Missed opportunity

November 11, 2019

The New Zealand Initiative says the Zero Carbon Bill fails the climate:

 . . .the Bill is so seriously flawed that it could raise emissions.

The report, Real action, not empty words says New Zealand can reduce global emissions by far more than we contribute by working with whoever can do the most to reduce emissions, wherever they are.

“The Zero Carbon Bill will prevent New Zealanders from accessing the world’s most effective ways to reduce emissions by insisting all emissions are reduced domestically, as far as possible,” says the report’s author Matt Burgess, a Research Fellow at The New Zealand Initiative.

While there are exciting ways to cut emissions within New Zealand, offshore opportunities appear extraordinary,” says Mr Burgess.

Research commissioned by the Ministry for the Environment suggests forcing emissions to be reduced domestically could add $300 billion to the cost of reducing emissions to net zero, lift carbon prices to $2,000/tonne, and lower national income in 2050 by 6%.

“These huge costs reflect the scale of opportunities offshore. We should be extremely reluctant to close the door given what is possible.”

If climate change is a global problem it is sensible to look globally for solutions.

The Government has said its goal is to reduce emissions by transforming the economy.

 “Transformation is a very expensive way to reduce emissions, and as advice from officials makes clear it is totally unnecessary,” says Mr Burgess.

“The Ministry for the Environment advised the Government could cut far more emissions, at much less cost, and reach net zero earlier than 2050 if it allowed emissions reduction through the most effective channels, including offshore.”

“The Government’s decision to pursue transformation is not only unnecessary, it is contrary to a goal of lower emissions and all-but guarantees failure to achieve our emissions targets.”

The report’s other main concern with the Zero Carbon Bill is the use of central planning to reduce emissions.

Sections 5ZD and 5ZF of the Bill say the Minister for Climate Change must plan how and where emissions are reduced. Plans can cover all parts of the economy, at whatever level of detail the Minister decides, and can be changed any time.

“We have serious concerns with the Bill’s rules around planning, which are so poorly drafted that almost anything could go into the Minister’s plan. History tells us poor legislation can lead to unintended outcomes, in this case higher emissions.”

The New Zealand Initiative recommends three simple changes to fix the Zero Carbon Bill:

  1. Require effective action on emissions by introducing an overarching objective for both the Minister and the Commission that requires exercising their powers for “effective and efficient” emissions reductions and removals.
  2. Remove section 5W to eliminate the domestic preference, allowing emissions reduction through the most effective combination of domestic and offshore mitigation.
  3. Remove sections 5ZD–5ZF to eliminate the requirement that the Minister for Climate Change plan emissions reduction. The Minister will be free to prepare plans, and give effect to them by way of Acts of Parliament, the appropriate level of scrutiny for such far-reaching powers. . .

Federated Farmers says the government missed the opportunity to make the Bill work:

The government failed to take on board common sense suggestions for the improvement of the Zero Carbon Bill yesterday.

“They had a golden opportunity to pass a Bill that was fit for purpose, and could have taken a bipartisan approach to climate change, and could have taken farmers along as well,” Federated Farmers vice president Andrew Hoggard says.

Just last Friday the primary sector put a proposal to government which would have achieved the Zero Carbon Bill’s aims and built on the good faith established by the industry-government climate change commitment, He Waka Eke Noa.

“This was a sad day for common sense as our coalition government not only walked away from an important part of our commitment to the 2015 Paris Agreement, which requires all its signatories not to forsake food production for climate goals, but also relinquished the opportunity to be true leaders and adopt targets for methane which truly reflect its actual warming impact.”

Federated Farmers was deeply worried by a comment made during the debate on Wednesday by Labour MP and former head of the Environment Select Committee, Deborah Russell, who questioned the usefulness of New Zealand’s ability to produce food.

She said:

“I’m not sure that we have a responsibility to feed as many people as possible. We certainly want to ensure that we produce food – it’s one of the things that we export – but it’s not clear to me that we need to continue producing food at that level.”

If we don’t continue producing food at the current level, what will replace it that can make the same important contribution to New Zealand’s economic and social wellbeing?

The Paris Agreement specifically recognises the “fundamental priority of safeguarding food security” and says policies to address climate change should “not threaten food production”.

How many times do we have to say that if food isn’t produced here it will be produced elsewhere by farmers who don’t do it nearly as efficiently as we do? That would come at a huge economic cost to New Zealand and increase global emissions.

A major focus of the United Nations is its Sustainable Development Goals, and whilst climate change is one of those, so too is zero hunger.

“Cutting food production in New Zealand does not stop people eating, it merely hands production and jobs to international competitors, such as the heavily subsidised European Union’s farmers, who will produce the same amount of product, only less efficiently and with higher greenhouse gas emissions,” Andrew says.

The unfit-for-purpose biogenic methane reduction targets outlined in the Bill remain unchanged.

