2025 advice best shot at bridging gap

First published in the New Zealand Herald. 2 December 2009

The report of the 2025 Taskforce, released on Monday, has been dismissed for all kinds of reasons by all kinds of people.

Some say that reaching Australian income levels by 2025 simply can't be done.  Well, it certainly can't be done with present policies, on that most people are agreed.  But reaching Australian income levels by 2025 was what the Government committed to achieve in their coalition deal with the ACT Party last year, and is a goal which the Prime Minister has confirmed repeatedly.  Taskforce members share the Prime Minister's view that achieving the goal is vital if we are to staunch the flow of Kiwis across the Tasman - a flow which saw the equivalent of all the people in Whangarei, Gisborne, Masterton, Nelson, Timaru and Invercargill leave New Zealand in just the last 10 years.  That outflow will only get worse if the gap continues to widen.

Some have said that the Taskforce members should have been more politically realistic in framing our recommendations, taking into account prevailing political views.  Perhaps that would have given us a more favourable reception from the Government, but we were explicitly asked to provide the recommendations which we believe would enable us to match Australian incomes by 2025, and to leave the political judgements to the politicians.  And of course coming up with recommendations which simply endorsed currently popular measures would have meant that we had achieved nothing at all.

Many people have dismissed our recommendations as somehow too "radical".

But what is radical about reducing government spending to the level it was, relative to national income, in 2005 (at the end of the second term of the Labour Government)?   That hardly had most people lamenting the small size of government in New Zealand. 

Last week, the Minister of Finance issued a press statement pointing out that government spending had increased by 45% over the last five years and noted that that "kind of rampant spending growth is unsustainable and cannot continue". 

Many of the major increases in government spending over the last few years have no policy justification at all - interest free student loans being one of the best examples.  At a time when the private return from tertiary education has never been higher, it is entirely unclear why taxpayers should provide even more generous subsidies than previously applied.

And what is radical about suggesting that there should be a gradual increase in the age of eligibility for New Zealand Superannuation?  Australia is doing it and so also are Denmark, Norway, Germany, the United Kingdom and the United States.  No serious observer doubts that New Zealand will have to do it in due course.  By pretending we don't, we simply shorten the time New Zealanders have to prepare for the inevitable.

What is radical about suggesting that as a general rule government should not own commercial companies?  Most developed countries have been gradually selling state-owned enterprises for years.  The Australian Government sold out of Qantas and Telstra.  The British Government sold out of British Airways and much more besides.  The German Government even sold their Post Office.

What is radical about suggesting that government should insist on rigorous cost-benefit analysis before embarking on any major investment programme?  We don't have so much capital that government can afford to squander it on half-baked projects where returns fall far short of costs.  It's worth recalling that assets in Crown ownership are worth some four times the total market capitalization of all the shares listed on the NZX.

What is radical about allowing more competition in the school sector?  We take it for granted in pre-school childcare, and they take it for granted in Sweden, hardly a bastion of extreme right-wing views.

At a time when youth unemployment is sky-rocketing, and the Government is having to think of ways of subsidizing employers to hire young people, what is radical about recommending the re-introduction of youth minimum wages?

Taskforce members come from a wide range of backgrounds.  We reached our recommendations unanimously.  We believe that our recommendations would give us the best shot of reaching Australian income levels by 2025.

We don't claim infallibility of course.  Perhaps there are other ways.  But some of those which were recommended to us have little merit, and we explain why we rejected them in our report.  For example, some people argued that faster economic growth would happen if only government would provide more support for research and development, or more support for industries with particularly attractive prospects.  

We noted that government already spends more on R & D, relative to national income, than do the governments of much richer countries such as Canada, the United States and the United Kingdom, and that the relatively low spend on R & D in the New Zealand private sector is undoubtedly influenced in part by the fact that so many New Zealand companies get access to the latest technology through a foreign parent.

We noted that government support for particular industries has a long history in New Zealand - from the high protection provided, disastrously, to manufacturing from the late thirties till the eighties; through the Think Big projects of the late seventies and early eighties; to the super yacht and film-making industries of the last decade.   All of those special subsidies came at a cost to the rest of the economy, in some cases enormous cost.  Governments simply don't have either the information or the incentives to "pick winners", and while some government-supported projects will no doubt succeed, many will not.  The cost of the government support always comes at a cost to the rest of the economy.

We expressed genuine concern for the impact on exporters of the big cyclical fluctuations in the exchange rate.  But we discovered not only that those big swings are no greater than in many other countries (such as Canada, Japan, and the United States) but that there are no obviously available remedies.  For reasons we explain in the report, the "Singapore model" is not feasible for New Zealand, and adopting the US dollar would be fraught with risk.  We acknowledge that there may be a case for adopting the Australian dollar, though of course that would still leave many exporters exposed to the fluctuations between the Australian dollar and the US dollar - fluctuations which in recent years have been every bit as big as those between the NZ dollar and the US dollar. 

The best assistance that government can provide to exporters is to avoid big increases in government spending at a time when resources are already stretched, because that only forces the Reserve Bank to tighten monetary policy and puts upwards pressure on the exchange rate.

What is commendable is the Government's willingness to be held accountable for its 2025 promise.  Plenty of previous Governments, both Labour and National, have promised to increase our growth rate, or lift us into the top half of the OECD.  This is the first Government to establish a mechanism to monitor progress.

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Copyright © 2020 Don Brash.