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6 June 2011 Time for a national economic strategy

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Last month the Minister of Finance asked for ideas to kick start the economy. It was a surprising request from someone who had just prepared the Budget - an economic blueprint for the years ahead.  

The budget included modest moves to curb state sector spending, there were marginal cuts to student loans, Working for Families and KiwiSaver, and there was a promise of 4 percent growth and 170,000 new jobs on the back of the Christchurch re-build, record farming payouts, and the Rugby World Cup. In addition there was a commitment to the partial privatisation of a handful of State Owned Enterprises should National win another term in government.

What the Budget lacked was a plan to grow the economy. By focussing on re-election rather than growth, yet another year will slip by without the country having a proper strategic plan for economic progress. Effectively this will mean another year of wasted opportunity, of declining family incomes, of lacklustre export growth, and of long-term economic deterioration.

This is not a new problem, of course. In their analysis of the New Zealand economy, the Savings Working Group pointed out that if government transfers such as pensions, benefits, Working for Families and so on are excluded from the calculation, 60 percent of households have experienced declines in real incomes since 1987! In other words, because of poorly devised policy settings over the last 20 years, a majority of taxpayers now gain more out of the government in transfer payments than they pay in tax.[1] The budget documents show this only too clearly: Half of all income tax in New Zealand is now paid by just 13 percent of taxpayers!

The current imbalance in our economic affairs is a real problem for New Zealand. When 60 percent of the population gets more out of the government than they pay in taxes, a large proportion of voters would prefer higher levels of government expenditure rather than the lower spending regime needed for growth.

According to the budget, there are 560,000 superannuitants receiving pensions worth $8.8 billion, 340,000 beneficiaries receiving welfare worth $12 billion, and around 400,000 working families receiving Working for Families benefits (WFF) worth $2.2 billion. Altogether, putting to one side other government transfer programmes such as the $1.2 billion paid out in accommodation supplements and the 1.7 million New Zealanders registered for KiwiSaver, in those three areas of super, welfare and WFF, 1.3 million New Zealanders are receiving $23 billion in government transfer payments. This means that around half of all voters are reliant on a welfare benefit. Of course, it does not follow that they will necessarily vote for more government spending rather than less, but it does mean that a large proportion of the electorate may be very worried about the impact of lower levels of government spending.

To turn the situation around, we need an all-out focus on growth. Higher incomes and living standards are only possible if the country achieves higher productivity and output. Output – the things that people value and want to buy – is only increased by producing more highly valued goods and services with the same or less resources. It is that expansion in output that generates higher wages - as we can see if we consider how things have changed over the years. 100 years ago a farmer may have only been able to manage 40 or 50 cows on his farm and it might have taken him a couple of hours to feed out hay in winter, by the time he caught and harnessed his horse, pitchforked the hay onto the wagon, and then spread it by hand in the paddock. These days, with the help of tractors and better baling technology, he may be able to get the job done in half an hour. Not only that, but his output will have been massively increased by production from 300-400 cows.

It’s a similar story for road workers, who 100 years ago would have used picks, shovels, horses and carts, but these days with bulldozers and trucks, they build roads in a fraction of the time. But while technological advancements have created an amazing opportunity for innovation and growth, what is also needed is an investment in productive equipment.

The fact that Australian workers have 30 to 50 percent more capital invested in them than New Zealand workers helps to explain why living standards in Australia are so far ahead of what we have here.

What New Zealand now needs is the government to play its part in aligning public policy to prosperity and wealth creation. A case in point is the gutsy transformation that took place in Canada in the mid-nineties, when the country went from being an economic basket case described by the Wall Street Journal as “an honorary member of the Third World”, to having a balanced budget within three years - to be followed by 11 years of budget surpluses!

This remarkable turnaround was achieved through the introduction of a number of fundamental changes including the reigning in of government spending and a reduction in the size of the public service, a tightening up of welfare to ensure that the able-bodied took available jobs, and the slashing of company tax rates by nearly a third to boost the productive sector. Canada has continued to reduce corporate taxes since that time in order to ensure their business sector has a competitive advantage, with company tax rates now at 16.5 percent, with a further drop to 15 percent planned for next year. The key point is while the government was getting its own house in order it also created an environment in which business could prosper. It’s this that New Zealand lacks.

I asked Business NZ Chief Executive and this week’s NZCPR Guest Commentator, Phil O’Reilly, for his view of the budget:

“Much post-Budget commentary has reflected the view that the Government was failing to take opportunities to take the big steps needed to advance the economy in a significant way. The only example of strategic change was one already previously signalled - the proposal to extend the mixed ownership model to four large state owned energy companies: Mighty River Power, Meridian, Genesis and Solid Energy.  This is still a very positive development.  It will provide a useful investment option for many New Zealanders and a boost for NZX, while over time helping to reduce the dominance of the state sector over the private sector. Meanwhile, Budget moves to reduce government spending on Working for Families and interest free student loans were certainly a move in the right direction, but did not tackle the really hard questions.

“But a week is a long time in politics.  In the days since the Budget, the Government has now signalled some indications for significant change. The first is the proposal to allow choice in the ACC work account. This is a welcome move - more choice will allow insurance and rehabilitation packages to better meet the needs of workplaces and their employees.  The ability for the private sector to take part in the workplace accident insurance market will help bring more resources and innovation to the sector. The second big smoke signal was the proposed investigation into reducing the number of government agencies.  Following on from the Budget requirement for the state sector to take out $330 million in costs over the next three years, the Government has now signalled the consolidation of agencies operating in health, education, employment, justice and the arts.  And the third big announcement since the Budget has been on social welfare.  Reforms to the welfare sector are to become a campaign item for this year’s general election.” To read Phil’s full article, A week is a long time in politics, please click here >>>.

In 2002, the Labour Government introduced the concept of well-beings in their reform of local government. There were four – cultural, environmental, social, and economic. While the country as a whole appears to have focussed on the first three well-beings, the fourth, economic well-being, has floundered. Roadblocks to progress are now everywhere. Ask any business and they will tell you about how their lives are ruled by ridiculous bureaucracy and red tape. Ask any developer and they will tell you how local government rules and regulations have put a stranglehold on progress. And ask any household what stops them saving and getting ahead, and they will tell you about the cost pressures they face - some of which are caused by wealth destroying government policies such as the Emissions Trading Scheme.

There is no doubt, that National appears to be serious about future reforms to improve the country’s economic outlook. However, without the detail it is impossible to tell whether the changes signalled will be cosmetic or real. For too long, governments have been afraid to do what is right for New Zealand’s economic future because of their fear of a political backlash from the powerful vested interest groups who oppose progress. But those vested interest groups need to be challenged – who will pay to improve living standards if progress is stifled? All of the advances and benefits in a country are generated by businesses and their workers. For a country to prosper policies must encourage business to innovate and invest and grow. Surely the time has now come for courage of the sort shown by the Canadian government back in the 90s when they decided to show the world that Canada could succeed.  

This week’s poll asks: Do you believe New Zealand needs a national economic strategy? Click here for poll >>>

Footnote:
1.Savings Working Group, Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity
 

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