Considered consistent reform better than opposition

November 4, 2010

The second 2025 Taskforce report recommends a much smaller role for government if we are to close the gap between New Zealand and Australia.

It’s broad recommendations are:

Cutting both government spending and tax rates
• Government withdrawal from most commercial activity to allow the private sector to drive value for money and innovation in those areas – including health and education services
• Proper cost-benefit analyses of government infrastructure projects
• More focused research and development in the public and private sector, including better governance of research and development in tertiary institutions and full contestability for government research and development funding
• Better quality regulation – more “fundamental review” of the Resource Management Act, restoration of the youth minimum wage, and a less restrictive hazardous substances and new organisms regime.
• More openness to foreign investment
• Better processes for scrutiny of regulations along the lines of the Regulatory Responsibility Bill.

Taskforce chair Don Brash commends the government for making some progress but also criticises some policies:

There has been some progress since the Task Force’s first report, Dr Brash said. He cited the tax cuts in this year’s budget, the first stage of the government’s Resource Management Act changes, extension of the 90-day probation period for employment law, and the lifting of the last government’s effective moratorium on new aquaculture farms.

Negative though include an even larger government deficit and a number of large government infrastructure projects undertaken without any sufficient cost-benefit analysis.

He also noted the budget’s changes to company tax law meant that even with the drop in the overall company rate the depreciation changes and new thin capitalisation regime means that overall the business sector is actually paying more tax than it was previously.

Finance Minister Bill English made a diplomatic response to the report, accepting the challenges it identifies but differing on the speed at which reforms can be made:

The second 2025 Taskforce report shows the Government has taken steps to lift New Zealand’s sustainable economic growth, but catching up with Australia will be a long-term challenge, Finance Minister Bill English says.

“Budget 2010 took several steps in that direction – including across the board personal tax cuts on 1 October that narrow the gap in after-tax incomes with Australia,” Mr English says.

“However the report shows just how challenging it will be to catch up to Australia by 2025, especially as we continue to recover from a recession – started under Labour – that Australia never had.

“Our first step has been to get the economy out of recession and growing again. We’ve now had five consecutive quarters of growth and we’ve put in place a broad programme of action, which will provide a platform for future growth.

“The Taskforce’s report – part of ACT’s confidence and supply agreement with National – raises some interesting ideas, which will hopefully generate constructive debate. The Government will consider some of those ideas, alongside the range of other advice we receive, and make practical decisions.

“However we disagree with the Taskforce report’s authors about the ideal speed of reform.

“History shows that reforms done at breakneck speed tend to be fairly counterproductive. If you don’t take the time to convince people of the benefits of change there’s a good chance the next government will simply reverse them.

“We are already moving in some of the directions suggested in the report. As well as cutting personal and corporate taxes, we have put a cap on new Government spending, have put better incentives into the welfare system and are reviewing major regulation.

“But any changes must meet the tests of fairness and equity, be consistent with our election promises and occur at a sustainable pace.

“The only way we can permanently lift New Zealand’s economic growth is through considered and consistent reform and change, year after year,” Mr English says.

I agree with the broad thrust of the 2025 report but also accept the political reality. 

Unpopular governments don’t get re-elected and it’s better to make slow progress in government than no progress in opposition.

However, I think governments sometimes underestimate the public’s acceptance of the need for stronger medicine if we’re to cure the economic malaise which has been widening the gap with Australia for 40 years.

The right prescription?

December 12, 2009

Brian Fallow responded to the report of the 2025 Taskforce’s first report with a column headlined: Old precription unlikely to fix new ills.

Taskforce chair, Don Brash, wrote an op-ed in response which the Herald delcined to publish because “the debate is moving on”.

Just how far a debate moves in a day is a moot point. Understandably Brash wasn’t impressed so he emailed his response to several people and asked us to spread the word.

I think everyone has the right of reply so here it is:

Brian Fallow is one of New Zealand’s best economic journalists.  But his article on 10 December dismissing the report of the 2025 Taskforce as “1980s thinking”, under the headline “Old prescription unlikely to fix new ills”, misses the boat completely and demonstrates that he is out of touch with mainstream professional opinion.  The arguments for reducing the tax burden caused by low quality and poorly targeted government spending, for privatisation, and for better quality regulation are absolutely consistent, for example, with the OECD’s 2009 report on New Zealand.

