Politics – Prosperity or Poverty – New Zealand at the Crossroads (7 December 2009)

[New Zealand] is a beautiful place with boundless opportunity. So I won’t accept that the bottom third of the OECD for average income is where we rightfully belong. I simply won’t believe we have to put up with losing 80,000 of our people every year to other parts of the world. I am horrified that the gap between our wages and those in Australia are now wider than they have been in our history – at more than 35%. How can we hope to hold on to our young people, the educated, the talented, the motivated, if on the Monday you can earn $50,000 for doing one job and on the Friday earn $80,000 by simply moving across the ditch? If we stay on the same growth course and speed, by 2030 the gap between wages here and wages in Australia will have risen to over 60%. We have a plan to steer New Zealand on a course to a more prosperous future. And we need to get to work on that plan straight away.  – John Key, “National’s Blueprint for Change”, January 2008.

An extraordinary debate has been raging over the last week about what is probably the most important question of the decade: do we as a nation want a more prosperous future, or are we prepared to accept the continuing decline in living standards? This is the critical issue that is at the heart of the discussion over the report of the 2025 Taskforce which was released last Monday.[1]

The 2025 taskforce, headed by the former Governor of the Reserve Bank and former leader of the National Party, Dr Don Brash, was part of the Confidence and Supply agreement between National and ACT. Both parties had campaigned on catching Australia during the 2008 election, largely in response to the Labour Government’s dismal failure to achieve their stated goal of lifting New Zealand’s economic performance into the top half of the OECD during their nine years in power. Sensing the public’s mood to support a future where New Zealand’s living standards are rising rather than falling, both parties pledged to prioritise policy goals aimed at closing the income gap with Australia. That made the setting up of the Taskforce a mutual objective.  

The National-ACT agreement states: “National and ACT have joint aspirations for greater prosperity for New Zealanders, and see Australia as a benchmark. They have agreed on the concrete goal of closing the income gap with Australia by 2025. This will require a sustained lift in New Zealand’s productivity growth rate to 3% a year or more. Both parties recognise that achieving this goal will require significant improvements in New Zealand institutions and policies. Their joint commitment to limited government – government limited to its proper role – and greater economic freedom will need to be consistently adhered to. To that end they have agreed on the establishment of a high quality advisory group to investigate the reasons for the recent decline in New Zealand's productivity performance, identify superior institutions and policies in Australia and other more successful countries, and make credible recommendations on the steps needed to fulfil National's and ACT's aspirations. The advisory group will report annually on the progress made to improve the quality.”[2]

The report released by the 2025 Taskforce clearly shows that New Zealand has lost its way. This country that was a beacon for hard working immigrants from around the world, who wanted a better life for themselves and their children, has now become, according to John Key, “a breeding ground and giant education facility for Australia”. Over the last 10 years, a net 260,000 skilled workers have left New Zealand, mostly for Australia where average incomes are 35 percent higher than they are here. That means that for a family of four, the gap is worth around $64,000. This is the critical issue – no country can prosper when so many citizens vote with their feet for higher living standards.

What is so disappointing about the Prime Minister’s response to the Taskforce’s report last week was the derisory way in which he dismissed the recommendations. By labelling the central proposition that government spending needs to be reduced so that taxes can be lowered as “radical big bang reform”, John Key did the 2025 project – and the country – a huge disservice. Not only did he undermine the pledge given to the ACT Party to take parity with Australia seriously, but he has also raised serious questions about the sincerity of his own election pledges including whether he is like so many other politicians who compromise good intentions once they are in power: “I came into politics because I believed New Zealand was underperforming economically as a country. I don't think it's good enough that so many New Zealanders feel forced to leave our country each year to seek higher wages in Australia. I don't think it's good enough that our average incomes lag so far behind the rest of the world. And I think it's unforgivable that the Labour Party has done so little to address these fundamental challenges. I believe that a very big step change is needed in our economic performance to ensure New Zealand can make the most of its considerable potential. Growing the economy of this country continues to be my driving ambition. I stand before you today ready to deliver on that ambition for New Zealand. You have my personal commitment that if I am elected Prime Minister in eight days' time I will work tirelessly over the next three years to deliver the stronger economic future our country deserves.”[3]

Essentially the simple concept behind the 2025 Taskforce’s recommendations is that if core government spending is reduced back to the same proportion of the economy that it was in 2004 and 2005 (around 29 percent of GDP), then the top rates of tax – personal, company and trust – could all be dropped to 20 percent, with all of the lower tax rates including GST left exactly as they are now. That would effectively mean that everyone earning more than $14,000 a year would pay less income tax, and nobody would have to pay more.