“The 2050 24-47% reduction target for biogenic methane remains eye-wateringly hard for farmers to achieve and correspondingly dire for our economy to withstand,” Andrew says.

With the current tools in the farmer’s tool box, the only way to meet the top end of the target (47%) is to halve the size of our livestock sector. Even if some of those tools become available they are not universally going to fit into all farming systems.

This sector contributes $28 billion in export earnings to our economy.

“New Zealand farmers are proud to be the most carbon efficient farmers in the world. Forcing them to reduce production is not only going to make New Zealand poorer, but will likely increase global emissions, so we will effectively be shooting ourselves in both feet.”

National proposed several amendments that would have made the legislation much better but they were opposed by New Zealand First. That party’s claims to be on the side of rural New Zealand fell victim to petty politicking.

However, National has committed to making several improvements to the legislation should it be in government next year:

“National proposed a series of changes that would have ensured the Bill is in line with National’s climate change principles of taking a pragmatic and science-based approach, but unfortunately the coalition Government voted down all of our amendments.

The changes we proposed were:

    1. That the target for biological methane reduction be recommended by the independent Climate Change Commission.
    2. That the Bill makes clear the stated aim of the Paris Agreement is for greenhouse gas reduction to occur in a manner that does not threaten food production.
    3. To strengthen provisions that consider the level of action being taken by other countries and allow targets to be adjusted to ensure we remain in step with the international community.
    4. To strengthen provisions for the Commission to consider economic impacts when providing advice on targets and emissions reductions.
    5. That the Bill ensures the Commission considers the appropriate use of forestry offsets, and has regard for the carbon sink represented by crops, riparian planting, and other farm biomass.
    6. That emissions budgets be split between biogenic methane and carbon dioxide as recommended by the Parliamentary Commissioner for the Environment.
    7. That the Bill includes a greater commitment to investment in innovation and research and development to find new solutions for reducing emissions.

Investment and innovation are the best ways to make a positive difference to the environment without the high social and economic costs other measures would impose on the country.

“We have taken a bipartisan approach to climate change but we will continue to fight for the changes we think will make the law better.

“Should National earn the right to govern in 2020 we will make these changes in our first 100 days in office. We will ensure the Bill drives the right long-term changes and factors in the wider impacts on New Zealand’s economy, jobs and incomes.”

Economic and social wellbeing must be balanced with environmental gains.

The current legislation is stronger on intention than impact. If National leads the next government it will make much-needed improvements and those should include the ones suggested by the NZ Initiative.


Rural round-up

May 10, 2019

Trade water NZ Initiative says – Neal Wallace:

A trading scheme for water, similar to that for emissions, will improve water quality, the New Zealand Initiative says.

Its chief economist Eric Crampton’s report, Refreshing Water: valuing the priceless, advocates a cap and trade market system backed by hard-wired environmental constraints to manage and sustain freshwater resources.

A well-functioning system can ensure all users follow best practice but cannot choose between the merits of competing water and land uses. . .

Bid to assess ‘M. bovis’ scheme surge – Sally Rae:

An independent report has been commissioned into the cause and effects of the current surge in the Mycoplasma bovis eradication programme and to identify additional immediate improvements.

Last month, the Ministry for Primary Industries announced the programme was increasing activity before autumn and winter stock movements.

About 300 farmers would be contacted as a priority and it was expected 250 of those would have notice-of-direction movement controls placed on them immediately and, following testing, that 10% to 12% might become confirmed properties. . . 

 

Dairy can protect water gain – Tim Fulton:

Water carried Graeme Sutton’s forebears to a life of freedom in New Zealand and it keeps doing the same for them on land. Tim Fulton reports.

Five generations ago, in 1842 Graeme Sutton’s English family landed in Nelson. 

It was the start of a family partnership that has endured and expanded into several irrigated dairy ventures.

“The reason they came out, I understand, is that New Zealand gave them an opportunity for land ownership. They never had that in England. They just worked for a Lord,” Graeme says. . .

Giant new painting reflects Tauranga’s rich horticulture history :

New Zealand’s largest rural art collection that tells the stories of provincial communities has a giant new painting.

Award-winning artist Erika Pearce completed her striking mural on the side of Tauranga’s Farmlands store on Taurikura Drive off State Highway 36.

Pearce started work on April 28 and managed to finish by her May 4 deadline, despite the project being rained off earlier in the week.

The finished product is an impressive 23 metres long. . .

Southland TeenAg member puts love of tractors to work

Southland student Hamish Goatley is using his love of tractors and machinery to make hay while the sun shines.

The 18-year-old spent six weeks over the summer school holidays driving for an agricultural contractor.

“It was an amazing learning experience. I really enjoyed it. It was my first season operating a round baler,” said Goatley.

Goatley is the vice-chair of Gore High School’s thriving TeenAg club. . .

