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2 December 2005 Does Treasury Advice Represent
Value for Money? A fortnight ago the Treasury's
Briefing to the Incoming Government was released. Treasury is the government's main
economic adviser. Taxpayers fund it to the tune of around $50 million
a year. Are they getting value for money for this expenditure? The Treasury's job is to assist
the government to meet its economic goals. The Labour-led government
has repeatedly stated that its "top priority" goal is
to raise the per capita incomes of New Zealanders into the top half
of the OECD rankings. A National-led government would have a similar
goal. Readers might therefore have expected
the briefing paper to focus on two central questions: is New Zealand
on track to achieve that goal with current policies; and, if not,
what policy changes should the government make to achieve it? On the first question, Treasury
pulls its punches. It says that "New Zealand will continue
to experience reasonable rates of economic growth, although probably
not sufficient to shift the country into the top half of the OECD
within the next decade." This is a massive understatement.
As the briefing explains, moving into the top half of the OECD within
10 years would require growth rates of around 4% per capita per
annum. This compares with average per capita growth rates of under
0.5% per annum up to the early 1990s and the much better 2% per
annum rate achieved in the last decade as the benefits of the economic
reforms materialised. But a further doubling of New Zealand's
per capita growth rate (from 2% to 4% per annum) is simply not in
prospect on current policies. Treasury is negligent in not pointing
this out. Indeed it does not offer advice
on whether current policies are likely to see any progress at all
towards achieving the goal of closing the gap with the OECD average.
If New Zealand maintained the small (0.3%) annual growth differential
it has achieved over the OECD average in the past decade, it would
take over 50 years to close the gap. Recent policy backsliding,
however, makes it more likely that the economy's trend growth rate
will deteriorate rather than improve. On the second question, does the
briefing paper give the government advice on the policy adjustments
necessary to achieve its growth objective? Regrettably, no. The first thing it should have
pointed out is that economic growth is primarily dependent on good
institutions and policies that are consistent with high levels of
economic freedom and allow entrepreneurship to thrive. Economic freedom, however, is not
mentioned in the paper. No country can be regarded as economically
free, and capable of fast growth, when total government spending
(central plus local) is around 40% of GDP, as is the case in New
Zealand. Cutting the government spending
ratio significantly, and releasing resources for productive use
in the private sector, is therefore a prerequisite to rapid growth. It is also a prerequisite to reductions
in the overall tax burden. Treasury recommends reductions to the
high personal tax rates (33% and 39%) and to the company tax rate,
but it doesn't suggest by how much or tie them to a government spending
recommendation. Treasury does, however, report
empirical evidence indicating that high marginal tax rates on personal
and company income are damaging to growth. Michael Cullen's rejection
of Treasury's advice on the grounds that it is "ideological"
suggests he is still in denial about the findings of economic research. The briefing also makes a sound
case for a rethink of government policies on climate change, the
Resource Management Act, roading, electricity and privatisation
in the interests of growth. However, the Treasury has little
to say on the barrage of regulation that is making business operation
in New Zealand more difficult. To note that New Zealand compares
well with other countries in many areas of regulation is irrelevant
to the task of advising on policies that would achieve the government's
growth objective. It is also surprising that the
briefing has nothing to say on monetary policy and the Reserve Bank's
misguided attempts to blame current inflation and economic imbalances
on the private sector rather than on monetary and fiscal policy
mismanagement. Nor does the Treasury engage in
arguments by the Business Roundtable and other business organisations
that 'constitutional' constraints such as tax and expenditure limits
and a Regulatory Responsibility Act should be considered as part
of a credible pro-growth strategy. It is pleasing that there is no
trace of the curious material on economic geography that featured
in previous Treasury briefing papers. So while the briefing paper is
an improvement, it barely scores a pass mark. Its main weakness
is the failure to advise the government that existing policies are
not achieving the goal of faster growth and to outline a coherent
programme that would. In the interests of achieving the
higher living standards that most New Zealanders want, taxpayers
deserve better value for money from their Treasury. Roger Kerr is the executive director of the New Zealand Business Roundtable. For more information, contact: Roger Kerr Web: www.nzbr.org.nz |