In his article, he cites at length the work of the economic geographer Philip McCann.  McCann has argued that since the 1980s the world has changed profoundly – China has abandoned communism, India has abandoned autarky and the Soviet empire has collapsed.  McCann accepts that over the past century transport costs have fallen by some 95%, while telecommunication costs have fallen by that much in just three decades.  This has provided a huge advantage to “the geographical dispersion of activities which are not particularly knowledge-intensive and do not add a lot of value”.  By contrast, what McCann calls “spatial transaction costs” have, he argues, become more important for knowledge-intensive high value-added activities because of the premium attached to face-to-face contact.

He argues that the increased importance of “spatial transaction costs” means that economic growth and globalisation over the past 20 years have favoured large urban centres in almost every country (large and small).   But he goes on to argue that an implication of this is that, within the Australasian region, Sydney and possibly Melbourne are growing in wealth and size at the expense of the periphery – which in this case, he asserts, includes New Zealand.  The further implication is that at this stage in the development of the world economy there are factors which drive us inevitably to have incomes lower than those in Australia.

Professor McCann is a serious researcher, and deserves to be heard respectfully.  It is probably true that large urban centres attract a disproportionate share of a country’s innovation and entrepreneurship. 

But one implication of his argument is that small countries, and especially those which are distant from world markets, are inevitably doomed to grow more slowly than larger more densely populated countries – and that simply does not seem to be borne out by the facts.  Over the last 20 years during which Professor McCann claims the world has changed, small countries tended to perform a bit better than large countries – even New Zealand has grown slightly faster than the OECD average over that period. 

Compared with large countries like France, Italy and Japan – all countries with large conurbations – New Zealand has also done better, increasing from 82% of the simple average of the incomes of those three countries in 1989 to 87% in 2007.

Moreover, if geography were really an important part of the story, no one would have predicted Australia’s impressive performance relative to the rest of the developed world in the last couple of decades.

Professor McCann and Brian Fallow also suggest that in the brave new world after 1989 capital is likely to be flowing out of New Zealand to places like Australia.  In fact, of course, it is well-established that capital is flowing into New Zealand, especially from Australia.  Thus, we have one of the largest current account deficits around – and, by definition, one might expect us to be running surpluses if capital were leaving New Zealand for ever better opportunities abroad.

The report of the 2025 Taskforce acknowledges that smallness and distance may indeed be impediments to our growth.  But let’s suppose for the moment that our size and location have become a much more important barrier to the development of knowledge-intensive industries in the “periphery” than they were prior to 1989.  Do we have to wait until the global economy changes, until, as Brian Fallow suggests, we get the benefit of our “combination of ample rainfall, temperate climate and skilled farmers” as the world’s population climbs and more and more people move into income brackets which enable them to afford the foods of affluence?

Or are there things we can do to actively lift our living standards?  The 2025 Taskforce is in no doubt about the answer to that question. Distance is what it is.  Our population is what it is.  But we don’t need to have a company tax rate which is now well above the average of other OECD countries.  We don’t need to discourage people who have dependent children with effective marginal tax rates of well over 50%.  We don’t need to hobble our businesses with needless red-tape.  We don’t need to inflate the cost of housing by tightly constraining the supply of residential land.  Our government doesn’t need to squander capital in low-yielding but politically-popular projects.  And we don’t need a size of government that is materially larger than that in Australia.

Yes, Australia and other developed countries also do some of these dopey things.  But the Government has set a goal not just of holding our position on the OECD ladder – a position which has us well below the average of other developed countries – but of catching up with Australia by 2025.  We won’t do that with policies which are merely as good as the average of other developed countries; we will only do that with much better policies.  If distance is a significant impediment to our growth, that simply means that our policies have to be of absolutely top quality.  Right now, they are not, and in recent years they have gone backwards in several important areas even as other countries have continued to reform.  This slippage is totally omitted from Brian Fallow’s account. 