The erosion of trust in society’s food regulators – Scott McPherson:

In a twist of remarkable irony, the very agencies that were put in place to protect each nation’s food supply, health, and environment are now often viewed with suspicion. This follows an overall trend in where, in general, trust in the expertise of society’s authorities appears to be at an all-time low.

What psychology repeatedly tests as the most fearful, anxious, and worried generations in history did not happen by accident. World War II had developed in the previous generations a genuine sense that citizens were united in making society happen. The natural deterioration of that sense happened over time, to everyone except farmers. They still needed their neighbors.

By the 1980s, cities were getting so disconnected that impressionable parents were teaching their children the concept of stranger danger. Considering the fact that modern parents were taught as children that strangers were potentially lethal, today’s lack of trust makes more sense. . .


CGT would hit middle hardest

February 22, 2019

It there’s such a thing as a fair tax, it’s not one based on misplaced envy as the Tax Working Group’s capital gains tax appears to be.

No photo description available.
Fairness is desirable but not at any cost and  it’s best achieved by helping the poor up not pulling the better-off down, especially when those who will be hit hardest are those with modest investments, not the really wealthy, and worse still, they’d be hit by one of the most penal CGTs in the world:

The Tax Working Group’s report released today proposes a broad-based top rate of 33% capital gains tax (CGT).

The New Zealand Initiative argues in a new policy note, The Pitfalls of CGT, that headline rate would immediately push New Zealand to the top of the international CGT rankings among industrialised economies, just behind Denmark and Finland.

“The proposal is conspicuous by a lack of exemptions and concessions around business investment, so a full rate would arguably qualify New Zealand’s CGT regime as one of the harshest in the world,” said Dr Patrick Carvalho, Research Fellow and author of the note.

“Worse, given New Zealand’s recognisably low-income tax thresholds by international standards, a new CGT would disproportionately hit middle-income earners already struggling to invest for retirement.”

“New Zealand should be cautious about siren calls for a top-ranking CGT. Trying to punch above our weight can sometimes place us in the wrong fight category,” concludes Dr Carvalho.

A good tax would foster investment that would help businesses grow, produce more and employ more.

A good tax would encourage and reward thrift and delayed gratification.

A good tax would improve productivity and promote growth.

The CTG as proposed would do the opposite.

New Zealand needs foreign investment because we don’t have enough of our own capital. The CGT would aggravate that by making investing overseas more attractive than investing domestically:

The Tax Working Group (TWG) proposals released this morning would skew New Zealand investors away from local assets, distort the KiwiSaver market and mangle the portfolio investment entity (PIE) regime if introduced, according to the founder of the country’s largest direct-to-consumer managed fund platform.

Anthony Edmonds, InvestNow founder, said while the TWG final report includes some welcome reforms, overall the capital gains tax (CGT) recommendations would add cost, complexity and confusion to New Zealand’s relatively efficient managed funds market.

“For example, the TWG’s plan to increase tax on New Zealand shares by applying CGT while leaving the fair dividend rate (FDR) tax for offshore shares unchanged would naturally drag capital offshore at the expense of local assets – at a time when New Zealand needs to fund major infrastructure projects,” Edmonds said. “In trying to discourage people from investing in residential property, the TWG has created a tax disincentive for Kiwi shares, which can only distort investment allocation decisions.”

Essentially, the TWG recommendation to tax unrealised capital gains on PIE funds marks a return to the ‘bad old days’ when Kiwis paid more tax on managed funds than direct share investments. . .

Concern over the housing shortage is one of the motivating factors for a CGT but It won’t improve home affordability in the long term:

Bindi Norwell, Chief Executive at REINZ says: “In the short-term there may be some initial relief in house price affordability as investors look to sell their property to avoid paying CGT. This may create opportunities for first home buyers.

“However, in the long term it’s likely to push house prices up as people look to invest more money in the family home, as there will be less incentive to invest in rental properties or other forms of investment e.g. equities.

“This will also have a flow on effect for the rental market with fewer rental properties available for tenants, thereby further pushing up weekly rental prices when they are already at an all-time high.

“The report even recognises that any impact on housing affordability could be small, therefore, we question whether all of the administrative burden and cost to implement GCT is worth it? Especially as CGT coming at the end of a raft of legislative changes the housing market has faced recently including the foreign buyer ban, ban on letting fees, insulation, healthy homes and ring fencing. . .

A tax that results in fewer and more costly rentals and more expensive homes is not a good one.

Nor is a tax that is fatally flawed:

Today’s Tax Working Group report recommendation for a new capital gains tax will not address residential housing affordability but it will penalise business owners and create costly complexity in our tax system, meaning it is fatally flawed, according to Business Central.

“New Zealand’s tax system is envied worldwide. The proposed capital gains tax increases compliance costs without boosting productivity,” says Business Central Chief Executive John Milford.

