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07 February 2010 Hopes of a Nation

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In his iconic book “Free to Choose”, Nobel Prize winning economist Milton Friedman, described what underpins a nations’ economic power: “A free society releases the energies and abilities of people to pursue their own objectives. Freedom means diversity but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables everyone, from top to bottom, to enjoy a fuller and richer life”.

John Key appeared to have understood that fact in his Speech from the Throne just after the 2008 election when he promised that “The driving goal of the new government will be to grow the New Zealand economy in order to deliver greater prosperity, security and opportunity to all New Zealanders”. He then explained that “The true builders of that future are millions of New Zealanders working in the homes, the businesses, the industries of our country. It is they who make the country strong. It is they who have placed their trust in us their parliament. And it is they, our fellow New Zealanders, that my Government will ever seek to serve.” [1]  

While words sound good – it is actions that matter. After nine years of socialism the country was more than ready for a fresh approach. That’s why National was elected – to get the country back on track to deliver greater prosperity, security and opportunity to all New Zealanders. This is about people’s lives; their future. Drift and compromise is not an option.

A desire for a better future is also why voters were so supportive of John Key’s promise to prioritise a policy agenda to catch Australia by 2025. With an Australian family of four on average being $64,000 better off than New Zealand families, many Kiwis now have friends and relatives living in Australia. Since young people are especially keen to live in a country where they can get ahead, the heartbreak of grandparents separated from their grandchildren - because New Zealand politicians have managed the country so poorly - is becoming increasingly commonplace. Meanwhile the income gap continues to grow. It is estimated Australian incomes, which were 35 percent higher than Kiwi incomes in 2008, will have grown to 45 percent by 2013 - unless the government takes action.

The reality is that the dominance of the state, manifested in various ways, has bogged down the country. Everywhere you look, things have become more complicated and more costly. Wealth creators and people just going about their lives are confronted by endless new laws and regulations which collectively are handicapping New Zealand’s prosperity.

A good example from local government was recently described by Owen McShane of the Centre for Resource Management Studies. Owen has long held that not only are most planning laws unnecessary, but the actions of local government - through the powers given to them by the Labour Government - have dramatically hiked up the cost of housing in New Zealand.

Here’s how Owen explains it.[2]  Someone in Kaiwaka in Northland, trying to create a section on which to build a house for retirement now has to take into account the following payments and charges: a reserve contribution (Council has chosen this time of recession to increase Reserve Contributions from 5% to 7.5% – a fifty percent increase) of around $15,000; a roading development contribution in the region of $10,000; a consent processing fees of $2,500; a challenge to the consent conditions of $600; a double gated street crossing estimated at more than $20,000; surveyors’ fees of around $6,000; planning consultancy fees of between $3,500 to $5,000. This means that all up, the cost of a small section in small town New Zealand has been increased by around $60,000 because of arbitrary local government charges and fees. It is no wonder that so many young New Zealanders are moving to Australia for affordable housing. While those who stay are having to pay money they don’t have, only able to do so  by increasing their long-term indebtedness to levels that are far greater than they need to be.   

The high cost of housing is one of the issues raised by Dr Don Brash, the former Leader of the National Party and Governor of the Reserve Bank, and the 2025 Taskforce in their Report on strategies for New Zealand to catch Australia, which they released late last year. In their report they explain that, “Houses in New Zealand are now among the most expensive, relative to incomes, anywhere in the world. The Task Force rejects the repeated claim that in some sense too many resources are devoted to housing in New Zealand.  Existing houses cost too much mainly because too few real resources are devoted to house-building. Council zoning restrictions and arbitrary ‘urban limits’ prevent the release of sufficient land to lower the overall price of housing. Dr Arthur Grimes provided a presentation to the Taskforce reporting on his published research work on the detrimental economic impact of the Auckland Metropolitan Urban Limit (MUL). Beyond that limit, housing development is not permitted, and land just inside that boundary trades at around 10 times the price of otherwise identical land outside the boundary. There are few more striking concrete examples than that of costly inefficient regulation, allowed to persist with no proper economic cost-benefit analysis. Such a cost-benefit analysis should focus on the real revealed preferences of individuals, not ill-defined ‘smart growth’ strategies or preferences of local body politicians or officials.