Just imagine the electrifying boost to the economy that a top tax rate of 20 percent would deliver. It would not only provide a welcome reward for hard work, but it would also create the incentive for able-bodied beneficiaries who have chosen welfare as their lifestyle option, to get jobs. Crucially, Kiwi businesses would gain a huge competitive advantage that would help to keep New Zealand one step ahead of Australia – especially as Australia is considering dropping their company tax rate down to 25 percent. Lower company tax would also help to mitigate the cost burden that National has just imposed on businesses through its ill-advised emissions trading scheme.

The 2025 plan sounds just what New Zealand needs – proper constraints on government spending and a welcome increase in taxpayers’ freedom and opportunity. The harsh reality is that without reducing the expansion of the state, New Zealand will never close the income gap with Australia because increasing government spending is a key factor in the differences in the performance of our two countries. According to Ken Henry, the Australian Secretary of the Treasury, government expenditure in Australia has grown from 18.9 percent of gross domestic product (GDP) in 1972 to just over 25 percent today. It has remained at that level for almost 35 years.[4] In comparison, government expenditure in New Zealand grew from over 24 percent back in 1972, to 29 percent in 2004, with a massive rise to 36 percent today. In other words, New Zealand’s consistently higher government spending has contributed to our consistently lower economic growth, and if the blow-out in spending during Labour’s last term in office is left unchecked, it will lead to an even more rapid decline in our living standards.

So what is it that the Taskforce is recommending to save $7 billion and enable a 20 percent top tax rate? Well, a total of 35 recommendations were proposed which cover initiatives in most policy areas including the idea of introducing a cap on government spending like they have in Hong Kong, a Taxpayers’ Bill of Rights like they have in Colorado, and an independent Productivity Commission like they have in Australia. The Taskforce also proposed that a proper first principles review of the Resource Management Act be undertaken, and that property rights be included in the New Zealand Bill of Rights. In the industrial relations area they have suggested extending the 90-day probationary period for new employees to a maximum of 12 months for all businesses, the reinstatement of youth wage rates, and the pegging of the minimum wage to the same ratio to average wages that prevailed in 1999. They have recommended that foreign investment restrictions be loosened, that local councils be encouraged to sell their trading enterprises, and that businesses owned by the government that operate in a competitive market be sold.

In addition, the Taskforce has proposed that welfare reform be prioritised, as much to prevent the development of an underclass, as to reduce government expenditure. They have highlighted the fact that there are insufficient constraints in the welfare system to prevent large numbers of working age people opting out of the workforce to become fully supported by the state. In fact it is a scandal that the welfare system has been allowed to remain dysfunctional with ineffective work requirements for the able-bodied and a lack of intensive case management for those on sickness and invalid benefits. The end result is an escalation in the cost of welfare, with individuals deprived of the opportunity to achieve their potential and disadvantaged groups locked into cycles of intergenerational dependency.

This week’s NZCPR Guest Commentator, Lindsay Mitchell, has long campaigned on the need for effective welfare reform in New Zealand. In her article, If social security had been contained, how much better off would New Zealanders be today? Lindsay outlines the disturbing growth in welfare dependency:

“During the post-war years benefit levels were reasonably stable despite population growth. For instance between 1940 and 1975 the population grew by 92 percent but receipt of Unemployment, Sickness and Invalid benefits grew by only 9 percent. Compare this to the next almost 35 year period – 1975 to 2009 – and the picture is vastly different. Reliance on the same three benefits grew by 903 percent or 9 times. The population grew by a mere 38 percent over the same period.

“But what if benefit dependence had stayed at 1975 levels? Using estimates based purely on total population growth the numbers would now look something like this: Unemployment benefit 3,964, Sickness benefit 10,727, Invalid's benefit 12,897; add in the DPB created in 1973 23,606. That's a total of 51,194.

“However, the actual total today is 309,717. The difference in terms of expenditure is about $5.17 billion. That represents an average of $2,400 per employed person.” To read Lindsay’s full article, click the sidebar link.

The 2025 Taskforce report has brought to a head the choices that National faces – it can either cut government spending so that the country can prosper or it can hold a gun to the heads of taxpayers and demand more taxes so that it can endorse the spending spree that the Labour government set in motion. Most people who voted National into power wanted change. They were sick of socialism and state control. They wanted to be liberated and they wanted a brighter future. National has a responsibility to deliver that. And if they think that the policy prescription outlined by the 2025 Taskforce is not the right one, then they need to find their own $7 billion worth of spending cuts so that taxes can be reduced down to 20 percent and New Zealand can enjoy greater prosperity. 

Read more from New Zealand Centre of Political Research.

FOOTNOTES:
All articles can be found on the NZCPR RESEARCH PAGE
1.2025 Taskforce, Answering the $64,000 Question: closing the income gap with Australia by 2025
2.NZ Government, National-ACT Confidence and Supply Agreement
3.John Key, Security and Growth: National’s Economic Plan
4.Ken Henry, Fiscal Policy: More Than Just a National Budget