“Business Central agrees with the conclusions of the minority view on the Tax Working Group.

“A capital gains tax is just another cost on business, nothing more. . .

It would hit small and medium businesses hardest:

Key areas of the Tax Working Group Final Report released today were disappointing, says Canterbury Employers’ Chamber of Commerce Chief Executive Leeann Watson. . . 

Ms Watson says the proposed capital gains rules should not be implemented because of the significant impact on small and medium-sized enterprises (SMEs).

“We support the Government’s review to ensure that our tax system is fit for purpose for a changing business environment. However, there is very real concern that taxing both shares and business assets under a comprehensive capital gains tax regime would create double taxation.

“This could disadvantage New Zealanders owning shares in New Zealand and create inconsistencies around overall taxation on investment.”

Ms Watson says a capital gains tax would be unlikely to achieve the desired outcome for business.

“There is concern around the effect for capital markets in a capital constrained economy with a long-term savings deficit. Adding further tax on the savings and investment of those New Zealanders in the middle-income bracket won’t drive the deepening and broadening of the capital base that we need for business investment, which is higher productivity and wages.

“While the impetus behind the changes are aspirational, there is little to indicate they would significantly reduce overinvestment in housing or increase ‘tax fairness’. In addition, there is concern that additional administration costs and investment distortions could outweigh any benefits and potentially discourage much-needed investment and innovation by locking businesses into current asset holdings.

“It is vitally important that we remain competitive as a country and are not continuing to add further compliance for business and in particular small business, who represent 97% of all businesses in our economy.”

Ms Watson says there needs to be a viable business case for any changes to the current tax system.

“There seems to be a real focus on ‘fairness’ in the system design, as opposed to revenue-building, so we need to be careful that any tax changes are for the right reasons and are backed by a clear, practical and sustainable business case. We currently have a fairly simple and efficient tax system that should be kept and better enforced, with changes to specific rules where needed.” . . 

The costs of a good tax would not outweigh the benefits:

The Employers and Manufacturers Association (EMA) says the key issue in the Tax Working Group’s proposal released today is that the cost of its capital gains tax rules will outweigh any benefits.

Chief executive Brett O’Riley says any gains from such a broad-based capital gains tax would be eaten up by administration and other costs, leaving little revenue.

“Fundamentally the proposed capital gains rules don’t address the Tax Working Group’s objectives of reducing over-investment in housing and increasing tax fairness,” he says.

Mr O’Riley is also concerned that capital gains tax on business assets could discourage investment and innovation, locking businesses into their current asset holdings. He says there are other policy settings that could be changed to increase investment in different asset classes, away from property.

“I also fail to see how taxing growth on the value of assets from the proposed commencement date of 1 April 2021 would work, because it would be open to conflicting valuations,” he says. “It could also act as a further disincentive to growth when New Zealand already has issues with business not growing from SME’s into larger scale operations and a CGT may also limit the availability of capital to reinvest in businesses as smaller businesses face an additional tax bill.

“It’s difficult to see any benefits for the business community from implementing the proposed capital gains tax rules, as taxing both shares and business assets appears to be double taxation,” says Mr O’Riley.

It is relevant to note that a number of the Tax Working Group do not favour its recommendations on capital gains tax. The minority view summary is available here

One reason for dissension was compliance costs:

Former IRD Deputy Commissioner Robin Oliver was one of the 11 in the Tax Working Group.

Along with two others from the group, he believes the costs and bureaucratic red tape involved in adopting all the capital gains options outweigh the benefits.  

“We didn’t agree that this was in the best interest of the country to go the full extent, particularly in the business area, taxing share gains which result in double taxation,” he said.

“To get a valuation for all business assets in all parts business and all business will easily cost over a billion dollars in compliance costs. The amount of revenue you’ll get is relatively minor.”

As for taxing shares, Mr Oliver said it would result in New Zealanders who invest in New Zealand companies paying more tax when foreigners investing in New Zealand companies will pay no more tax. Furthermore, New Zealanders investing in foreign companies will pay no more tax.

“The obvious conclusion is New Zealanders will own less New Zealand companies and more foreign companies, and foreigners will own our companies,” he said. . . 

The proposed tax is no panacea for fairness:

Deloitte tax partner Patrick McCalman warns that a CGT is not a panacea for tax fairness.

“At one level, there is an attractiveness in the argument that a ‘buck is a buck’ and everyone should bear the same tax burden on every dollar earned. However, when one delves into the detail of the design, other issues of fairness emerge,” says Mr McCalman.

“For example, is it fair that property could pass on death without an immediate CGT cost, while gifts made during one’s life would be taxed? For family businesses, wouldn’t it be more productive to be able to pass assets from generation to generation before death,” he says.

