The Importance of Economic Growth
It is an interesting fact that New Zealanders were the second wealthiest people on earth in 1900. By 1950 we had dropped one place to number three - which means that for 50 years we were right up the top of the world when it came to high standards of living.
Over the last 50 years our growth rate varied widely and for 11 years we actually had negative growth in real GDP per capita (i.e. we each got poorer). In 1973 we were about level with Australia and Iceland in terms of wealth per person at around number 17.
Australia has been growing at around 1% a year faster than New Zealand since 1973 and now Australians enjoy a higher standard of living. Average workers in Australia have incomes around 35% higher and the unemployment benefit is 25% higher. When you have a higher growth rate everybody benefits. If America had had a growth rate only 1% lower over the last 100 years the average American worker would now be earning the same as the average Mexican. That extra 1% growth rate is vital.
Iceland has taken economic growth seriously and improved their position to number 14. Just in case you are not sure, Iceland is mostly ice and tundra and no trees. No minerals, no wood. Fish in the sea but competition almost wiped them out in the 90s. But with a determined effort and the cooperation of all they have triumphed in adversity and now enjoy a high standard of living. By the way corporate tax is now 18%. Income tax is 24.5% but they still have a high municipal tax. Other earnings are taxed at about 10%.
Now suppose that we determine that we would like to have the same standard of living as Australia. We have been trailing behind Australia in the GDP stakes by 1% per year for 30 years so to catch up we must do more than just match their rate of growth. If we want to catch up in 30 years then we must beat their GDP growth rate by another 1% per year for the next 30 years. So to get back to even with Australia in 30 years we must grow by 2% faster than we did for the last 30 years. We need growth of 4% or 5% per year, which is a very difficult task.
Last year our growth rate was around 4.5% so that is a good year for a start! The bad news is that next year our growth rate is projected by Treasury to be 2% or less. We believe that sustained economic growth is achievable. There are ample examples in other countries e.g. Finland, Singapore, Ireland and Iceland to prove a country of our size, distance from markets and lack of natural resource wealth can gain ground against its larger neighbors.
Government policies do matter; they set the mood and create an environment for change in the country. For example, if the private sector is heavily taxed more entrepreneurs and business people will adjust their mode of operation and move into housing and property for the capital gain and no tax. Some will sell their enterprises to larger companies owned by overseas interests and just give up and some will move offshore where tax rates are lower. The country starts to generate less wealth and we all are the poorer for that.
It is the Government of the day that must develop policies that will encourage the private sector to work harder and get our economic growth rate up to 4% or 5%.
What can we do? Our answer is very simple; Vote for people and parties who understand these things and who will legislate accordingly.
Some things that would encourage economic growth in New Zealand are as follows:
1. Reduce tax rates. Treasury officials have judged that a lower tax rate alone could give us 1% to 1.5% extra growth. The IRD, some years ago, used an international expert to assess what tax rate would give us maximum growth and the answer was a flat rate around 20%.
2. Lower the cost of government. No company can forge ahead with a Head Office costing 40% of revenue and it is the same for a country. Less government expenditure should give us an extra 0.5% growth.
3. Free the labour market and introduce reforms that make it easy for businesses to adjust their work force to meet the needs of the market. They will hire people more readily and workers will therefore have more choice. This will help to increase wages and could add up to another 0.5% to our growth rate.
4. It is clearly seen from many examples both in New Zealand and around the world that privatization works. Commercial enterprises work much more efficiently providing cheaper and better services when owned by private individuals than when owned by the government.
5. Reform the Resource Management Act.
6. Limit local government to the provision of goods and services that businesses find difficult.
This list is not exhaustive and we are sure that there are many more things we can do to raise our efficiency and improve our standard of living. The world is one market now and how we manage our affairs in that market depends entirely on us. It is our politicians’ job to ensure that we do well and this means a growth rate of 4% or 5%. We must hold the politicians accountable and only vote for parties that will raise our standard of living back up to at least the Australian standard.
