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Professor Roger Bowden

Election 2014: An (out of) pocket guide to the economics

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Cynics might view Mr Key’s  flag waving as a deliberate diversion of voter attention away  from Labour’s baby package; or perhaps it all tees off from golf with Mr Obama. We all have views on the flag, our dreary national anthem, the role of the monarchy, and the controversial constitutional review. But right now it’s economics, or voter bribery if you like, that are making the running for election 2014.  In this respect it’s not the promises that matter so much as the hidden agendas we don’t know, and will find out only after the Treasury benches are filled. 

You’d have to say the current National led coalition hasn’t done so badly on the economic front. Our public accounts, notably the core government budget balance (the ‘Obegal’), are in the best state for years. The government has foreshowed a billion dollars or so new spending initiatives, but as yet we don’t know the details, including how they’ll be financed.  Teaching quality initiatives -educational ‘supermen’ – for lower decile schools might help, but will require a lot of care to avoid alienating the grass root teachers.  Other measures have been foreshadowed,  notably a new quango  for food safety monitoring for dairy and other food exports.  The Fonterra Bot was Not, but so much is at stake that third party implied certification becomes important.

Some nettles the Nats haven’t grasped and may eventually be forced to do so. Foreign ownership rules, taxation of multinationals, GST for Amazon.com and the like, polluting salmon farms, exploding Waitangi settlements, our deteriorating universities, are just some. It’s less a matter of throwing money at such things as correctly identifying  the problems and  seeking the best advice on how to fix them.

In the meantime, Labour has certainly grabbed the headlines with its ‘Best Start’ baby and parental leave packages. Not even a professional economist is dismal enough to question spending on babies. It will certainly help in the dormitory suburbs of south Auckland to have 60$ a week for each infant under three. To avoid diversion from child welfare purposes I should have preferred more payments in kind rather than straight money, but that’s a quibble. Extending paid parental leave to 26 weeks is praiseworthy but will have a few fishhooks, notably tacit hiring discrimination against women of childbearing age. This will be so where any form of job specificity is entailed, with the ‘key employee’ provision almost impossible to prove.

However,  with Labour and  the Greens, it’s the hidden agendas that will have the bigger economic impact. Growing economic inequality is the handle that has cranked them up on wages. (You could argue that the baby package might not help too much on this, but that is a side issue.) Labour and the Greens are committed to the spirit of the  ‘living wage’, an effective piece of social rhetoric – how could anyone disagree?  In this country it has been assessed by a family research unit of Massey University as $18.40 versus the current official minimum wage of $13.75 an hour. The underlying logic has been questioned by several authors (e.g. my 24th Jan NBR article), but the rhetoric has proved too much for local bodies, and the movement will spread in the spirit, if not the letter. Mr Key has recently indicated that he will raise the minimum wage to $15 though the time horizon remains unclear.  Mr Cunliffe has indicated that he wants every public servant to have the living wage, but in the meantime is sticking by the Labour Party’s  previously announced $15 target for the minimum wage for every worker.

Direct action on wages will add to the inflationary pressures that are already starting to build. Reserve Bank Governor Mr Wheeler has been hanging back on the official cash rate until March, doubtless to send out advance signals to homeowners with mortgages. There will  likely be one or two modest rises in the interim. But it’s post the election that the proverbial may hit the fan. Labour, the Greens, and NZ First have all signalled that they want the Reserve Bank Act modified.

Labour want a Monetary Policy Committee to set the OCR by vote. Nothing much wrong with the idea as such; the Bank of England and the US Federal Reserve have similar models.  The devil is in the detail as to who is chosen (a man ban would be good) and just how they would set the rate. In this respect, Mr Peters will doubtless return to his theme of broadening the terms of reference to include the impact on the NZ dollar. My best guess is that if Labour does get elected, the market will expect more inflation and a weaker NZ dollar.

Inflation is never great for  real income equality. However, the Labour Party are going to fix that with more progressive taxation regimes. For Mr Cunliffe this will encompass capital gains, extending to second homes and other assets. However, voters will be most concerned with the more progressive income tax. In order to generate the tax  income needed to pay for social initiatives the top marginal rate will have to increase, and kick in much earlier than the $150,000 mentioned in dispatches.  Down into the swinging voter income range, in fact; and these are the very people to whom Labour and the Greens have to pay court.

It’s harder to critique the economic policies of the minor parties. Those of the Maori and Mana parties are pretty much self evident. The NZ Conservatives are too late on the asset sales, and otherwise long on generic motherhood statements such as ‘Stimulate the economy through growth in agriculture, fisheries, mining & manufacturing’. Well, that, too… On the other hand, ACT has a more complete list of economic policies, predictably free market in nature. But there does not seem to be much of a reality or compatibility test, e.g. to blame funding shortfalls and student fee constraints for poor university performance is a misapprehension.   Finally, the United Future party are currently reviewing their economic policies. For more, do not watch this space.

It’s early days yet for election 2014. The parties will no doubt refine their economic policies if only as an adaptive response to criticism from the other side. My own concern is not so much with what has so far been promised, but what will be delivered and the outcome, should this or that party actually achieve the balance of power. For voters, thinking it all through has never been more important. As the saying goes, the road to Hell is paved with good intentions.