“Accordingly, we need to be cautious as to how much ‘fairness’ a CGT will introduce. It may simply change where the ‘unfairness’ is perceived to sit within the tax system, creating new tax exemptions that would distort where investments are made.”

Complicating matters further is the political dimension. And MMP only exacerbates the political difficulty and increases the likelihood of whatever ultimately sees the light of day being less coherent from a policy perspective. . . 

The Deloitte paper raises several questions about fairness:

At one level there is an attractiveness in the argument that a “buck is a buck” and everyone should therefore bear the same tax burden on every dollar earned. However, when one delves into the detail, other issues of fairness emerge including new tax exemptions which would distort where investments are made – in effect, in seeking to create fairness, the proposal creates a number of layers of unfairness. For example:

    • With a CGT applying at full rates with no inflation indexation, is it fair that someone who buys an asset is taxed on the full amount of any gain when part of that gain is simply inflation? How will they be able to re-invest in a new asset if the inflation element is taxed?
    • Is it fair that the family home and artwork are excluded but most other property is not? Consider a plumber who has a $500,000 house and a $500,000 commercial building who would be taxed on the disposal of the commercial building. Should they have instead bought a $1,000,000 house, rented a business premise and enjoyed a tax free capital gain?
    • Is it fair that that investors in New Zealand shares would pay tax on capital gains but investors in foreign shares would continue to be subject (as they are presently) to the 5% FDR rate (even if gains are less or more)?
    • Is it fair that small business (turnover less than $5 million) could sell assets and defer the CGT bill if they reinvest the proceeds, while medium and larger size business cannot?
    • Is it fair that property could pass on death without an immediate CGT cost but gifts made to children during one’s life would be taxed?
    • Is it fair that there are proposed tax reductions for KiwiSaver to compensate for CGT but not for other forms of investment?

At one level, true fairness can only exist if all asset classes and forms of remuneration are subject to the same tax rate. But even then, anomalies will always arise. . . 

The proposed tax would be especially bad for farming and farmers:

Federated Farmers has said from the outset that a capital gains tax is a mangy dog, that will add unacceptably high costs and complexity.

“There is nothing in the Tax Working Group’s final report, released today, that persuades us otherwise,” Feds Vice-President and Commerce spokesperson Andrew Hoggard says.

“A CGT would make our well-regarded tax system more complex, it will impose hefty costs, both in compliance for taxpayers and in administration for Inland Revenue, and it will do little or nothing to ease the housing crisis.”

It is notable that even the members of the working group could not agree on the best way forward, with three deciding a tax on capital gains should only apply to the sale of residential rental properties and the other eight recommending it should be broadened to also include land and buildings, assets, intangible property and shares.

“Federated Farmers believes that the majority on the tax working group have badly under-estimated the complexity and compliance costs of what they’re proposing, and over-estimated the returns.”

The recommended ‘valuation day’ approach to establishing the value of assets, even with a five-year window, will be a feeding frenzy for valuers and tax advisors, “and just the start of the compliance headaches for farmers and other operators of small businesses that are the driving force of the New Zealand society and economy. . .

Farm succession is difficult enough as it is.

A CTG would make it harder still and encourage older farmers to hold on to their farms. That would lead to more absentee ownership and leasing with less investment in improvements as happens in other countries.

New Zealand doesn’t have a lot of many wealthy people and while those relatively few would pay more with the CGT as proposed, if their accountants and lawyers didn’t help them find ways to minimise their liability, they’d still be wealthy.

The many small business owners and more modest investors would not. They’d have the reward for their hard work and thrift cut back and lose enough of the value of their investments to hurt – unless they’d invested in art, cars or yachts which would be exempt.

That sends the message that such luxuries are good while investing in businesses and productive assets is not.

Where’s the fairness in that?


KiwiBuild is KiwiFail again

January 24, 2019

A report from the New Zealand Initiative calls KiwiBuild Twyford’s tar baby:

  • Relative to income, dwelling prices in New Zealand are among the highest in the OECD. This is New Zealand’s housing affordability problem in a nutshell.
  • High population-driven demand growth has collided with inflexible supply-side constraints.
  • Land prices have sky-rocketed, but construction costs are also too high.
  • KiwiBuild cannot hope to materially increase home ownership proportions – the original 2012 objective. Additional housing, if achieved, will likely lift renting and ownership more or less in tandem.This report explains why KiwiBuild – defined as the government’s pledge to build or deliver 100,000 homes within a decade – fails against all the objectives set for it:
    • It is not about social housing to help those at the bottom.
    • Nor is it about helping struggling first-home buyers. They cannot afford KiwiBuild homes at current costs. KiwiBuild is for the relatively well-off.
    • It is intended to be subsidy free, since wealth transfers to the well-off are hard to justify. But its inducements to attract private developers are subsidies.
    • Even more paradoxically, if there were no subsidy, there would be no gap for KiwiBuild to fill. Private developers will meet unsubsidised market demand.
    • It cannot hope to increase the housing stock sustainably. Only enduring lower property prices can induce people to own more dwellings than otherwise. KiwiBuild reduces neither land values nor construction costs at the margin.
  • The enduring effect of the policy is a changed composition of the housing stock by decree rather than by public demand.
  • KiwiBuild is floundering having no clear public interest objective. It constitutes a massive political and bureaucratic distraction from what is really needed – direct action to reduce land values and construction costs.