Now we have to ask ourselves what our current political candidates and parties will do for us. We have had private meetings and interviewed all the party leaders with the exception of Labour where we interviewed Dr. Cullen. We also surveyed all current politicians on their thoughts on economic growth and from all this information and from the evidence of what they have actually done as opposed to what they have said we can draw some conclusions about the likelihood of each party contributing positively to economic growth. And so in alphabetical order:
ACT’s economic policies will promote growth. Their aim to reduce taxes considerably will add 1% to 1.5% to our growth rate. ACT policies are also strong on property rights for individuals and this contributes to economic growth. The question is, can they compromise with other parties to achieve their aim?
The Greens do not have a good appreciation of economic matters. When we interviewed Jeanette Fitzsimons she commented that the best way to get economic growth was to destroy infrastructure and the environment so that putting it all together again would need a lot of work and money which would therefore increase GDP and be a good thing. We were not able to understand the sense of this.
We interviewed Dr. Cullen and enjoyed an interesting conversation. Unfortunately he seemed to not be concerned with policies that would help the economy to grow. He explained that he was “capacity building” and we learned that this means building up the public service. Adding to the overheads in running the economy will reduce growth not enhance it.
We haven’t interviewed Tariana Turia or had a response to our survey. Dividing the nation along racial lines is just such a bad thing we will leave it at that.
Our interview with Don Brash and John Key showed us that they understood the benefits of economic growth. Don was very forceful in aiming for 4% growth on a consistent basis. National’s policies of lower tax and compliance costs will improve our growth rate. National will move in the correct direction but they may not move quickly enough.
New Zealand First
Winston Peters is very keen on promoting exports as a way of generating wealth. This is a good thing. However we need a more comprehensive growth policy if we are to move back up into the top half of the OECD.
Jim Anderton is a very active participant in the economic field. His heart is definitely in the right place and he understands that reducing taxes on business will help generate more wealth for the country as a whole. Unfortunately he believes that Government can “pick winners” when the rest of the world has come to understand that the opposite is the case.
Peter Dunne gave us a good hearing. United Future is interested in growing the economy but their actions and proposals are timid and will not have much beneficial effect. They have just gone along with all Labour’s legislation that is reducing our growth rate without any mention or discussion on the effect it is having. We need bold and positive action to get our growth rate back up again and to keep it up.
Overall we found that only two parties, National and ACT, have very positive policies for economic growth and seem to understand the link between these policies and the general wealth of the citizens of this country. The other parties range from some understanding but little positive action to downright anti-growth legislation to the detriment of all citizens.
Aug 15, 2005, 15:02
Our Philosophy, Goals and Vision for Growth
Where we explain why and how we have come to think the way we do and the result of these thoughts.
Aug 16, 2004, 13:49
A Summary of our Philosphy
A summary of our philosophy and vision and our strategies for achieving these for New Zealand
Aug 16, 2004, 13:46
Public expenditure: Spending habit limits 10 years of fiscal care
It has been estimated that reducing the most ill-justified government spending 10% could add 0.5% per annum to the growth rate for a 10-25 year period - a huge contribution to achieving higher living standards. If we are to ever catch up with Australia then we need to make every effort to improve our growth rate. Individuals, households and businesses impose spending constraints on themselves - it is time for some serious thinking from our government and local bodies about how they are going to reduce their spending to 30% of GDP instead of the current 40% and rising! Read what Bryce has to say . . .
Aug 6, 2004, 15:14
How Competitive Are We?
Now for some good news. According to the Global Economic Monitor New Zealand is one of a handful of countries who can be placed in the class of "Most Entreprenurial". Some of our class may surprise you! Are we entreprenurial through sheer necessity? However, it is this entreprenurial spirit that raises our standard of living. Good news for a change.
May 21, 2004, 12:25