Everyone knows that Australians are richer than New Zealanders, with wages a third higher on average. Almost everyone agrees this is a bad thing, but the hard part is working out what exactly to do about it.
At a public forum in Auckland next Tuesday a line-up of speakers, including Don Brash, David Skilling and Andrew Little will outline their ideas on how to ‘super-size’ New Zealand’s economy. The challenge is major, and there is more at stake than just bragging rights with our Aussie neighbours.
It was barely a generation ago that New Zealand was one of the wealthiest countries in the world. From the 1970s onwards we began to slide, so much so that we’ve fallen behind countries we used to consider poor, like Spain, Greece, Taiwan and Singapore.
Market reforms of the 1980s and 1990s put a stop to the decline, and our economy today is far stronger and more resilient than it was in 1984. But it hasn’t been enough to close the gap with the rest of the world, let alone Australia. Early in 2000 the government set a bold goal of returning to the top half of the OECD for income, but after eight years we have slipped a place to 22nd and the goal has been quietly dropped.
A wide and worthy range of ideas will be floated next week on how to close this gap, but one major handbrake on New Zealand’s growth needs to be confronted first: the size of government.
This is not the most fashionable idea, nor the most original, but that doesn’t make it any less important. The entire public sector (including state owned enterprises, universities and local government) now makes up 45% of GDP in New Zealand, so to downplay its importance is to ignore the elephant in the room. We are now the highest-taxed English speaking nation in the OECD and a full 10% ahead of Australia.
For the last 10 years successive governments have greatly increased the amount of tax we pay and the level of public spending. When spending is this high – higher even than it was under Muldoon in 1984 – the efficiency of the public sector becomes crucial. We can’t afford as a nation to squander nearly half of what we earn, yet this large transfer of wealth away from the private sector has delivered poor results at a very high cost.
Government spending is now $20 billion a year higher than it was in 2000 yet there has been little change in social indicators. Life expectancy, hospital outputs, literacy, violent crime, suicide, poverty and inequality are largely unchanged, representing a poor return from such a large investment.
To do better as a nation then we need better productivity from the public sector, just as much from the private sector. We need more transparency and accountability in what we spend, and to focus on actual outcomes achieved rather than on just how much we spend.
We also need to accept that governments just can’t do everything. Major tax cuts instead of higher government spending would allow people to spend their money as they see fit, and give a real boost to growth. Lower tax makes it more rewarding to invest, save, hire workers, and to move to New Zealand in the first place.
This is not blind ideology; it is exactly what countries like Australia and Ireland have done, and it works. Across the Tasman Kevin Rudd is cutting $10 billion of inefficient public spending over the next four years and delivering big tax cuts in a determined bid to boost growth. For the last 30 years Australia has had a much smaller government than us, and the results speak for themselves.
There is no reason why New Zealand can’t follow suit. Policies like KiwiSaver, Working for Families and interest-free student loans are highly inefficient because they recycle money straight back to the people who paid the tax in the first place. Scrapping these policies, plus a bit more restraint on the public purse would give us scope for major tax cuts.
For example, switching to a two-tier income tax system with rates of just 15% and 25% would be surprisingly affordable, costing around $5.5 billion. If we use the budget operating balance and unallocated new spending, I calculate we could bring in these rates without cutting a single dollar of current spending. It’s all a question of priorities and discipline.
Not only would this be a massive boost to the income of New Zealanders, but it would dramatically simplify the tax system. Imagine the satisfaction of being able to sack half of IRD, along with thousands of tax lawyers and accountants. That has to be good for the country.
This plan is probably a bit too radical for most politicians, but if we’re serious about growth and creating better lives for people we need to start doing things differently. Theory and real-world evidence tells us it is the dynamism, creativity and entrepreneurialism of the private sector that will get us there, rather than relying on government programmes. Wishful thinking isn’t enough.
Phil Rennie is a policy analyst with the Centre for Independent Studies. He is speaking at a public forum on “Big Ideas to Super-Size New Zealand’s Economy”, Tuesday April 15th 2008, in Auckland.