Do we need 1980s thinking?  Of course, where it is still relevant; absolutely not where it isn’t.  The recommendations of the 2025 Taskforce are absolutely consistent with orthodox economic thinking about how to accelerate economic growth and, as noted, are consistent in particular with the recommendations made by the OECD report on New Zealand a few months ago.

Brash responds to George

December 5, 2009

Herald columnist Garth George was one of the people who was less than impressed with the recommendations of the 2025 Taskforce.

Taskforce chair Don Brash said George had got several things wrong in his column. He wrote an op-ed countering that which the Herald hasn’t yet published so he emailed it directly to George and some others, including me.

George’s column is here.

In response Don Brash wrote: 

Garth George was way off beam in his attack on the first report of the 2025 Taskforce. 

Leaving aside the personal invective, he claims that the “biggest absurdity” in the report is the proposition that New Zealand can and should catch up with Australia.  He says that “there is just no comparison between the two countries”, with Australia having five times our population, 32 times our land area, and huge resources of minerals.  Well, those are factual statements about Australia, but they ignore some important facts which he would be aware of had he read the report. 

First, there is no correlation between living standards and population – if there were, India would be super-rich and Singapore would be poor. 

Second, there is no correlation between living standards and land area – if there were, Russia would be super-rich and Finland would be poor. 

Third, there is no correlation between living standards and mineral wealth – if there were, the Congo would be super-rich and Japan would be poor. 

In any event, a recent World Bank study showed that, in per capita terms, New Zealand has more natural resources than almost any other country in the world. 

For most of New Zealand’s history, our standard of living has been very similar to that in Australia – sometimes a bit ahead, sometimes a bit behind.  And the Taskforce didn’t off its own bat decide that catching Australia again by 2025 would be some good idea: the goal was set by the Government itself, and the Taskforce was set up both to advise on how best to achieve the (very challenging) goal and to monitor annually progress towards achieving it. 

Too often in the past, governments have announced grandiose commitments to lift living standards – such as the last Government’s commitment to lift us into the top half of developed countries within 10 years – but then totally ignored those commitments, hoping that nobody would notice it.  It is to the Government’s credit that they made a commitment and then established a mechanism to hold them to account. 

Garth George accuses the Taskforce of recommending a whole range of things which we do not recommend.  For example, he accuses us of recommending a flat personal income tax, and notes that if such a tax were established a whole range of low income people would have to pay more tax.  But whatever the merits of a flat tax, the Taskforce did not recommend such a tax.  What we did say was that, if core government spending were cut to the same fraction of GDP that it was in both 2004 and 2005 (29%), the top personal rate, the company tax rate, and the trust tax rate could comfortably be aligned at 20%.  Under such a tax structure, all those earning above $14,000 a year would pay less income tax, while nobody would pay more income tax. 

Nobody seriously argues that government was vastly too small in New Zealand in 2004 and 2005 (the end of the Labour Government’s second term in office), so why the ridiculous reaction when the Taskforce suggests reducing government spending to that level? 

Mr George also suggests that we recommended abolishing subsidised doctor visits, and implies that we are advocating an American approach to healthcare.  This is again utter nonsense.  We suggested targeting subsidies for doctor’s visits at those who need them, either because they have low incomes or have chronic health problems. 

He suggests that we favoured removing subsidies for early childhood education.  Again, not true.  What we said was that those subsidies – which have trebled in cost from $400 million a year to $1.2 billion a year over the last five years – should be focused on those who need them.

The recommendations of the 2025 Taskforce are actually totally in line with orthodox thinking in most developed countries, and are almost entirely consistent with the recommendations of the recent OECD report on New Zealand.

Time to scare the horses

December 2, 2009

National was determined not to scare the horses before the last election.

That’s why the party swallowed dead rats and why the government is determined not to break any promises.

The reaction to the 2025 Taskforce  recommendations suggest that not scaring the horses is still a priority.

It shouldn’t be.

We might have got through the recession with fewer casualties than expected but the fundamentals underlying our economy are still unsound.

The government is borrowing far too much money to pay for luxuries we can’t afford.

It’s time to scare the horses.

If we don’t face up to the need to cut back government spending the pain of doing so will be even greater when we’re forced to do it in the future.

The government has built up political capital, now’s the time to use some of it by acting on some of the recommendations of the Taskforce.

The odd horse will buck and kick, but if the need for action is explained properly I think they’ll find most don’t scare nearly as easily as they fear.

P.S. Kiwiblog’s post on the Taskforce recommendations is here.




2025 Taskforce wants more from Fonterra

December 1, 2009

The 2025 Taskforce report says Fonterra hasn’t lived up to its promise and it should convert to a conventional corporate structure.

Fonterra is New Zealand’s largest company. It is a private company, owned by its shareholders, and we have studiously avoided commenting on individual private companies elsewhere in this report.

However, Fonterra exists in its current dominant position only because of exceptions granted to the Commerce Act to allow it to form. The Dairy Industry Restructuring Act continues to influence it and the sector as a whole. 

Fonterra’s performance matters for New Zealand and in view of Parliament’s role in the creation of Fonterra, the Government has a legitimate strong interest in the future structure of the company in a way that it would not if a more competitive model had been adopted earlier. 

As with so many state-sponsored or facilitated businesses, Fonterra has not lived up to the promise sold to New Zealanders when it was allowed to form. 

We do not believe that in its present cooperative structure it can do so, and we believe it is important for the long-term health of the dairy industry in New Zealand, and hence for farmer shareholders, that a transition to a conventional corporate form with outside traded capital occurs expeditiously. 

That choice is one that is in the hands of farmers, but we believe it is important that the Government keeps legitimate pressure on, using any appropriate instruments to encourage the transition to be made. No consideration of accommodation for Fonterra on any other front should be countenanced until the transformation of the company is irreversibly underway.

I’m pleased the report acknowledges that the company is owned by its supplier shareholders and its future is in their hands.

Whatever anyone says about Fonterra’s role in the economy and its importance to New Zealand, farmers have shown little appetite for a public listing before and are unlikely to support the idea now.

I’m also intrigued that the recommendation for Fonterra is being made by a taskforce chaired by Don Brash. He is one of the men behind Oceania Dairy Group which is planning to build a milk processing plant near Waimate in South Canterbury.

I am not accusing him of any bias, in fact the opposite is the case. If Fonterra was operating as well as the 2025 Taskforce thinks it ought to be it would be much harder for new competitors to gain traction.

Criticism of Fonterra from farmers has quietened since the forecast pay out was increased but global prices are expected to fall when new season supplies from Europe and the USA reach the market early next year.

However, those unhappy with the co-operative are more likely to move their milk to another processor than to agitate for it to change its structure.

2025 Taskforce report requires tough decisions

November 30, 2009

The 2025 Taskforce chaired by Don Brash has made  35 recommendations to help close the income gap between here and Australia.

Most of them require some tough decisions from government and some belt tightening from the rest of us.

Finance Minister Bill English said:

“Having steered the economy through the recession in better shape than many had predicted, the Government is now focused on getting a step change in New Zealand’s economic performance over the next three to five years.

“We must consider a range of options if we are to get the investment, economic growth and new jobs needed for that to happen.

“Having said that, this Government is pragmatic. And any decisions about key economic policies must meet the tests of fairness and equity.

“Where we specifically campaigned on doing certain things, we’re not going to break our word.”

The government isn’t going to break any election promises but not everything in the report was covered by a promise.

There is also plenty of scope for fresh promises in National’s 2011 election campaign.

The sale of state assets, for example. The previous government sold some Landcorp farms and there is nothing wrong with continuing with that in the future.

The government isn’t going to do anything which will threaten economic recovery in the short term. But it has sent very strong signals about the lack of money available for new spending which will make next year’s budget pretty stringent.

That might help focus the rest of us on how much we expect from public funding and how much we should be doing for ourselves and that any funding of luxuries now will be at the expense of some necessities later.

The resilience of the economy in the face of global economic uncertainty was due in no small part to the tough decisions the governments of the 80s and early 90s made.

If the economy is going to continue growing and be strong enough to cope with the next recession, we’re all going to have to accept the need for some tough decisions from government and the sooner it makes them the sooner we’ll feel the benefit.

Hat Tip:

The full list of recommendations follows the break.

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