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12 December 2010 Looking ahead

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With the general election now less than 12 months away it is time to reflect on whether the National Government has lived up to expectations in the first two years of its term.

Without a doubt, the most pressing issue the country faced at the last election was the deepening recession. Economic credibility was a top-of-mind issue for most voters and many were tired of the advancing socialism and a more aloof government that had characterised the Clark years.

With “tightening our belt” having become a national past-time, we expected the new government to do the same.

But what has surprised many, is the extent to which National has turned out to be driven by polls. Having derided Helen Clark’s Labour Government for their reliance on polling, John Key’s National government appears even more obsessed with opinion rather than principle. What that means is that almost any contentious issue (except apparently those being pushed by the Maori Party) is “off the agenda” no matter how desperately reform is needed.

Given the perilous state of the economy, the Secretary of the Treasury John Whitehead has been keen to outline his strategy to turn things around. In a speech last month he discussed some of the challenges we face. [1]

In 1950 New Zealand had the third-highest GDP per capita in the OECD. It has been a downhill slide since then, with our average 1.3 percent rate of growth since that time being the lowest in the OECD. Ranked at 22^nd last year, to catch up with the average GDP per capita of the OECD we would need to grow at 3 percent per year, and to catch up with Australia we would need to grow at 4 percent per year.

With around a quarter of skilled New Zealanders now living abroad, if we don’t raise our growth rates, the New Zealand Institute for Economic Research has estimated that another 410,000 Kiwis could emigrate to Australia by 2025 seeking better opportunities and pushing down our economic performance even further.
 
To grow the economy, John Whitehead firstly recommends that the government must reduce its spending. By spending more than it earns, National is pushing the country deeper into debt by the day. It is this excessive spending that is responsible for keeping interest rates and the exchange rate higher than they should be. In turn this is not only hurting every New Zealand family with a mortgage, but the high dollar is seriously undermining our export-led recovery.

A key part of his plan for growth is to push on with simplifying and flattening the tax structure – especially corporate taxes which remain far too high on international comparisons – as well as reducing bureaucracy and regulation. In fact, as an example he explains how importing or exporting from New Zealand costs almost twice as much, takes twice as long, with over twice as many documents, as OECD best practice!  

The education system also comes in for criticism since just over a quarter of secondary students leave school with no upper secondary qualifications, and nearly half of tertiary education entrants leave without completing tertiary qualifications. These outcomes must be improved if we are to raise workforce skill and productivity levels. In addition, the fact that one in ten 15 to 19 year olds are not in education, training or employment, is a serious indictment of our system. Any country that allows ten percent of its young people to go onto welfare at such a young age is grossly irresponsible. Everyone knows that once a young girl has a baby and goes on the Domestic Purposes Benefit, or a young boy goes on the dole – or a sickness benefit - their chances of getting into good jobs and a worthwhile career is greatly reduced. Welfare just shouldn’t be an option for able-bodied teenagers.

But while Treasury’s growth suggestions make sense, the nagging question is whether a government that is obsessed with opinion polls will take any notice? Do we seriously believe that National will reduce spending enough to eliminate the need to go into debt to the tune of $250 million a week? Will red tape and bureaucratic compliance really be cut or will National do what Labour did and just talk about it? What about tax – does National really have the commitment to keep lowering company tax so Kiwi businesses can gain a competitive advantage that will help them to overcome not only the disadvantage of being so far from our markets, but the cost burden imposed by the ridiculous emissions trading scheme? 

What about education? After two years of battling the unions, it doesn’t look like much progress has been made in lifting education standards – so would National consider following the Swedish model to allow independent schools to be established to provide parents with a greater choice of school for their children at no additional cost?[2]

And what about welfare? The welfare working group is working hard to provide some options for reform, but is National likely to want to tackle the Domestic Purposes Benefit, which is by far the most problematic and destructive of all benefits? I doubt it.