The government should not be in the business of subsidizing property developers and people on well above average incomes.

It purports to be focused on helping the poorest and most vulnerable.

Instead, policies like KiwBuild and fee-free tertiary education waste millions on people who aren’t poor, many of whom are or will be wealthy.

Not only is it a bad policy, it hasn’t a show of meeting its target to build 1000 houses by July.

KiwiBuild is KiwiFail again.


$1 in 3 wastefullly spent by govt

September 19, 2018

The New Zealand Initiative’s Fit for Purpose? Are Kiwis getting the government they pay for? shows we’re not getting value for money.

Dr Bryce Wilkinson explains:

Taxes in New Zealand have risen four times faster than incomes in the 20th century. Taxes now take more of our income than in almost any country outside Europe. We have become a high tax country.

We, the public, need the government to spend our tax money well.

Government is a dominant provider of many activities, including health and education. Poor performance here would harm current and future New Zealanders.

Government also dictates much resource use through ownership and regulation. It is a major landowner, and there are 50 times more Parliamentary Acts now than in 1908.

It should aim to get the best possible outcomes for New Zealanders from its assets. It should also regulate wisely and administer those regulations well.

The report’s focus on value for money is not ideological. Who would not want to see government doing the best possible job for New Zealanders?

This shouldn’t be ideological or partisan, but the left does too often mistakenly equate more spending with better spending.

How well is government spending our tax money?
The quality of much government spending is poor. The Productivity Commission’s inquiry into public sector productivity showed why. Public sector agencies are not focused on productivity. Measures are too often lacking or neglected.

A 2013 report published by a Canadian think tank, the Fraser Institute, assessed outcomes compared to spending in 192 countries. South Korea came out on top. Its government was spending 27% of GDP to achieve a performance score of 7.5. In New Zealand, government was spending 38% of GDP for a score of 5.5.

Perhaps, one-third of New Zealand government spending is wasteful. That represents around 13% of GDP, or $20,000 per household, annually.

Every cent not wasted is a cent more to spend on something we need, or to leave in taxpayers’ pockets.

Imagine the positive impact of that money being spent where it has a positive impact instead of being wasted and/or of each household keeping more of what they earn.

A 2009 OECD report similarly assessed spending efficiency in school education. The indicated level of waste in New Zealand spending on education was one dollar in six.

Less waste would mean more money to improve outcomes. Currently, around 17% of 15-year-olds can barely read. The government has likely spent more than $130,000 on each of their schooling. Few would regard this as an acceptable outcome.

Nearly a fifth of children getting through school unable to read and write is appalling. There will be many reasons for this failure and wasting a sixth of the budget will be one of them.

That extra dollar in six spent well could improve pay and conditions for teachers and support staff, provide extra help for pupils who need it and/or do away with at least some activity fees and fundraising.

In health, even official reports acknowledge a lack of focus on productivity. The OECD has also assessed the efficiency of health spending across member countries. A 2010 report indicated that New Zealand could spend 2.5% of GDP less a year for similar outcomes. Of the order of one dollar spent in four looks like waste.

One dollar in four wasted – that’s 25% of health spending that’s not getting spent where it should be.

Such findings from international comparisons are only motivational. They do not show what New Zealand would need to change or whether such changes are plausible. Their value is in inviting us to learn from countries that seem to be doing better.

In some cases, government providers would be more focused on productivity if users had more choice of providers. Government providers can fail to give value for money when users are captive. Users will be more empowered if they have a wide choice of providers and if state funding follows them. The funding of pre-school education has this feature.

Choice tends to improve competitiveness and performance but this government isn’t keen on it.

How well is the government doing as a regulator?
The Crown’s performance as a lawmaker and regulator is flawed. There is widespread dissatisfaction among regulators with the quality of the law they have to administer. The statute book has become too prescriptive and too detailed. Parliament cannot hope to keep it up to date and fit for purpose.

It needs to be easier for lawmakers to resist the pressures to legislate poorly. Greater reliance on simpler laws of a more general nature is desirable. Prescriptive law quickly becomes out of date. Change is unlikely as matters stand.

Bad law leads to added costs and unexpected consequences.

What about our high international rankings?
Many international agencies assess countries’ outcomes for aspects of wellbeing and economic performance. New Zealand enjoys top-tier world rankings in many of these measures.

Does this mean government is doing a great job? Yes, and no.

