This article was first published in the Otago Daily Times on 8 February 2008

Shifting the Goal Posts: A Saga of Recent Budgets

The annual budget is the vehicle governments use to present their economic goals, policy thinking and programmes to the public.

So as we await this year’s budget, it’s timely to review the current government’s successive budgets to check its goals and track its progress in achieving them.

Labour came into office in 1999 arguing that New Zealand’s earlier economic reforms had failed and that we were about to suffer a credit rating downgrade.

But these arguments were wrong. All major economic indicators – inflation employment growth, the unemployment rate, productivity, public debt and real GDP growth – improved substantially in the 1990s. New Zealand was never at risk of a rating downgrade provided sound policies were maintained.

The 2000 Budget signalled a change in economic direction with a focus on more interventionist industry policies, the ‘knowledge economy’ and ‘Closing the Gaps’.

Who now remembers the goals for the ‘three strategic sectors’, such as a hundred $100 million IT firms by 2010, the Growth and Innovation Advisory Board, and ‘Closing the Gaps’?

In response to business criticisms, the government put the emphasis in the 2001 Budget on economic growth: “We need to set ourselves a goal of being back in the top half of the developed world in terms of per capita GDP”. Sustained growth of “4% a year or more” was needed to achieve that goal.

Yet the rate of growth is declining steadily and New Zealand has moved down the OECD ladder, not up. Last year journalist Colin James referred to “Clark’s now discarded promise to get back into the top half of the OECD income rankings”.

The 2002 Budget featured discussion of savings. Finance minister Michael Cullen said “The Government is not considering upfront tax incentives. These are likely to have to be very large – with fiscal costs running to many hundreds of millions of dollars a year – before they have any desirable effect on overall savings. Their abolition in the mid-1980s represented sensible tax policy on both equity and efficiency grounds.”

Yet KiwiSaver has been enacted at a cost of perhaps $2 billion a year and with the largest benefits going to high-income taxpayers.

Dr Cullen has repeatedly linked savings to the current account deficit. But as a recent New Zealand Institute of Economic Research paper showed, there is no causal relationship. Early budgets expressed concern about large deficits, but they have increased as a proportion of GDP, despite very favourable external terms of trade.

The 2004 Budget suggested “there are signs of longer-term increases in labour productivity growth”, and observed that it is “a key factor placing a ceiling on our ability to grow faster.” Regrettably, the signs have disappeared. In the year to March 2006, labour productivity growth in the measured sector of the economy was the lowest since the statistical series started, and may subsequently have declined further.

Over several budgets, Dr Cullen argued that New Zealanders were not overtaxed, and lower personal and company tax rates would do little for the economy. Yet the company tax rate was cut in the 2007 Budget and this year personal tax cuts are promised. With the OECD now estimating that general government tax and non-tax receipts are running at 45% of GDP (far above Australia’s level of 35% and the OECD average), it is ludicrous to maintain that New Zealand is not a high-tax economy.

The government has pointed to strong job creation during its term of office, totalling 333,000 between 2000 and 2007. However, job creation was similar between 1991 and 2000, totalling 305,000. In both periods the increases owed a lot to the 1991 moves to free up the labour market.

A further government goal was to reduce welfare dependency. However, although numbers on the unemployment benefit have declined, the combined numbers on the domestic purposes, sickness and invalid’s benefit rose from 207,000 in 2002 to 226,000 in 2007.

Early in its term of office the government dismissed fears that its policies would encourage a ‘brain drain’. Few now doubt that those fears were well-founded, with the latest figures on net immigration to Australia ringing real alarm bells for employers and families throughout the country.

Dr Cullen said in 2002 it would be clear within two years whether New Zealand was on track to faster growth. With every passing year the evidence has become clearer that it is not.

To be fair, the government deserves credit for some of its policies, in particular by maintaining many of the previous reforms, despite its rhetoric.

And we must still hope that this year’s budget will acknowledge what might be called ‘the failed policies of the present’ and chart new directions. The government’s goals for a more prosperous New Zealand are commendable. The problem is that it has misdiagnosed the issues and its ‘remedy’ of ever bigger government doesn’t work.

Roger Kerr (rkerr@nzbr.org.nz) is the executive director of the New Zealand Business Roundtable.