Thursday is budget day, the day when the government outlines their economic plan for the country for the next twelve months. It is also a time of judgement on how well the economy has performed over the last year. In National’s case, recent economic reports show that their belt tightening has started to produce results.
When National was elected into office in November 2008, the country had already fallen into recession. Under the stewardship of a Labour administration, the economy had stalled months ahead of the on-set of the global financial crisis. The new government’s goal was to rebalance the economy – reduce out-of-control government spending, while protecting the most vulnerable New Zealanders from the hard edges of the recession. An important part of that plan was a strong focus on removing the barriers to growth – improving infrastructure and reducing the red tape and bureaucracy that was undermining business confidence and holding back progress.
While the Christchurch earthquakes had a massive impact on the government’s progress, National’s plan does appear to be working. The country is on track for a return to surplus by 2014-15, the tax take is higher than expected, unemployment is lower, there are more jobs, and higher growth.
Treasury reports are positive – our economy grew by 3 percent in 2012, only marginally behind Australia, which, with its mining boom, grew 3.1 percent. Growth in the December quarter was 1.5 percent, the fourth fastest amongst the countries monitored by the OECD, and behind only China, Russia and Luxembourg.
Commodity prices in March had the third-strongest rise on record, driven by dairy prices and forestry, although the drought will have an adverse effect on dairying returns in the future. In addition, manufacturing and services industry indexes have both risen strongly, contradicting the claims by Labour and the Greens that there is a crisis in manufacturing.
A recent New Zealand Institute of Economic Research business opinion survey showed confidence in the March quarter was at a 3-year high, pointing to growth of around 3 percent a year. Our major trading partners – Australia, China, the US, and Japan – have all reported economic data ahead of expectations, and consumer confidence is growing.
The Government’s accounts show that the deficit was $3 billion for the first 8 months of the financial year, $556 million better than forecast in December – reflecting good control of expenditure and rising revenues. The Crown’s operating balance, which records change in the value of all the government’s activities, including its investments, recorded a surplus of $4.3 billion.
In commenting on the performance of the New Zealand economy, Christine Lagarde, the managing director of the International Monetary Fund said, “All I can tell you is the IMF is very supportive of what is being done by the Government …” and “If you look at the numbers, if you look whether it is growth, whether it is employment, whether it is inflation, whether it is debt, overall it is very stable and it is also very promising … it’s certainly a lot better than what we see in other parts of the world.” And she went on to say that the economic policies are supportive of good fundamentals and “policies we believe are sound and solid.”1
In comparison, Ms Lagarde described the outlook in Europe as “still very challenging”. Overall EU unemployment has hit a new record with more than 19 million jobless. This includes one in four of the region’s 15 to 24 year olds. In Greece, a staggering 64.2 percent of young people were out of work in February, and, in an attempt to turn this situation around, the monthly minimum wage for under-25s has been slashed by a third. In Portugal, where the economy is predicted to shrink by a further 2.3 percent this year, and where civil service pay and sick leave benefits have just been cut, more and more young people are leaving the country to find employment abroad.
However, there are some success stories in Europe. A special report “The secret of their success” was recently published by the Economist, identifying Sweden, Denmark, Finland, Norway, and Switzerland as the top five countries when assessed on a range of measures including global competitiveness, ease of doing business, global innovation, corruption, human development, and prosperity. Based on league tables produced by the World Bank, the World Economic Forum, and a number of other organisations, New Zealand was ranked a commendable sixth – first equal for a lack of corruption, third for ease of doing business, fifth for human development, thirteenth for global innovation, and 23rd for global competitiveness.2
The Nordic countries that are now topping the table can attribute their success largely to the fact that over the years they were forced to reduce government spending and balance their budgets. To do this they lowered taxes, ensured greater flexibility in the workplace, encouraged entrepreneurs, and restricted welfare entitlements, making far greater use of the private sector to deliver social services.
The Economist suggests that other nations could learn from the success of these Nordic countries, and it certainly appears that the National government has adopted a similar strategy through an economic growth programme that includes reducing government spending, balancing the budget, tightening up welfare, and encouraging the private sector.
Another country with wisdom to share is Singapore. In the sixties, Singapore was a very poor tropical island with few natural resources, a rapidly growing population, substandard housing, and on-going conflict between ethnic and religious groups. Thanks to the exceptional leadership of Lee Kuan Yew, the country was able to transform itself in just a generation, so that today it is one of the world’s highest ranked economies.
