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10 February 2006 Budget 2006: More Spending
and Less Growth Last December the government released
its latest Budget Policy Statement (BPS). It gives the government's
assessment of the medium-term outlook for the economy and outlines
the broad shape of the 2006 Budget. The first striking point about
the BPS is that it projects the economy's medium-term performance
to deteriorate sharply. New Zealand is not on track to lift its
average living standards relative to Australia or the OECD average.
The projected annual average rate of growth in real GDP is only
2.8 percent during the five years to March 2010. This is far below
the annual average rate achieved in the last decade and well below
the 4 percent per annum rate of growth that the minister of finance
has said would be the test of whether the government's growth strategy
is working. Economic growth depends, among
other things, on high levels of economic freedom - modest levels
of government spending, taxation and regulation. New Zealand greatly
improved its rankings for economic freedom as a result of reforms
that were implemented 10-15 years ago. Since then governments have
lost their way. The 2006 rankings, just published by the Heritage
Foundation in conjunction with the Wall Street Journal, saw
New Zealand fall from 5th equal position in 2005 to 9th equal with
Australia. Both government spending and taxation
are continuing to surge. By 2010 government taxes and levies are
projected to be $14,400 per capita, nearly 70 percent higher than
the 2000 level of $8,500. A very large proportion - around 60% -
of the 'growth dividend' is being appropriated by the government.
The government has denied that
it has been fiscally imprudent. It points to the fact that core
Crown spending has fallen slightly as a percentage of GDP since
it assumed office in 1999. However, this outcome is due mainly to
growth in GDP (the denominator of the ratio) rather than to spending
restraint. Moreover, the claim overlooks the fact that the spending
ratio was projected in 1999 to decline even further (as the economy
recovered from the effects of the Asian recession) and that it is
now set to increase by nearly 2 percentage points by 2010. This
increase in planned spending, and the dubious quality of much of
it, can only be negative for growth. Likewise the government points
to World Bank research on business regulation suggesting that New
Zealand scores highly as a place to do business. That outcome is
a direct and welcome result of earlier economic reforms, but little
has been done to build on them for over a decade. The World Bank
research relates mainly to developing countries and largely measures
factors that are easy to measure (eg how many days or steps it takes
to set up a business). The need in New Zealand is to review the
issues that are at the heart of our regulatory environment and problems
with it such as labour law, the Resource Management Act and electricity
industry regulation. The BPS states that the key initiatives
in Budget 2006 will be interest-free student loans, an expanded
Working for Families package, and lifting the married couple rate
for New Zealand Superannuation to 66 percent of the net average
wage. These involve huge increases in spending and limit the scope
for reducing taxes. They involve redistribution of income to favoured
groups and do little to create wealth, whereas the Treasury has
recently reaffirmed that "Tax policy is a major tool that can
assist in promoting economic growth." With excessive taxation, the more
productive sectors are likely to be squeezed as the state outbids
them for people and other resources. This is happening at present.
Employment in agriculture, hunting, fishing and manufacturing fell
by 5 percent in the five years to the year ended June 2005 whereas
employment in education, health, community services and other services
rose by 17.5 percent. It would be wrong to blame monetary
policy for the present high real exchange rate. A high real exchange
rate arises not because the overall rate of inflation is too high
or too low but because inflation in the sheltered sectors where
government spending is concentrated is higher than inflation in
the exposed sectors - those facing international competition. Hence
the saying that "monetary policy needs mates". A fiscal
policy that was more supportive of monetary policy in current circumstances
would see much more constrained spending by the government and lower
taxation. Business organisations will be
expressing serious concerns about the outlook for growth and the
economic and fiscal policy settings foreshadowed in the BPS. There
is an urgent need to rein in spending, improve its quality, reduce
taxes in ways recommended in the 2001 McLeod tax review, and cut
back regulations. Devices like a Taxpayer Bill of Rights and a Regulatory Responsibility Act to constrain government and expand economic freedom would help make New Zealand a more prosperous place. Roger Kerr is the executive director of the New Zealand Business Roundtable. |