“There is no shortage of land in this country, but local authorities prevent it being used for its most valuable purpose. That has to change. When it changes, housing will be a great deal more affordable: our incomes will stretch further.”[3]

Given the hugely important contribution that the Taskforce has made to plotting a future course for New Zealand - in particular through the startling finding that if core government spending was reduced to the same proportion of GDP that it was in 2004 and 2005, the top personal tax rate, the company tax rate and the trust tax rate could all comfortably be aligned at 20 percent, with all those earning above $14,000 paying less tax and nobody paying more income tax – I asked Don Brash for some feedback on the responses he received to the release of the 2025 Taskforce report. Given the interesting points that he raised, I am publishing his “Reaction to the Report of the 2025 Taskforce” as this week’s NZCPR Guest Commentary.

In particular, Don explained that “The Government’s reaction to the report could at best be described as lukewarm”. Having said that, he goes on to explain, “The good news is that the Government remains committed to having us reach Australian living standards by 2025.  The 2025 Taskforce makes no claim to infallibility, though its recommendations are entirely consistent with those made by successive OECD reports on New Zealand.  The one thing which is absolutely clear is that neither present policies, nor a few minor tinkerings here and there, will get us to the goal the Government has adopted.” To read Dr Brash’s full commentary, please click the sidebar link>>>

Mike Butler, a former newspaper chief sub-editor, who now writes for the NZCPR’s new Breaking Views blog, reminds us that New Zealanders used to have incomes rated amongst the highest in the world, but that over the years our standing has fallen. He explains that according to the International Monetary Fund’s data from 2009, “the top nation was Luxembourg with a GDP per capita of $78,559. The United States was fourth at $46,716, Australia 13th at $35,677, the United Kingdom 15th at $35,445, and New Zealand 27th at $27,027”. (Scroll down for the direct link to Mike’s excellent article “Between Rich and Poor” and that of our other bloggers)

Without a doubt New Zealand is on a slippery slope from being rich to very poor, not because we are too small, too isolated or lack mineral wealth, but because successive governments have managed our economy badly. In fact, a country is no different from a household or a business – if you make poor quality spending decisions and do not have the gumption to cut back on waste and inefficiency, economic wellbeing will slip out of reach. The challenge to improve this situation and rescue the country from our slide is in John Key’s hands. He must forget about tinkering but be prepared to do what is right, not what is politically convenient.

The problem is that National has now taken a leaf from the former Government’s book and is now more poll driven than Labour ever were. The result is that the National Party leadership has become too obsessed with the reaction to reform rather than the benefits that will flow. That is a symptom of the fact that not enough effort has been made to enunciate and communicate the nation’s long-term goals, and in particular the importance of cutting government spending and balancing the books so that we can begin to improve our economic prospects – and close that widening gap with Australia. New Zealanders have shown in the past that we are not afraid of tightening our belts - just so long as the benefits of such restraint can be clearly seen.

To her credit, when first elected Prime Minister in 1999, Helen Clark said that her objective was to raise New Zealand’s living standards into the top half of the OECD within a decade. But because she found the going more difficult than she had thought, Helen Clark abandoned the goal and let the country down. As a consequence our relative economic wellbeing deteriorated rapidly.

A first clear indication of how serious John Key is about lifting New Zealand’s performance will be seen in his speech to Parliament on Tuesday. The main indicator of course, will be in the 2010 Budget in May.  For the sake of our future, let’s hope John Key will meet the hopes and expectations of the nation when they elected him to lead the promised revitalisation.

This week’s poll asks: Would you support National making its election promise of catching Australia by 2025 a major priority? Go to poll >>>  

Footnotes:

1.John Key, Speech from the Throne
2.Owen McShane, The Report of the 2025 Housing Task Force
3.2025 Taskforce Report, Answering the $64,000 question: Closing the income gap with Australia by 2025
 

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