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Dr Muriel Newman

Too little, too late

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With the budget fast approaching, National is finally being forced to do something about a government sector that has grown far too big. According to Treasury, since 2005 “government spending has ballooned by about 50 percent – twice the rate of Government revenue growth and twice the rate of economic growth”.1 As a result, core Crown expenses that were an affordable 29 percent of the economy in 2005, have now blown out to an unaffordable 35 percent.

The Minister of Finance outlined the problem this way, “The Government has now become the driver of the growth in our debt to foreigners, and our total public and private debt to foreigners is the highest in the world. We are already borrowing $300 million per week and borrowing more than that would be totally irresponsible. New Zealand’s total indebtedness to the world is up there with Portugal, Ireland, Greece, and Spain at about 85 percent of GDP. A better level would be somewhere around 60 percent of GDP, which is about where Australia is, and internationally regarded as low risk.”2

It is unfortunate that National has waited so long to acknowledge the scale of the problem. With the economy having already slumped into recession almost a year ahead of the world economic crisis, the public were expecting austerity measures to be imposed shortly after the 2008 election. Households were by then tightening their belts and had expected the new government to do the same. Under the leadership of a Prime Minister with finance sector experience, a case for comprehensive reform to enable the country to live within its means could have been made. While the public might not have liked it, they would have at least accepted it as necessary.

The delay has meant the government sector continues to crowd out private enterprise, the economy has stalled, and the country is not in a great shape to tackle major problems like the cost of the Christchurch earthquakes, estimated to be in the region of $15 billion.

The numbers tell the story. Back in 2000, just after Labour was elected to office, the government spent $34.8 billion on core services and employed 29,055 public servants. By the time of the 2008 election, core government spending had grown to $56.9 billion with 43,569 public servants employed. Instead of reigning in the size of the bureaucracy, the National government has increased spending on core services by 23 percent over the last two years to $70.5 billion, and by June 30th 2010, the number of public servants had grown to 44,554.

The main drivers of public spending in New Zealand are social services. Social security and welfare, health, and education will cost taxpayers a total of $48 billion this year ($22b, $14b and $12b respectively) up from $27b in 2000 ($13b, $6b, and $5b respectively). The cost of social security and welfare has increased over the decade as a result of the growing number baby boomers who are retiring as well as an increase in unemployment and long term dependency, while major wage settlements have played a large part in the expansion of health and education spending.

While National has continued to complain about the Labour government’s big-spending entitlement programmes, they have left them largely in place. Working for Families, which they roundly criticised for turning working families into state beneficiaries, now costs over $2 billion a year and provides subsidises to families who earn over $100,000 annually. The popular Kiwi Saver scheme costs taxpayers over $1 billion a year in generous government subsidies – including a one-off kick-start payment of $1,000 and an annual subsidy of up to $1,042. Then there are interest free student loans, which have direct costs of almost $500 million a year as well as an $11 billion student debt loan book of rather dubious quality!

The point is that while such big-spending programmes were always unaffordable for a low-growth economy, they are now unsustainable as evidenced by our growing levels of national debt and high taxes. Both are recipes for permanently lower living standards.

There is no doubt that over the last decade the encroaching machinery of state has expanded into every corner of our business and personal lives. There are bizarre stories: business owners in Christchurch who haven’t been allowed to retrieve the crucial materials they need to restart their enterprises; business owners in provincial New Zealand wanting to relocate to bigger business premises getting slammed with a whopping $20,000 in council and consultant fees and ordered to comply with a landscape plan that requires the planting of 80 trees on one quarter acre section!. Big government is holding back people with initiative, yet these are the very people the country needs to get the economy growing again. If you have examples of crazy red tape and compliance that you would like to report, please share them here.

