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| 8
August 2005
Election Policies Should be
Viewed Beyond ensuring the provision of
public goods (such as biosecurity and the court system), and leaving
aside the production of private goods that could be more efficiently
produced by the private sector, governments are not directly involved
in wealth creation. Most of their other activities involve wealth
redistribution. Government redistribution up to
a certain point can be growth-enhancing, but generally there is
a trade-off between growth and redistribution because redistribution
affects people's incentives to be productive. There is a strong case for a social
safety net, but also for limiting it so as not to throw sand in
the machinery of wealth creation. Elections are a perilous time for
growth-oriented aspirations and policies. As the American writer
H L Mencken put it, "Every election is a sort of advance auction
sale of stolen goods". He meant that political parties promise
to tax, spend or regulate to benefit some groups at the expense
of others. The general public interest in wealth creation is often
sacrificed. To date, features of the election
campaign bear out Mencken's observation. The National Party has
promised tax breaks for childcare and student loans. These come
on top of commitments to match Labour's promises of an extra week's
statutory holiday and to keep the Cullen superannuation fund. All these are essentially about
redistribution, not growth. To be fair, National is also promising
changes in employment law, infrastructure provision, the RMA and
tax which should have growth benefits. Labour's main campaign commitment
to date is to make most student loans interest-free. Even at the
claimed annual cost of $300 million, this adds significantly to
the tax burden. In its recent report on New Zealand, the OECD stated
unequivocally that "higher taxes have a negative impact on
economic growth". Not only are excessive subsidies
or tax concessions for tertiary education largely redistributional;
they redistribute income from poorer to richer groups on average.
Tertiary students come mainly from better-off backgrounds and typically
go on to earn above-average incomes. This is a classic example of so-called
'middle-class welfare', whereby articulate and organised interests
gain privileges through the political process at the expense of
people who are less well off. There are other reasons why Labour's
interest-free loans scheme is bad public policy: it discriminates
against students who avoid borrowing or have repaid their loans,
penalises graduates who want to pursue work or study overseas, increases
the incentives to rort the system, and does nothing to increase
the resources of tertiary institutions. A far better strategy from both
a growth perspective and to facilitate debt repayment would be to
cut high tax rates, including the higher effective tax rates generated
by the Working for Families package. New Zealand is in no position to
lose interest in growing the pie and to focus just on how it is
divided. The higher incomes, employment levels and spending on health
and education that New Zealanders are now enjoying are largely the
result of earlier growth-oriented reforms. But economic reform is not a one-off
process, as Australian prime minister John Howard constantly points
out. The Australian government's plans to press on with labour market,
welfare, tax, public sector and other reforms could see income gaps
between New Zealand and Australia widen further. The government has said that increasing
the economy's growth rate to restore New Zealand to the top half
of the OECD income rankings is its 'top priority' objective. If
it is genuine, that goal will surely be the number one item on Labour's
pledge card, and be backed by credible policy announcements. As the OECD has pointed out, an
acceleration of New Zealand's trend growth rate is not in prospect
with current policies. The government has defended many of its initiatives
on distributional grounds but has not even tried to claim that any
of them have materially improved New Zealand's sustainable growth
outlook. The reality is that a large number of them will have negative
effects over time: budget documents show the economy's projected
growth rate trending downwards. Only growth, not redistribution,
can underpin prosperity and security. As Robert Lucas, the 1995
Nobel Laureate in economics, has put it, "Of all the tendencies
that are harmful to sound economics, the most seductive, and in
my opinion the most poisonous, is to focus on questions of distribution
… [O]f the vast increase in the well-being of hundreds of millions
of people that has occurred in the 200-year course of the industrial
revolution to date, virtually none of it can be attributed to the
direct redistribution of resources from rich to poor. The potential
for improving the lives of poor people by finding different ways
of distributing current production is nothing compared to the apparently
limitless potential of increasing production." In the election campaign, the policies
of all political parties should be scrutinised through a growth
lens. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |