As the Head of the International Monetary Fund Christine Lagarde was warning about the bleak global economic outlook last week, New Zealand politicians were digging deeper into taxpayer pockets and promising to spend more. With our General Election on Saturday week, it is disturbing that so many parties are totally ignoring the dark clouds that are gathering as they try to bribe voters with money they don’t have.
In a speech in Beijing on Thursday, Christine Lagarde spoke in an uncharacteristically direct manner. “In our increasingly interconnected world, no country or region can go it alone. There are dark clouds gathering in the global economy. If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment.”1
New Zealand’s prime export markets are already under threat as growth slows in Australia and the US, and Asia’s manufacturing base feels the pressure of falling European consumption. This means surely, that ‘austerity’ should be the benchmark for all parties contesting this election.
The Government’s latest financial statement – released last Thursday – reinforces the need for prudence. While Core Crown income for the three months to the end of September was $14.1 billion, expenses were $17.2b, leaving a shortfall of $3.1b to be funded through borrowing.2 If we look back at the state of the books just before the last election, the impact on the country of the recession and the earthquakes become more evident. Crown revenue today is $1.4 billion lower than three years ago and Crown expenses $2.2 billion higher. In 2008 gross Crown debt was $31.9 billion, or 17.8 percent of GDP. Today it is $76.3 billion or 38.1 percent of GDP. While this escalation in debt is nowhere near Italy’s dangerous level of 119 percent of GDP, it is certainly high enough to require political constraint. A browse through the Party Manifestos shows however, that constraint is not the name of their game.
The worst offender is the Labour Party, which has promised over $16 billion worth of benefits, all of which will have to be borrowed until their tax increases – a capital gains tax and an increase in the top tax rate – eventually kick in. Their latest big ticket item – costing almost $2.6 billion – is an extension to Working for Families and Paid Parental Leave. Working for Families is an expensive welfare programme that was introduced by the Labour Party ostensibly to provide an incentive for beneficiary families to leave welfare. By expanding the scheme to cover beneficiaries, not only would the work incentive be removed, but many families would find themselves better off on welfare than they would be in work. This would further entrench New Zealand’s disastrous long-term dependency problem.
While most of the National Party’s new spending promises have been tied to the returns from the partial sale of state assets, they have made a serious commitment to curbing the escalating cost of welfare. By investing $130 million on restructuring the benefit system so it pro-actively focuses on work as the primary outcome, $1 billion is expected to be saved over four years. These changes have been described as a fore-runner of a series of reforms designed to reduce intergenerational dependency and the damage it does to children.
The Green Party plans to establish a $10,000 income tax free threshold, introduce a universal child benefit paying $18.40 a week for the first chid and $13 a week for others, increase social welfare benefit levels, introduce new payments to beneficiaries doing voluntary work, extend Working for Families to beneficiary families, increase the minimum wage to $15 an hour, shorten New Zealand’s working week to 35 hours, impose a new Code of Corporate Responsibility for all businesses, write-off of all student debt, introduce a new universal student allowance equal to the unemployment benefit, and eliminate all student fees. To balance their spending the Greens are proposing to increase the top Income Tax rate to 39 cents, introduce an Earthquake Tax levy of 1.5 percent rising to 3 percent, increase the Company Tax to 30 percent, introduce a Capital Gains Tax, establish new Eco Taxes on water, commercial fishing, mining, pollution, and waste, and bring in a Tobin Tax on international currency movements.
ACT would lower the top rate of income tax to 25 percent and the company tax to 12.5 percent, scrap the Emissions Trading Scheme, reintroduce a youth wage, and consider the full sale of State Owned Assets.
The Maori Party’s spending plans include removing GST off all food, making the first $25,000 of income tax free, increasing the minimum wage to $16 an hour, lowering the age of eligibility to superannuation to 60 for Maori, extending the Working for Families package to beneficiaries with children, introducing a universal student allowance equal to the dole, subsidising domestic internet connections, establishing a government-funded fishing fleet and fish processing plants, and orchestrating a debt write-off of overdue rates on Maori land. These promises would be paid for through a Financial Transaction Tax.
