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Dr Muriel Newman

Is our Government too Big?

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22 March 2008

Is our Government too Big?

How big should our government be? To what extent do we want politicians to decide how we should be living our lives? That, one hopes, may be an issue in this year’s general election.

In 2000, Dr Yegor Gaider, the director of the Institute of Economies in Transition, and a former acting Prime Minister of Russia, visited New Zealand and spoke about the challenges of moving from totalitarianism to a free market economy. In his speech “The Struggle for a Free Economy and Society in Russia” he explained how after three generations of living under communist rule, the tipping point for the people was “the right to be free – to run their own lives, to be able to travel where they wanted, choose the government they wanted, read the books they wanted, and have many other basic liberties. They wanted an end to totalitarianism”.

He went on to describe how “Real socialism, as opposed to imagined socialism or the textbook socialism of some thinkers, is, above all, totalitarian rule. A functioning socialist society and socialist economy requires a very strong, relatively well-organised, extremely cruel, totalitarian political regime. Such a regime eliminates the complicated, delicate mechanisms that evolved over a period of centuries to create the modern market economy. It eliminates civil society because civil society is itself an enormous threat to totalitarian control”. (To read this fascinating speech, click here )

Dr Gaider’s insight highlights the stark contrast between the political extremes. From those who believe that governments cannot be trusted to act in the best interest of individuals, to those who believe that individuals cannot be trusted to act in the best interest of society. The question that each of us needs to be asking ourselves is whether we think that we have the right balance between state control and individual freedom and liberty in New Zealand?

The present Labour Government has been described as the most socialist government in our history. During their time in office there has been a massive expansion of the state. Government spending is now more than $20 billion dollars a year higher than when they first came to office in 1999, the core public service workforce has increased by 55 percent over that time from 29,000 to 45,000, and under their command the state now intrudes in unprecedented ways into our private lives, directing how we should raise our children, what we should be eating, and what we can and cannot say in election year.

Dr Graham Scott, a former Secretary of the Treasury and Prime Ministerial advisor, is the NZCPR’s Guest Commentator this week. In his paper, “Some Concerns about the State of the State in New Zealand”, Graham questions whether this expansion of state influence is desirable.

“The public service is under more pressure to conform to political direction than it has been since the professional apolitical civil service was established almost a century ago. This pattern of deeper political control was signalled early and has been implemented. So we are headed for an election debate not just about the usual tussle over policy settings but also about whether this expansion of state influence is desirable or whether it is undesirable”.

Graham goes on to warn that “There is enough evidence around to suggest that the sum total of the way in which the government has expanded the use of state powers and the particulars of how it has done this, is doing more to hold back the development of the economy than to promote it. Its drive to transform the economy might be much assisted by more focus on transforming itself”.

And he reminds us that in spite of the political spin, government is not a benevolent force: “it is wise never to forget that behind the rhetoric about partnership and stakeholder consultation, governments are using the coercive powers of the state for much of what they do. Nothing matters more in an advanced democracy than the rights and constraints the government has in the use the coercive powers of the state. A good government uses them sparingly, effectively and wisely”. To reac his article click here

Let us never forget that it is people that create wealth and governments that consume it. When people create wealth at a rate greater than government consumption, living standards increase. But when governments impose impediments to growth and expand the state sector too rapidly, living standards decline.

When Labour became the government, out of the 30 OECD countries New Zealand ranked 20th in GDP per capita (Gross Domestic Product measures the value of everything produced in the country). Since then both Spain and Greece have overtaken us and we have fallen two places to 22nd, just ahead of Korea, Portugal and the Czech Republic. Once Labour implements their proposed climate change policies, our slide will undoubtedly escalate.

Can anything be done? Of course it can.

In a free market economy, wealth is created when motivated individuals are able to pursue their dreams through working hard and making money. Having a positive attitude to wealth creation within a country is absolutely essential to our social well-being.

The ability to create wealth is a function of productivity. The more productive an enterprise, is the greater the wealth that will be created. The problem for New Zealand is that our productivity has been steadily declining. Our latest figures are dismal. They show that since Labour has been in office, productivity has averaged only 1.1 percent. That is less than half of the productivity growth of the 1990s. To move back up the OECD ladder, productivity growth would need to be 3 percent or more. (For more information see “Dismal Productivity Figures” )

Australia’s productivity and GDP per capita OECD rankings are higher than New Zealand’s. In effect, Australians are a third richer than New Zealanders. Imagine what a difference it would make to your life if your weekly income was a third larger. It would undoubtedly improve your quality of life and that of your family. You would invest, purchase goods and services provided by others, and support worthwhile causes. All in all the increase in your own wealth would create wealth around you, helping to make the country a more prosperous and productive place. Perhaps it would also reverse the outflow of 30,000 Kiwis a year going to Australia.

Of course productivity gains can only occur if government puts the right incentives in place. Such a framework would need to include lower taxes, less regulation, and a reduction in red tape and compliance costs. There are many other factors, of course, but these are a good start.

Key amongst these is a reduction in the top personal tax rates. The main driver of wealth creation in any economy is the small business sector which can account for 95 percent of all enterprises and employ between 65 and 70 percent of all workers. A large proportion of small business owners pay tax at the individual income tax level. Cutting the top rates of tax flows on as a direct incentive for small business owners to expand and grow their business, creating wealth and jobs in the process.

The reality is that in a free country, people only make the extra effort to create wealth if it is rewarding. If it is too hard, with the hurdles too great and the returns too small, then many people with good ideas will not bother to even try to get their enterprise off the ground. Unless this situation is turned around, there is nothing to suggest that New Zealand’s slide in living standards will not continue.

None of this is rocket science. Treasury has advised the Labour Government of this each time they have won an election. Their recommendation has always been to reduce the country’s tax burden. A lower tax environment would give

the entrepreneur more money to expand and grow his business, thereby increasing the country’s productivity. A lower tax environment would give consumers have more money in their pockets to demand more goods and services, increasing the country’s productivity in order to meet that demand.

While the private sector is instrumental in increasing productivity and creating wealth, most of the money consumed by government neither improves productivity nor increases wealth. It does the opposite. That’s why the size of government is such a big issue in the run up to the 2008 election.

The poll this week asks: Do you think the government in New Zealand is too big, too small or about right? Go to Poll

Reader’s comments will be posted on the NZCPR Forum page click to view .