Helped by the reforms of the late eighties and early nineties, and stimulated by strong commodity prices, the lowest exchange rate in New Zealand’s history, and a strong surge in net migration – the result in large part of the security concerns triggered by international events – the New Zealand economy has been very buoyant lately. This has produced the best fiscal outcome for years: an operating balance before “funnies” of close to $4 billion this year.
The outlook for the economy is very uncertain, however, with a weak world economy, a rising exchange rate, drought, and SARS, so this is not the time to blow all of that surplus in increased spending or reduced taxes, and were I the Minister of Finance I would not do so.
But the underlying reality is that this economy is currently only able to grow on a sustainable basis at a rate of between 2% and 3% a year. That is simply too slow a growth rate to narrow the large gap in living standards between New Zealand and Australia which emerged over the seventies and eighties. At present, the average Australian enjoys a standard of living some 30% higher than the average New Zealander – which amounts to about $200 per week for every man, woman, and child.
That means that Australians can enjoy better paid jobs, better schools and universities, shorter hospital waiting lists, better roads, and more of all the other good things in life.
So the priority task for the Government in everything it does, including the Budget, should be to do everything possible to increase that sustainable growth rate. The Minister of Finance and I agree that that objective is not achieved by simply dumping more purchasing power into an economy which is already working at close to full capacity.
Rather, the challenge is to find ways of increasing the rate at which productivity, or output per person, is growing. That means improving the skills of the workforce, giving people more and better plant and equipment to work with, improving the road network, and eliminating other infrastructure bottlenecks (such as in the electricity grid). It means encouraging people to be innovative and enterprising. It means rewarding people who take business risks, invest, and make profits.
Sadly, this is where the present Government has totally failed. It has discouraged those with initiative and enterprise by keeping the company tax rate at a rate which is one of the highest in the Asia-Pacific region and by raising the top tax rate from 33% to 39%. It has totally failed to deal with the traffic problems which, in Auckland alone, are costing the country $1 billion a year, and legislation now under consideration will make the prospect of solving these problems even more remote. By failing to fix the problems in the Resource Management Act, it has failed to remove major obstacles to investment in many sectors of the economy, and has compounded these difficulties by creating huge uncertainty for power companies and those companies wanting to use power by ratifying the Kyoto Protocol before most of our major trading partners. Added to the problems caused by the amendments to Health and Safety in Employment legislation, the Local Government Act, and more, it is hardly a surprise that future growth looks to be very modest indeed. At least the Prime Minister has been honest enough to admit that her previous goal of getting New Zealand into the top half of the OECD within a decade has not the slightest chance of being achieved.
On the tax side of the ledger, I believe we ought to be moving towards a flatter tax structure designed to encourage enterprise and investment. We should move the company tax rate from 33% to 30%, on a par with the Australian company tax rate, and over a period of three years reduce the top personal income tax rate to 30%, and the “lower middle” tax rate from 21% to 20%. The total cost of these moves would be in the order of $1.8 billion a year when fully implemented, before making any allowance for the extra investment and economic growth which these moves would surely stimulate. They would mean that everybody earning more than $9,500 would pay less tax, and the people who are now paying by far the most tax – those earning over $38,000 – would receive in their hand significantly more of what they actually earn. This would take a great deal of pressure off working New Zealanders, would encourage investment, and would also encourage skilled New Zealanders who are contemplating moving to greener pastures overseas to stay.
On the spending side of the ledger, I have no doubt that one of the things which would encourage economic growth is more spending on the police. It is surely a scandal that in some parts of the country the police no longer have the resources to investigate fraud, or to follow up in a timely manner crimes against property.
Should we be spending more on education in order to improve the skills of the workforce? I have no doubt that far too many young people come out of school with totally inadequate skills in reading, writing and arithmetic, and that this is a serious problem for them in ever getting a well-paid job or making a contribution to increasing our growth rate. Indeed, far too many of these people will end up on a benefit, or in gaol.
But the problem doesn’t appear to be inadequate government spending on education. On the contrary, government spending on education in New Zealand is already at a higher level than in almost all other developed countries, relative to our national income. Over the last 50 years, government spending on education has gone up hugely, even after fully adjusting for inflation and for the increased number of children in the school system. No, the problem doesn’t seem to be lack of spending but rather the way the money is being spent. A National Government would focus on getting better value for the money spent on education, by giving parents more choice about which school their children go to, by improving the standard of teaching, by devolving more authority to school principals, and by insisting on standards.
Similarly with health. Government spending on healthcare has also risen hugely over the years, both in absolute terms and relative to national income, and despite that hospital waiting lists and the number of those on sickness and invalid’s benefits, already over 100,000, continues to rise strongly. What we need is not just more spending on healthcare but smarter spending, including a greater willingness to use private hospitals.
Couldn’t a National Government save lots of money by spending less on welfare, where the number of those on benefits has grown enormously over the last 25 years and is projected to continue growing? Longer-term, we should be able to spend less on welfare. I can not believe that with a well designed welfare system and a well functioning economy we should have more than 100,000 people on the unemployment benefit and more than 100,000 on the domestic purposes benefit. But fixing that problem will not save big dollars in the short-term. Indeed, it may even cost money in the short-term, and I would not want to base a Budget on the expectation that we could save billions of dollars on welfare in the next few years.
One area crying out for more government spending is the road network. This isn’t the right place to get into a full discussion of the pros and cons of the Cullen Fund, but in summary my own view is that, while running fiscal surpluses is indeed sensible when the economy is buoyant and the age structure of the New Zealand population makes running such surpluses relatively easy, investing those surpluses in overseas share markets is not sensible at a time when there are high-yielding investments available in New Zealand. High-yielding investments? Certainly investing in upgrading the road network in key parts of the country would yield a high return in terms of more and better-paid jobs and higher growth. So I would use money ear-marked for the Cullen Fund to embark on a crash programme to remove bottlenecks in the road system.
I have no doubt that leaving more money in the hands of those who earn it, improving the education system, fixing the problems with the RMA, and undertaking an immediate programme to upgrade the road network would pay big dividends in terms of improving New Zealand’s rate of economic growth, to the benefit of all New Zealanders.
Copyright © 2024 Don Brash.