The government has repeatedly stated that its 'top priority' goal is faster economic growth (to return New Zealand to the top half of the OECD income rankings).
So the acid test of the budget is straightforward: Is the economy moving to a higher growth path?
The projections indicate this is not the case; in fact the trend is in the opposite direction. The government's scorecard, in NCEA parlance, is 'not achieved'.
The numbers are as follows. Real growth in gross domestic product in the decade to 2003 averaged 3.7% a year. There has been no acceleration over the government's term of office, despite generally favourable external and internal conditions.
For the next four years, the budget forecasts annual growth to fall away and average just 2.8% a year. Even more importantly, real growth in GDP per capita (a measure of material living standards) is projected to fall from an average of 2.5% over the decade to 2003 to just 1.9% in the next four years, a 20% decline.
There is no reason why New Zealand cannot lift its economic performance and catch up with richer countries. Better policies largely explain the better record in the post-1993 period. The fact that the outlook is deteriorating rather than improving can only be put down to bad policies.
A major case in point is excessive and wasteful government spending, with little regard for value for money. Treasury has been telling the government that output in the health sector is not reflecting the huge increase in funding. No comparable OECD country has achieved sustained per capita growth of 4 percent or more with New Zealand's level of government spending (central plus local) of around 40% of GDP.
The fully implemented effect of the 2004 and 2005 budgets will be a massive increase of government spending of over $3 billion a year, and by 2009 the government spending share of the economy is forecast to increase by a full 2 percentage points. Because the private sector is essentially the productive sector of the economy, expanding the government share of the economy at the expense of the private sector is a recipe for slower growth. A credible growth strategy requires smaller and less wasteful government.
The way tax is raised also matters for growth. The government has chosen a fiddling and tweaking approach to business taxation - a complex Working for Families-type package for business. A better policy would be simply to reduce the company tax rate (along with high personal rates).
Increasing tax thresholds, as the government is foreshadowing in a minimal way, is also an inferior policy. As the Business Council of Australia (an organisation of CEOs similar to the Business Roundtable) recently explained, "A rate change is needed, not a threshold change. Raising the threshold at which the top marginal tax rate cuts in would reduce the average rate of tax paid by these individuals and increase their after-tax income. However, it would not alter the marginal tax rate that these individuals face when they are deciding to undertake additional saving and investment."
With both personal and business taxes, the government has missed an opportunity to implement real tax reform. Emphasising the cash balance is a return to inferior fiscal indicators, and does nothing to prove tax cuts are unaffordable, particularly if more capital expenditure were financed on normal commercial lines and greater use made of private enterprise and funding. There is ample scope to cut tax rates given greater fiscal discipline. Tax cuts are less inflationary than government spending of the same amount.
The discussion paper to be released on the Stobo tax proposals deserves consideration. However, there is no evidence of savings problems to justify the intrusive workplace savings proposals. They will impose significant costs on employers and taxpayers. Moreover, they have little to do with a serious growth strategy. As the International Monetary Fund pointed out in its recent report on New Zealand:
Even if the proposals currently being debated do lead to an increase in aggregate savings, the effects on investment and growth are unlikely to be large as New Zealand already has easy access to international capital.
Once again the government has turned its back on policies that would improve the business environment and increase household incomes, such as lower spending and taxation (including scrapping the unjustifiable carbon tax), a greater role for private enterprise in the economy and the provision of health and education, less restrictive labour law, serious infrastructure reform including changes to the Resource Management Act, and welfare policy initiatives to reduce benefit dependency.
A failure to move in these areas, contrary to policy directions across the Tasman, means that New Zealand will slip further behind Australia and fall far short of its potential.
Roger Kerr is executive director of the New Zealand Business Roundtable
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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