We rank among the best for many but not all aspects. The report identifies 20–30 government-dominated areas of weakness. Some are no surprise. These include overseas investment and aspects of labour market laws. Infrastructure quality is another weakness.

Labour law changes on the table now are going to make matters worse and the redirecting of fuel taxes from roads to public transport and cycleways will too.

More surprising is the weakness in our legal system. We rank poorly in the ease of enforcing contracts and resolving insolvency and the quality of judicial processes.

There is no excuse for our 54th ranking by the World Bank for the quality of our judicial processes. Gallingly, Australia is ranked first.

The bottom line is there is compelling evidence of much government waste. It is occurring for many reasons, but a major symptom is a lack of focus on efficiency.

Were the state to do a better job, it could use the savings to raise wellbeing by:
• maintaining government outputs, while cutting tax revenues; and/or
• increasing government outputs from unchanged government spending.

Those options are outside the scope of this report. The first task is to achieve the savings.

National managed to get some improvement in some areas during the GFC – requiring the public service to do more with less.

Under Bill English’s social investment regime the government focused on treating causes, acknowledging that sometimes you have to spend more in the short term to get savings later.

It also set measurable targets and reported on progress towards them.

But all parties need to focus on getting better value for taxpayers’ dollars.

It would help if all of them acknowledged that the government isn’t always the bet option for providing services; that governments aren’t good at picking winners and that the quality of their spend is far more important than the quantity.

It would also help if more of us didn’t think of the government as the first or only source of support.


NCEA not achieving literacy & numeracy

March 5, 2018

The New Zealand Initiative looks at the costs of NCEA:

Ministry data shows that between 2001 and 2016 the difference between the percentage of Māori and All students achieving Level 3 (or its equivalent) has narrowed. However, in the more meaningful benchmark of University Entrance, the gap has grown even wider.

International PISA data shows that since testing began in 2002, New Zealand’s educational equity has worsened and our 15-year-olds’ reading, maths and science scores have almost constantly declined. This contrasts starkly with the same period’s NCEA data, which shows ever-improving performance and rising equity.

If NCEA data can paint a picture of constant improvement, while almost all other measures expose decline, there is reason to believe we have a problem.

Added to this, 2014 research by the Tertiary Education Commission found that within a sample of 800 Year 12 students with NCEA Level 2, 40% failed an international test of functional reading and 42% failed it in numeracy. How can students be succeeding in NCEA when they lack basic skills in reading and maths?

In pursuit of flexibility and inclusion, NCEA all but abandoned the idea of a core curriculum requirement. Instead, nowadays, students need only ten loosely defined Level 1 credits in literacy and in numeracy. Beyond this, all subjects – from meat processing to mathematics – are valued equally.

This means well-advised or motivated students can still achieve a broad and valuable education. However, for poorly-advised or less motivated students, NCEA also offers a plethora of ‘safer’ alternatives. These will maximise NCEA success by avoiding academically challenging content. With pressure on teachers and schools to drive up NCEA pass rates, some students may even be encouraged towards these safer choices.

This way, NCEA’s flexibility ensures almost all students achieve a qualification, and creates glowing headline figures for government and schools. However, the downside is that NCEA also masks huge variation in students’ achievements; it widens disadvantage while hiding it behind an alluring façade.

A system which shows improvements while literacy and numeracy rates are declining, enables pupils to take less challenging subjects that count as equal to more challenging ones, masks variations in achievements and widens disadvantages would, by NCEA’s measure get a not achieved.

It’s not just pupils who lose with NCEA:

NCEA exerts unintended negative consequences on the most important interaction in schooling: that between teacher and student.

For example, although chunking enables course flexibility, it also increases assessment volume. And because most assessment now happens internally, NCEA increases teachers’ workloads.

‘Teaching to the test’ describes the practice of coaching students in the detail of exam questions and selected content, to boost their short-term performance in assessments rather than their long-term learning. Some teaching to the test is inevitable with any high stakes assessment. However, at least three features of NCEA’s flexible design exacerbate the practice.

And NCEA doesn’t achieve for employers either:

Many employers are vexed by NCEA’s complexity and disappointed by school leavers’ skills. Although University Entrance restricts NCEA’s flexibility, too many students miss out because they fail to realise the implications of their choices. Universities also reverse-engineer NCEA data to create crude, yet life-defining rankings.

The Initiative makes seven recommendations that will:

 . . .raise expectations and equity by creating a safety-net of core subjects all students must master. They will reduce teachers’ workloads and the volume of assessment, reduce the opportunities and incentives to teach to the test, and improve teaching and learning.

Recommendation 1Raise English (and Te Reo) and maths requirements: The government should amend NCEA so that achievement at Level 1 or higher requires a minimum number of Level 1 credits in the core subjects of English (or Te Reo) and maths. This new list of eligible standards should replace the current literacy and numeracy requirements. It should also demand levels of mastery that ensure all students with NCEA also meet international benchmarks for functional literacy and numeracy.

