind as they deliberate on their recommendations to the government.

Meanwhile the Minister for Climate Change Issues is plowing ahead with plans to set emissions targets for 2020 to prevent global warming - at a time when New Zealand is experiencing some of the coldest temperatures on record (see “Isn’t it Getting Cold” by Dr Ron Smith – view >>>)!

By the way, if you feel strongly about the setting of New Zealand’s greenhouse gas emissions targets for 2020 (so that we can sign up to a binding Treaty to replace the Kyoto Protocol once it expires in 2012) then please email Minister Smith before the end of the month to have your say.

This week’s NZCPR Guest Commentator is Don Nicolson, who, as President of Federated Farmers - an organisation that represents the sector of New Zealand industry that will be hardest hit by an emissions trading scheme - feels strongly about the “sanctimonious hypocrisy” of the “false prophets” who are pushing for such extreme measures as a 40 percent reduction in emissions by 2020: 

“Greenpeace’s Sign-On campaign calls for a 40 percent reduction in New Zealand greenhouse reductions by 2020.  It was launched with a hiss and roar on 23 May, featuring starlets like Lucy Lawless, Keisha Castle-Hughes and the left’s favourite businessman, Stephen Tindall.

On Stephen Tindall, he has this to say, “Stephen Tindall made his many millions importing cheap Chinese goods into New Zealand and flogging it to hard working Kiwis who wanted cheap but modern consumer goods.  Yet Mr Tindall had many of these goods made in factories with cheap Chinese labour using cheap coal fired electricity…  

And regarding the starlets, “Farmers would love to see Lucy Lawless and Keisha Castle-Hughes tell Hollywood that they’ll only tele-audition and tele-act for future roles, as they’ve ‘signed-on.’ 

Don concludes, “The convenient truth is that humankind is an evolutionary animal.  Our future will not come from signing up to faux targets but from technology.  New Zealand needs to be a world leader not in cutting, but in research that makes our continued existence compatible with the planet we all share.  The heroes are not the false prophets who tell us how to live, but the scientists and farmers who will enable us to live and prosper.” To read the full article click here >>>

Instead of focusing on unachievable emissions targets, the Minister would do better to fight on behalf of New Zealand farmers against a carbon tax regime which will see them being seriously penalised for their productive activity as carbon emitters, while US farmers are set to gain carbon credits for their farmlands which their authorities regard as carbon sinks![5]

What is so worrying about all of this is that no matter how much good work goes into raising our productivity, cutting government spending, and working harder, so we can improve our economic performance and get on a path to catch up with Australia, the ramifications of an emissions trading scheme are so massive that all of the good work could be swept away in an avalanche of costs and compliance, in no time at all.

This week’s poll asks: Do you support the setting up of a taskforce to map out a plan to close the income gap with Australia? Go to poll >>>

FOOTNOTES:  

1.List of State Sector Organisations,  http://www.nzcpr.com/forum/viewtopic.php?f=7&t=698
2.John Whitehead, Publi c Sector Performance
3.Prof C. Northcote Parkinson, Parkinson’s Law
4.Roger Kerr, Submission on the NZIER/Infometrics Report
5.Owen McShane, US Farmers sell their carbon credits – how come?

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