This week’s NZCPR Guest Commentator is Dr Henri Ghesquiere, a former Director of the International Monetary Fund’s Singapore Regional Training Institute – and author of Singapore’s Success: Engineering Economic Growth. In his illuminating paper From Third-World to First, Dr Ghesquiere outlines how Singapore achieved its ambitious goal of moving from a third-world to first-world nation in record time. He explains that that a number of factors strongly influenced a young Lee Kuan Yew – as an 18 year old he witnessed the brutality of the Japanese occupying forces against the civilian population during World War II. He experienced the debilitating effects of colonialism and ethnic strife, and he saw the political threat of the communists, who wanted to turn Singapore into an Asian Cuba.
In 1959, at age 35, Lee Kuan Yew – by then a “brilliant Cambridge-educated lawyer” – was elected prime minister of Singapore. His goal was a future of shared prosperity and safety: “I wanted Singapore to be a developed nation in the shortest time possible”.
Dr Goh Keng Swee, the architect of Singapore’s economic strategy and Lee Kuan Yew’s right hand man, explained, “We must strive continuously to achieve economic growth. We should not be distracted by other goals”.
Those words “in the shortest time possible” and “single-minded focus” can be attributed as holding the key to Singapore’s success. Their economic and political strategy – and institutions – over the past five decades have been shaped with that singular goal in mind: whatever it would take to succeed.
Dr Ghesquiere believes a crucial factor is the government’s budgetary discipline – living within their means:
“In Singapore total revenue in the Government budget is only 19 percent of GDP. But government expenditure is even lower. Frugality inspires the Government to manage its expenditures rigorously. Singapore’s famous Jurong tropical bird park was created when a finance minister rejected the proposal for a zoo. He persuaded his Cabinet colleagues that feeding birds would be much less expensive than feeding lions. Civil service staffing is lean: the government does not act as employer of first and last resort. Efficiency is paramount: for example, invoicing of services sold by private agents to government entities is all electronic and centralized. Perfect paperless records are available with minimal manpower. Singapore’s budget is not burdened by generalized price subsidies for utilities or energy products.
“Public enterprises in Singapore tend to be consistently profitable. Many are listed on the stock exchange and are partly in private hands. They do not draw budgetary support for operating losses. If systematically loss-making they would be liquidated or merged. Singapore Airlines has long been ranked among the most admired companies in the world. At one time, the government threatened to close it down if management and unions failed to cooperate.
“Financial sector oversight has been consistently alert. This has prevented the socialization of bank losses that has aggravated fiscal deficits and public debt levels elsewhere. Today Singapore’s banks are among the best capitalized in the world.
“Accordingly, despite relative low taxation, the government budget registers surpluses, not deficits. Consequently, whereas other countries have a public debt ratio in some cases as high as 140 percent of GDP, Singapore has just the opposite: net public assets possibly of a similar magnitude. Heavily indebted governments face steep interest payments on the expenditure side of their budget that pre-empt development outlays. The Singapore government by contrast earns substantial returns on its net assets, (conservatively estimated at perhaps 5 percent of GDP). These resources boost the revenue side of the budget, allowing development expenditure such as for infrastructure and education. The government’s accumulated surpluses have been built the old-fashioned way: over decades thanks to annual saving and the power of compounding. The strong national balance sheet inspires confidence in entrepreneurs and investors.”
In his illuminating appraisal, Dr Ghesquiere explains the importance of incentives in public policy – a low corporate tax rate of 17 percent attracts companies and encourages them to create jobs, and personal income tax with the highest bracket at 20 percent incentivises people to work.
In comparison, of course, New Zealand’s corporate tax rate is 28 percent and our top personal tax rate is 33 percent. As tax competition forces down tax rates, New Zealand’s corporate tax rate is becoming increasingly uncompetitive – it is above the European average of 20.67 percent, above the EU average of 22.74 percent, above the Asian average of 22.36 percent, above the OECD average of 25.4 percent, and above the global average of 24.08 percent.3
Although reducing corporate tax would be a very efficient way of boosting business growth and job creation, the government has ruled out significant tax cuts in the foreseeable future. They have stated that their priority is to reduce debt – from a net 30 per cent of GDP to 20 per cent between 2017 and 2020, before tax cuts can be considered. However, they have explained that they will continue to cut the cost of a wide range of government fees and levies – the recent reduction in the frequency of warrant of fitness tests is apparently just a start.
Thursday’s Budget is not expected to contain any big surprises, but one hopes it has a vision for a better New Zealand based on the roadmap provided by the likes of Singapore.