Recommendation 2Expect a broader core of subjects: The government should signal higher expectations of the breadth of core subjects all students must master in school (two suggestions as to how this might be achieved are given in the final chapter).

Recommendation 3Reduce the number of standards: The government should reduce the number of standards so that within a particular subject there is minimal to no choice and each standard covers a bigger and broader set of skills and knowledge (there is far less ‘chunking down’). The optimal size and number of standards may vary for different subjects, to be determined by subject and assessment experts. However, broadly the ambition might be set to reduce the number of standards in a subject at each level from 6–8 to 1–3.

Recommendation 4Make it harder to teach to the test: The New Zealand Qualifications Authority (NZQA) should rely more heavily on the reassurance provided by elements of norm-referencing (e.g. PEPs and the cut score procedure during grade score marking) to move away from such close matching of external assessment to past assessments and specifications. Instead, they should inject elements of ‘surprise’ that encourage teachers to teach the breadth of their subject’s curriculum, rather than to its assessments. Reference tests could also be deployed to help examiners identify national level changes in students’ performance over time.

Recommendation 5: Reduce reliance on internal assessment: The government should reduce NCEA’s reliance on internal assessment, so it is used only where external assessments cannot capture performance in essential areas.

Recommendation 6: Use Comparative Judgement software: NZQA should use Comparative Judgement (CJ) software to improve the reliability and efficiency of the processes available to judge external and internal assessments. CJ would also better capture genuine quality in essay-type assessments, and equip assessors to ask more open-ended and creative questions.

Recommendation 7: Commission independent analysis: The Ministry of Education should openly evaluate NCEA’s effects by commissioning and publishing independent analysis (various suggestions are given in the final chapter).

Recommendations 1-5 trade some of NCEA’s flexibility for higher equity and standards. In the short term, they may generate a drop in NCEA achievement. However, in the longer-term, these recommendations will raise expectations, equity and outcomes across the board.

Education, especially literacy and numeracy, is one of the surest pathways out of poverty.

The current assessment system is failing pupils, over-burdening teachers and is not helpful for potential employers.

Knowing what a pupil has achieved in details might be helpful for practical subjects, for example an employer at a clothing factory might want to know a prospective employee can sew button holes.

But for general subjects the details don’t matter. Employers who looked at a CV and saw a pass mark in University Entrance geography, knew the pupil could read, write and reason. By contrast NCEA results would show a lot of detail that meant nothing and could mask that the pupil was illiterate and innumerate.

NCEA isn’t achieving. It must change and change quickly.

 


Quote of the day

March 18, 2015

In self-proclaimed intellectual circles, it has long been fashionable to belittle the idea of economic growth. “GDP is not the same as happiness”, some critics of growth will explain. Others will warn that excessive growth could destroy the environment and leave our planet uninhabitable. Others still will warn that the finite nature of our resources does not allow continuous growth in any case.

This kind of critique has become a pastime of the chattering classes. It is now part of polite conversation in the better suburbs of developed world cities. To question the value of growth at dinner parties in air-conditioned or heated houses while sipping French champagne and eating Italian prosciutto presumably adds a sense of intellectual gravitas to one’s physical well-being. These people probably do not even realise the self-contradiction in condemning economic growth while enjoying its blessings.  . .

Economic growth is no silver bullet to all the world’s problems. But it comes close. There is overwhelming evidence that the unprecedented economic expansion humanity has experienced roughly over the past three centuries has been a great force for good. It has made our lives better in ways that would have been unimaginable to previous generations.

This should also be the response to the aforementioned critics of growth. At which stage in history do they believe we should have proclaimed the end of economic development? Certainly not in Plato’s time (4th century BC) since that would have prevented the invention of the canal lock (3rd century BC) and paper (2nd century BC). Development should not have stopped at the time the Gospels were written either since otherwise we would not even have invented the wheelbarrow (2nd century AD).

To move to more modern times, had economic development stopped when Ernst F. Schumacher suggested it should (Small is Beautiful was published in 1973), we would have never seen CD-ROMs, the Internet or the first vaccine for meningitis. And even if we had only stopped to grow and develop when Pope Francis told us to in November 2013, we would have never seen the first human clinical trials in the United States for a wearable artificial kidney – or the new iPhone 6.

Economic growth is the driver behind all of these developments because at its core, economic growth is not mainly about the production of more but about the discovery of better (though often it is both). Economic growth helps us to find new and improved ways of combining resources. The outcomes could be a new medicine, a faster way of travelling, a healthier way of eating or a better way of learning. . . Dr Oliver Hartwich

This is an extract from the New Zealand Initiative’s report The Case for Economic Growth by Eric Crampton and Jenesa Jeram.

 


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