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17 October 2009 Halting the economic decline

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After decades of making jam as a fundraiser for the local hospice, a Good Samaritan from Kerikeri in the Far North was forced to lay down her wooden spoon and hang up her apron when officials from the local council demanded that she upgrade her kitchen to a commercial standard. They were, the Council’s damage control spokesperson said, acting on a complaint and had no option but to enforce the laws as passed by Parliament - despite there never being a case of food poisoning in the more than 20 years she had been making jam for worthy causes.

While the local council and the state regulator were both forced to apologise over the incident – once they were caught in the glare of bad publicity – the fact that a one-off complaint, without any substance, could generate such an over-reaction from officials exemplifies the PC madness we now face. It’s as if local authorities (and central government) have become so “risk averse”, that the focus of their activity is on protecting their own backsides and not facilitating progress.

The price we pay for such an approach to governance is massive, not only in dollar terms, as local authorities waste mountains of ratepayer resources, but also in the destructive effect it has on the good intentions and great ideas of others. A hospice in the Far North is now missing out on critical funding to better care for those suffering during the final days of their lives. How shameful is that? And how can the members of the Far North District Council’s clip-board brigade live with that? Do they really believe their bureaucracy is more important than palliative care?

The sad reality is that such actions are not exceptional. They are typical of a new culture that has permeated councils - and many central government agencies. But it’s time for local councils to get real, or get out of the way.  They should become ‘enabling’ in the way that they deal with their citizens, or they should be stripped of their powers. Thanks to Labour’s legacy of social engineering and economic neglect, this is now a crucial issue as the economy has stalled and the government’s financial accounts are recording their biggest ever deficit. Unfortunately those figures are more than ugly numbers – the ballooning deficit will inevitably mean that someone has to pay for the incompetence of the bureaucracy and the fact that it is holding the country back. And of course, that someone will be taxpayers, who will be expected to pay through higher direct and indirect taxes.

That’s why, it is critical that Labour’s debilitating legacy be erased - and quickly! Now more than ever we need a ‘can do’ approach at all levels of bureaucracy. Local government can start by changing its attitude and central government can force their hand by dealing to the badly flawed Local Government Act which presumed far too much when it gave councils the powers of general competency and enabled them to focus on the social, cultural, environmental and economic “wellbeings” within their communities.

But it doesn’t stop there. Another significant hurdle to progress at a local level is the Resource Management Act (RMA). A brainchild of the 1980s Labour Government, it was passed into law by the newly elected 1991 National Government and is a great lesson on why National - as a matter of principle - should reject most legislation proposed by Labour. The RMA imposes huge costs and risks as projects are held up in a complex web of planning and appeals. It’s been said that while in New Zealand it can take up to seven years to gain approval to build a major road, in Singapore, it might take just seven days! And while the government is proposing to amend the RMA, the question remains on whether the reforms will go far enough.

There are many other new barriers to progress that need to be changed if New Zealand’s economic slide is to be halted. At the national level, Labour’s repeal of the Employment Contracts Act destroyed flexibility in the workplace, making it much harder for businesses to respond quickly to changing market pressures. Labour’s softening of welfare rules has not only allowed thousands of people to claim sickness and invalid benefits who have nothing more wrong with them than an allergy to work, but it also sanctioned the domestic purposes benefit becoming a lifestyle choice for many women. Yet National has shown no indication that it intends to tackle this crucial problem, even though it is a huge drain on the economy and one of the key reasons why taxes in New Zealand are so high. Then there are the changes that Labour made in education – their PC-packed curriculum is preventing far too many children from learning even the basics of reading, writing and maths skills.

When Labour increased taxes in 1999, they sent the message that during their administration hard work would be penalised. Then, when they introduced their Working for Families welfare scheme, they ended up not only paying people back with the money they had just taken off them, but in the process, they destroyed the incentive to get ahead – for fear of losing benefits.

And so it goes on – perverse incentives and unjust interventions now manifest themselves at every level of our society, trapping New Zealand in a permanent state of underperformance.  

