Each year the government issues a Budget Policy Statement (BPS) that contains its long-term objectives for fiscal policy, its broad strategic priorities for the next Budget, and its aggregate fiscal intentions for the next three financial years.

Recently the 2005 BPS was published. A pleasing feature is that it unequivocally states:

New Zealand's recent growth performance can be attributed to past structural reforms that began in the mid-1980s, which have resulted in a trend increase in New Zealand's growth rate since the early 1990s … a more flexible economy better able to absorb adverse shocks and take advantage of favourable shocks, and sound macroeconomic policy settings.

Given this acknowledgement, the government's repeated references to “the failed policies of the past” can now only be taken as misleading political rhetoric.

However, when it comes to present and future policies and their effect on growth, taxpayers have less reason for confidence. There is no basis in the BPS for believing that the budget 'tax-and-spend' strategy will contribute positively to the government's growth objectives. On the contrary, a solid case can be made that it is more likely to impair prosperity and thereby put other goals at risk.

The government has consistently stated that returning New Zealand to the top half of the OECD per capita income ladder is its “top priority” goal. This was reiterated as recently as December 2004 when it stated in its social policy document Opportunity for all New Zealanders: “The Government's economic objective is to return New Zealand's GDP per capita to the top half of the OECD rankings". It is therefore very puzzling to note that the BPS is completely silent about this objective, against which the government has to date been happy to measure its performance.

In 2002 the minister of finance stated that it would be clear within the next couple of years (ie by mid-2004) whether New Zealand was on the right track to achieve its “top priority” goal. It is now apparent that it is not. The December Economic and Fiscal Update 2004 (DEFU) projected that after this fiscal year, New Zealand's growth in GDP per capita will average only 1.9 percent per annum through to 2009. This is well below the post-1993 average of 2.5 percent per annum. Professional forecasters are sticking with the widespread view that the underlying trend in labour productivity growth going forward is around 1.5 percent per annum. These growth rates are well below those needed to reach the level of incomes of countries in the top half of the OECD within any reasonable period of time (say a decade or two).

It is equally clear that the government is not on track to achieve the minister of finance's alternative goal of sustained GDP growth of 4 percent per annum. The BPS projects real GDP growth to be in the 2.4-3.0 percent range in 2006-2009 (the average since 1993 has been 3.7 percent per annum). In contrast, the BPS projects Australia's GDP growth rate to be in the 3.3-3.5 percent range and our trading partners' average GDP growth rate to be in the 3.4-3.5 percent range.

The BPS has two fundamental problems. One is the absence of any analysis of the likely effect of additional tax revenue and spending on the growth objectives. The other is the failure to put forward any principles for assessing whether new spending is justified or and to evaluate whether existing spending is achieving desired results.

High and growing levels of government spending are a major drag on the economy. The government has been spending a large proportion of the ‘growth dividend' and there is no analysis in the BPS to suggest that it is achieving value for money. A far better growth strategy would be to cut taxes and let taxpayers make spending decisions for themselves. The Business Roundtable has recommended getting all income tax rates – personal and company – down to a maximum of 25 percent. At an estimated annual revenue cost of $3.6 billion, this could be easily managed over a few years and make New Zealand a far more attractive place to work and invest.

The Business Roundtable recently published Restraining Leviathan by Dr Bryce Wilkinson which promoted a strengthening of the Fiscal Responsibility Act to curb unjustified expenditure. A central proposal was a rule to limit growth in government spending to population growth plus inflation, unless taxpayers authorised higher limits in a referendum. Finance minister Michael Cullen dismissed the proposal as “ideological”, apparently unaware that the rule – or variants of it – is in place in a number of countries and many US states.

The government has also shown no interest in a Regulatory Responsibility Act to check and reverse the growth in regulation which is making business operation in New Zealand more difficult and holding back growth . This is favoured by several business organisations.

Despite the current economic buoyancy, it is plain that the government's own growth objectives are not being met. Its policies are leading to a deceleration, not an acceleration, of growth. A more credible growth strategy is badly needed.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz