Opinion & Commentary

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Kiwis facing a critical choice

Luke Malpass | Australian Financial Review | 24 November 2011

New Zealand’s political economy must be compared with Australia’s to be properly understood. In Australia Bob Hawke, Paul Keating and John Howard are modernising heroes who laid the foundation for Australia’s prosperity: politicians everywhere try to claim they are in their tradition.

In New Zealand this is not the case. Conventional wisdom says the Lange/Douglas and Bolger/Richardson governments were extremists. Reform is a dirty word. However, in an election campaign cut short by Rugby World Cup celebrations, public attention is turning to the economic challenges facing the nation, which are sobering.

Over the past decade government spending rose from NZ$34.5 billion to NZ$70.5 billion – a real increase of 57%. Meanwhile total government involvement as share of the economy grew from 35% to 45% of the entire economy, a full 10 percentage points more than in Australia. This year it is actually 49.9% due to the Christchurch earthquake.

This jump in expenditure, coinciding with static revenues, has meant that since 2008 the government has run deficits. This year the deficit is a staggering NZ$18 billion, or 9% of the economy. Half this figure is the Christchurch Earthquake, but half is a structural deficit of 4.5% of gross domestic product or some NZ$9 billion. This compares with a 1.5% deficit in Australia.

Even more seriously, it is rarely reported that although New Zealand officially went into recession 2008, the tradables sector has been in recession since 2004/5. Meanwhile the non-tradables and government sectors of the economy grew apace.

This downturn was covered up by the stimulatory effect of massive spending. For all this cash, social indicators barely improved, productivity growth is stubbornly low, and New Zealand’s middle classes are trapped by high effective marginal tax rates created by an insidious welfare scheme called, ironically, Working for Families. The state has also renationalised a number of assets.

The election however, apart from oblique references to paying down debt, has concentrated on other issues. The primary economic election issues being fought over are: partial privatisation, minimum wages, unemployment, introducing a capital gains tax, Australian migration, jobs and who has the best ‘economic plan’ for New Zealand.

The most emotional issue is privatisation – which the Nationals are proposing to resume and which many voters are opposed to. Nationals propose an Initial public offering of 49% of four state owned electricity companies for ‘mum and dad shareholders’.

While a move in a positive direction, this is hardly radical policy. Minimum wages are more interesting. The Nationals and their potential collation partner, the free market ACT Party, reject a minimum wage increase. All other parties favour an increase from $NZ13 - $NZ15 per hour on the spurious basis that ‘business can afford to pay’, and that ‘wages are a third higher in Australia’. This is despite evidence that since the youth minimum wage was scrapped in 2008, there has been a substantial spike in youth unemployment.

This is where the debate about an ‘economic plan’ comes in. The National party argues that cutting costs, removing red tape, cutting bureaucracy and reducing government spending over the medium term, will encourage growth, wage increases and will increase employment: slow reform bringing the public along.

Labour and the left wing parties basically argue that there is no ‘jobs plan.’ Their proposals are varied, but all signal 1970s type policy solutions: introduce a capital gains tax (housing exempted), change the nature of Reserve Bank independence (the dollar is apparently too high), create make work schemes, pick (often green) winners, raise taxes, minimum wages and create food exemptions in New Zealand’s mercifully clean and world leading goods and services tax.

Essentially it is a choice between a timid government, desperate to be moderate, moving in the right direction, and an economically illiterate five headed beast, parts of which yearn for the days of 1970s fortress New Zealand.

Prime Minister John Key is the most popular leader in the world (52% approval), the country has responded to his straight talking, open manner, and pragmatic, moderate conservatism. His National party should still win the election.

But with economic storm clouds gathering, and record numbers of young, skilled Kiwis migrating to Australia, moderate and popular reforms may not longer be a luxury the Primes Minster can afford.

Luke Malpass is an analyst with the New Zealand policy unit of the Centre for Independent Studies.