United Future’s spending plans include income splitting for tax purposes – a policy Treasury estimated to cost $500 million – and a $150 a year winter subsidy on the power bills of all superannuitants.
The Mana Party would introduce tax-free threshold of $27,000, abolish GST, increase social welfare benefits, extend the Working for Families package to beneficiaries with children, and increase the minimum wage to $15 an hour. This spending would be balanced by a Capital Gains Tax, a ‘Hone Heke’ Financial Transaction Tax, and an Inheritance Tax.
New Zealand First would simplify New Zealand’s tax code, cutting personal and company tax, reduce GST to 12.5 percent, remove GST on rates, remove the double tax on savings, scrap secondary tax, raise the minimum wage to $15 an hour, introduce a government subsidy for the reduction of student debt, introduce a raft of subsidies to support the elderly, and scrap the Emissions Trading Scheme.
The Conservatives would scrap the Emissions Trading Scheme and raise the top rate of tax.
As a property investor, NZCPR Research Associate Mike Butler has a particular interest in housing-related policies. In his Breaking Views blog Property investors squeezed, Mike has outlined the changes affecting property investors that have been implemented over the last three years by the National Party – largely without warning! In addition, he has trawled through Party Manifestos to find out what the various parties are proposing for the future.
In the same vein Dr Ron Smith, NZCPR Research Associate and co-director of International Relations and Security Studies at Waikato University, has examined party manifestos for their stance on defence. He finds the lack of political focus on national security rather troubling – you can read his analysis in his Breaking Views blog Sounds of the election.
Finally, there is no doubt that the backdrop to this 2011 election is global unrest as world economies falter and a range of protest movements emerge – from the regime changers in the Middle East, to the riots in England, to the more recent Occupy Wall Street movement. Starting in New York, OWS protest action has now spread around the world with groups taking up residence in major public spaces – including Auckland’s Aotea Square, Wellington’s Civic Square, and Dunedin’s Octagon.
This week’s NZCPR Guest Commentator Professor Roger Bowden, the former Head of Economics and Finance at Victoria University, has examined one of their major complaints, namely the explosion in top level remuneration, to find that the ‘blame’ for these developments can be laid at the feet of academics. In his article The 1% balance and Belshazzar’s Feast he states:
“Over past twenty years or so, there has been a sea change in remuneration relativities. The average CEO in the U.S. now gets paid 50 times the average wage and salary earner. Just in case you think that’s just President Obama’s problem, think again. Last year, the local NZ boss of Westpac raked in about NZ$5.5 million, which is roughly 100 times the average, while the big boss in Australia pulled in a package worth a whopping $55 million. Dynastic wealth in the making, so to speak, and it’s a story repeated over a whole range of companies, not just financials. How did all this happen? As usual, you can blame the ‘academic scribblers’.
In a democracy, an election gives voters an opportunity to have their say on the future direction of the country. Elections should be are a contest of ideas – unfortunately ours has become a bidding war. The socialists are pushing for more spending and higher taxes to make society, they say, a ‘fairer’ place – instead of promoting improved savings and productivity as the way forward. The separatists are proposing more race-based privilege as they pursue their goal of ‘partnership’ with the Crown – instead of accepting that one law for all and a united effort is what is needed for progress in a modern economy. The environmentalists are driven by a desire to punish human endeavour – particularly our crucial dairy industry – instead of promoting a balanced approach to care and concern for our natural environment. As Martin Durkin, producer of the controversial documentary, The Great Global Warming Swindle, writes in his Breaking Views blog The Green Superstate – what the global warmers really want, “With terrifying single-mindedness, the Green movement is waging war against freedom, for more State control. And they’ve been at it from the start.”
But as you deliberate over who to vote for don’t forget those dark clouds that are looming on the horizon and Christine Lagarde’s warning that we could be facing a “lost decade”.
- Sydney Morning Herald, IMF boss warns of ‘lost decade’ for global economy ↩
- Treasury, Financial Statements of NZ Government – 3 months ended 30 September 2011 ↩