To make matters worse, National has added layers of additional costs upon businesses and households by introducing the Emissions Trading Scheme – instead of shelving it until our major trading partners implemented similar schemes. The entry of the transport and electricity sectors into the scheme last July have forced up the cost of power and fuel. Businesses will have passed on their costs as far as they are able, with the result that householders are feeling the pressure of rising prices on already stretched budgets. Through its Emissions Trading Scheme, National is costing the country jobs and imposing price increases that families simply cannot afford.

Last year Fonterra clearly warned the National government that the ETS would increase the cost of processing dairy foods by $38 million in 2011 rising to over $100 million a year by 2015. Meat processors estimated that their costs would increase by $10 million from July last year rising to $20 million a year by 2013. In addition, Federated Farmers estimated that the direct costs to farmers of the power and fuel price increases from July would be around $87 million, but that the indirect costs on the sector as a whole would be in the region of $200 million.3 Along with the increase in GST, this is one of the main reasons that the price of food is escalating in our supermarkets. If you would like to comment on the impact of the ETS, a government review is currently underway with submissions due by April 6 – for more information click here.

Between now and the budget National will undoubtedly be making the case for spending cuts. But there are many government programmes which, while they may not cost the country billions of dollars in taxpayer funding, do nonetheless come at a price that some say is far too steep.

This week’s NZCPR Guest Commentator, Dr Ron Smith, Co-Director of International Relations and Security Studies at the University of Waikato, makes the case for the abolition of the Performance-Based Research Funding scheme. A brainchild of the Labour government, not only is the scheme grossly bureaucratic and wasteful – costing $28 million in the first assessment round alone – but it also introduces a race-based quota system which means that universities get twice the fees if post-graduate students are Maori and four times the fees if their thesis is written in Te Reo! In his article Evaluating Performance in our Universities, Dr Smith explains:

“As 2011 begins, academic staff at New Zealand Universities will emerge from all the ‘formative exercises’, ‘mentoring’ and ‘coaching’ sessions of recent years, to get straight into the real thing: the 2012 round of Performance Based Research Funding. This will be the third in a sequence of formal evaluations of the value of academic research, which began in New Zealand in 2003 and was repeated in 2006. The year 2009 saw a practice exercise and now the serious effort will commence, as committees are formed and data-bases updated, ready for the official beginning of the ‘census period’ on 15 June. Academic staff will then devote themselves to putting together their ‘Evidence Portfolio’, reporting publications of the greatest quality and providing evidence of the high esteem in which they are held by their peers across the world. This will take the best part of a year, as evidential items are added and validated and claims of worth are ‘sexed-up’. Then the numbers will be added up and the final rankings decided and announced. By this time it will be April 2013 and the process will have been on-going to a greater or lesser extent for seven years.

“And it will all be a monumental waste of time and money and a source of great angst when the dreaded judgments are announced. What we do know from the copious amount of data that has been collected on this kind of assessment in the various places in which it is undertaken (UK, Australia, here), is that it will tell us next to nothing about the quality and value of research being done in our universities. The most it will tell us is which groups and individuals have the most capacity to manipulate the system and which institutions have the boldest and most imaginative public relations department.”

You can read Dr Smith’s more substantive NZCPR research paper Performance-Based Research Funding: why it should end now HERE

The PBRF is administered by the Tertiary Education Commission, a Crown entity that was established by Labour – and opposed by National. The Commission costs over $50 million a year to run, it employs 300 staff 66 of whom earn between $100,001 and $499,999, and it has nine commissioners receiving around $200,000 in fees who have established an additional three committees of 17 members.

The Tertiary Education Commission is one of over 100 taxpayer-funded Crown entities. If National is really serious about reducing the size of government to affordable levels, this and all of the other Crown entities should be heavily scrutinised with a view to finding simpler and less costly alternatives to providing any necessary key services.

New Zealand is a small country that should have a small government and a strong economy. Instead we have ended up being a small country with a bigger government and a weak economy. Whether National is really serious about reversing the excesses started by Labour when it took office in 1999, will no doubt become clear when Bill English delivers his third budget on May 19th.