It wasn’t always like this - New Zealand was once one of the world’s richest nations. In the 1960s our gross domestic product (GDP) per capita, was higher than Australia’s, but by 1970, we were down to ninth - almost equal to Australia. However, as a result of the oil shock and Britain joining the EEC, by 1990 we had slumped to 19^th place, and by 1999, 20^th place.  Over the nine years of Labour’s rule, the slide continued, down to 21^st by 2003 and 22^nd by 2005.

GDP statistics show that incomes in Australia are now one-third higher than in New Zealand, with the gap set to increase to 40 percent over the next few years.  One of the reasons for this, according to Statistics New Zealand, is that productivity growth in Australia over the eight years to March 2008 averaged 2 percent whereas the rate for New Zealand was only 1.3 percent. What this means of course, is that not only are Kiwi wages significantly lower than those in Australia, but we can’t afford the public services the people in richer nations enjoy, like better health treatment or greater investment in education. And the reason is not that we don’t work as hard - in 2006, the OECD found that New Zealanders ranked fifth out of the 30 OECD countries for hours worked.

What’s causing our slide relative to other countries, especially Australia, is an extremely important question and one that is very much occupying the mind of Dr Don Brash, the former Governor of the Reserve Bank and this week’s NZCPR Guest Commentator. Dr Brash, who is leading the government’s 2025 Taskforce, explored some of the suggested causes of our underperformance in a speech he delivered in July.

He explained that popular wisdom suggests that the gap between our two countries is largely the result of Australia’s substantial mineral wealth. Further analysis shows, however, that the Australian mining industry only contributes around 5 percent of GDP - employing only 1 percent of the workforce - certainly not enough to explain the difference.

Another explanation is that more capital is invested in Australian workers than their Kiwi counterparts, meaning that with more advanced machinery, better roads, faster broadband and the like, they are more productive. So then the question becomes why do Australian’s invest more capital than New Zealanders in their workers? Is it because we invest too much in housing? Yet Dr Brash points out that this can’t be the reason since over the 16 years from 1990 to 2005, New Zealanders invested 5.4 percent of GDP in housing, compared to the OECD average of 5.9 percent and well below the Australian average of 6.5 percent for the same period.

Are we less productive because our interest rates are too high and it’s therefore too costly to borrow to invest in business? But that can’t be the case because as a rule Kiwis are very enthusiastic borrowers (and reluctant savers!). So what about taxes – are we taxed too highly and therefore don’t have enough disposable income left over to invest in business? That certainly could be a contributing factor, since, while business tax in New Zealand has been recently reduced, it is still at the top end of the OECD.

Dr Brash then looked at the quality of institutions:

“Some observers argue that what distinguishes rich countries from poor is the quality of their institutions, and the policies which go with those institutions.  They argue that when New Zealand adopted the institutions and policies of most other developed countries in the late eighties and early nineties we lifted our growth in productivity up to that in successful countries, and that when we started abandoning those policies – gradually in the late nineties and more rapidly since 2000 – our productivity growth started to fall off sharply.  Among other things, they point to:

• The rapid increase in government spending after the first MMP election in 1996, and especially after 2005, to the point where government spending in New Zealand is now markedly higher than in Australia as a share of GDP; 

• The increased complexity throughout the tax system as a consequence of the increase in the top personal income tax rate in 2000, thus splitting the top personal rate from the company tax rate for the first time since 1988;  

• The increased rigidities in the labour market as a consequence of the repeal of the Employment Contracts Act in 2000, and the refusal until this year to contemplate even a very short period during which an employer can dismiss a new employee without the risk of costly personal grievance action;

• The extraordinary obstacles put in front of almost any new investment – be it in roads, electricity transmission, wood processing, or residential land subdivision – by the Resource Management Act, and the way in which local and regional authorities have been allowed to interpret that Act to thwart investment and erode the rights of property owners; and

• The capricious way in which the Labour Government over-rode the rights of the shareholders in Auckland International Airport – and the rights of two major international investors wanting to buy shares in that company – and the rights of Telecom shareholders when the Government decided to unilaterally abrogate the agreement under which the company had been privatised.

“Is it any wonder that investors hesitate to invest in New Zealand?” To read the full text, click here >>>

This is a big issue for New Zealand. Unless we get on the right path now and make some proper progress in introducing the reforms that will be needed, our continued economic decline will be assured.

This week’s poll asks: Do you believe local councils have become an obstacle to economic growth? Go to poll >>>

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