Another high profile New Zealanders who outlined a plan for growth last month was Don Brash, former National Party leader and head of the 2025 Taskforce, which was set up to identify a strategy to improve living standards so that New Zealand can catch Australia by 2025. As a former Reserve Bank Governor Dr Brash is well positioned to identify what needs to be done to turn around our country’s failing fortunes. In his speech he explained:

“Catching Australia is possible – after all, for much of our history, standards of living in the two countries have been very similar.  But we will certainly not catch Australia on our current policy track, and nobody that I’ve spoken to thinks that we will.

“I’m sometimes asked what’s the single most important thing Government must do if we’re to give catching Australia our best shot, and I sometimes attempt an answer.  But the reality is that we will never catch Australia in 15 years – or in 50 years – unless Government is willing to look at every policy – new and existing – through a growth lens.  Does it help the boat go faster or does it not?

“Don’t get me wrong.  Governments don’t create wealth: people and firms operating in vigorously competitive markets do.  But government policy choices affect the environment all of us face, and therefore the ability of this country and its people to reach their potential.  We need to get those choices right, and that sometimes involves asking hard questions and making difficult calls.  But we owe it to ourselves, to our children and to our grandchildren to do so.” To read Dr Brash’s speech “Return to Orewa”, click here >>>

In spite of all the rhetoric from National, the stark reality is that government spending as a share of GDP is not only the same this year as when National took office two years ago, but the deficit that they are responsible for is now bigger than at any time in the last forty years. In his speech Dr Brash also identifies government spending as the key factor that is keeping our interest and exchange rates far higher than they should be, and he points out that when National lowered company tax from 30 to 28 percent, some of the other changes that were introduced - including the increase in the rate of depreciation - resulted in the effective tax on companies increasing by 1 percent not reducing by 2 percent! He therefore recommends significantly reducing business tax, which he believes is far too high compared to our trading partners.

Interestingly, the newly released Annual Portfolio Report for 2010 by the Crown Ownership Monitoring Unit on the operation of the Crown’s commercial portfolio exposes the dismal performance of government enterprises.[3] The Crown’s portfolio consists of $95 billion of assets - $55 billion in commercially focused companies and $40 billion in investment funds. Essentially, when the dividends produced by the government’s seven largest State Owned Enterprises - worth about $20 billion - are compared with equivalent private sector companies of a similar value, the performance is dismal: over the last three years the average dividend yield for the private companies was 4.5 percent, while the yield from the SOEs was only 2 percent!

As Dr Brash explains, with assets owned by central and local government amounting to six times the value of all the shares on the New Zealand stock exchange, the cost of holding these poor performing assets is seriously dragging down the economy.

As well as outlining the steps needed to transform the economy, Don Brash raised another crucial issue in his Orewa Speech - the state of race relations in New Zealand today. He discussed the importance of a principle that used to be core to the National Party: that all New Zealanders are equal before the law. He then explained that there is no justification for treating Maori differently in general legislation, and nor are there any grounds for separate Maori political representation in Parliament – or anywhere else – given that the Maori electorates were established on a temporary basis for a five year period in 1867 … 143 years ago!

Dr Brash believes the whole concept of a racially-based political party is inappropriate, especially when it’s total focus is on trying to secure privilege in clear contravention of the ‘one law for all’ guarantee in Article 3 of the Treaty of Waitangi. 

The point is that visionary leadership takes courage. It takes courage tackle the difficult issues that need to be addressed to help a country move forwards. My sense is that is what people expected from John Key’s National government; I suspect many feel disappointed.

This week’s poll asks:  Are you more or less satisfied with the performance of the National government over the last 12 months? To vote click here >>>    

FOOTNOTES:
1.John Whitehead, Lifting New Zealand’s economic growth
2.BBC, Swedish parents enjoy school choice
3.Crown Ownership Monitoring Unit, 2010 Annual Portfolio Report

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