Roger Kerr: No time to stop and smell the roses

Roger Kerr

New Zealand is experiencing one of its most prosperous periods in several decades.

Economic growth has averaged 3.7 per cent a year over the past five years. Unemployment, at 3.6 per cent of the labour force, is the lowest among Organisation for Economic Co-operation and Development (OECD) members.

Inflation is low, the Government budget is in substantial surplus, public debt is at comfortable levels, company profitability is high, investment is strong, productivity growth is better than in previous decades and real wages are rising in the tighter labour market.

Comparisons have been made with the 1950s, a so-called "golden age" in New Zealand's economic history. The main reason for this better performance is the two waves of economic reform of 1984-1988 and 1990-91.

Even the Government now acknowledges this.

With growth in real per capita gross domestic product (GDP) averaging 2.5 per cent since 1993, the average income of New Zealanders is now about 30 per cent higher than it was then.

Those who argued for the reforms have been proved right and their critics have been proved wrong.

However, a number of things need to be kept in perspective.

First, as the Budget Policy Statement noted, the 3.7 per cent average growth rate in the past five years is no better than the average growth rate since 1993, when the benefits of the more coherent policy framework achieved in the early 1990s started to show up.

The average for this whole period was also 3.7 per cent.

Moreover, in the first part of it, the economy was hit by the Asian economic crises and unfavourable climatic conditions, whereas lately we have had good terms of trade and a strong world economy. Arguably, our performance should have been even better in recent years.

Second, New Zealand's growth performance has not matched that of Australia in the past decade. The margin is not great: Australia has recorded a touch under 4 per cent a year compared with New Zealand's 3.7 per cent.

Australia has been labelled the "miracle economy" and New Zealanders should also take pride in our greatly improved performance.

However, Australia's edge has been sufficient to enable it to climb back into the middle-high income category of countries in the OECD whereas New Zealand is still in the low-middle income group.

Third, comparisons with the "golden age" of the 1950s arenot particularly flattering.

A 1962 Monetary and Economic Council report noted that New Zealand had the worst productivity performance of the advanced countries in the postwar period. The costs of the country's earlier mistakes - particularly the establishment of import licensing, the regulation of the labour market and the growth of the welfare state in the 1930s - were showing up even then.

Fourth, despite the progress made, there is still plenty to worry about.

New Zealand's productivity levels remain much lower than those of Australia and the high-income countries. Domestic inflation is too alive and well to allow complacency. The Maori unemployment rate is still 8.9 per cent of the labour force. There are more than 300,000 people of working age on benefits when many firms are desperate for labour.

Fifth, and most important, what matters now is not past progress but the outlook in the period ahead.

The Government's own projections have GDP growth falling away from the 3.7 per cent average in the past decade to around 3 per cent or below. By contrast, it projects Australia's growth to be in the 3.3 per cent to 3.5 per cent range and a similar range for the average of our trading partners.

Growth in per capita GDP is projected to fall significantly from the 2.5 per cent average of the past decade to 1.9 per cent, and labour productivity growth, at about 1.5 per cent a year, is not projected to increase.

So New Zealand is at risk of falling behind other countries again after holding its own in the past 10 years.

Why the deteriorating outlook? The answer isn't hard to fathom. In a presentation to a Business Roundtable meeting last month, Roderick Deane listed more than 25 significant Government initiatives that are harming our growth prospects.

Leading items include the growth of Government spending, the increase in the top tax rate, the restoration of the ACC monopoly, the re-regulation of the labour market, the slowdown in the pace of tariff reductions, the growth in state ownership of businesses, increasing regulation of banking, telecommunications and electricity, takeover regulation, more expansive local government legislation, ratification of the Kyoto Protocol, more central control of health and education and more lenient welfare rules.

It would be easy to add to the list. In addition, problems in roading, water management and the Resource Management Act are not being effectively addressed.

And the cumulative effects are mounting: just as the benefits of the earlier reforms took years to show up, the costs of harmful moves will take time to materialise but they are now showing up in economic forecasts.

The point is not that the sky is about to fall in: New Zealand is still a good place to do business, but it is getting harder.

There is now a marked contrast in the directions that New Zealand and Australia are taking, and the public debate in each country. In Australia, business, media organisations and Government advisers are pushing the case for ongoing reform.

The Business Roundtable has been pointing out that no OECD Government has sustained economic growth of 4 per cent-plus - the kind of growth rate the Government is targeting - with total Government spending (central plus local) at New Zealand's level of about 40 per cent of GDP.

The Government studiously ignores this factual observation. If it is serious about its growth target, it should set about reducing the Government spending share of the economy in the forthcoming budget.

However, it plans to increase spending by another two percentage points of GDP over the next few years.

Its track record is to spend more without regard to value for money just because its coffers keep filling up and without asking whether the money would be best left in taxpayers' hands.

For this reason, the Business Roundtable has recently advocated tighter constitutional constraints on Government spending, perhaps through rules that would limit spending growth to changes in population plus inflation, with surplus revenue being returned to taxpayers unless they supported higher spending increases in a referendum.

The Minister of Finance dismissed the idea as "ideological", seemingly unaware that similar rules or spending caps apply in many US states and several countries.

We have also advocated moves towards a lower and flatter tax structure along the lines of the 2001 McLeod tax review, with maximum personal and company tax rates of 25 per cent. This is not a radical proposal: Singapore and Hong Kong are two countries with lower rates, and many east and central European countries have been implementing low flat taxes.

The annual fiscal cost of our proposal would be about $3.6 billion, which would be readily achievable over a few years given the state of the Government's accounts. Such a tax structure would dramatically increase New Zealand's attractiveness as a place to invest and work.

Another constitutional measure we have advocated is a Regulatory Responsibility Act to curb and roll back New Zealand's growing regulatory burden.

 

It would be a tragedy if it took another period of mediocre economic performance and relative economic decline for New Zealand to get back on to a serious reform path.

New Zealand has many vulnerabilities, not the least of which are an ageing population, ever-increasing global competition and the nasty shocks that routinely occur in economic life.

Better institutions and policies are the key to economic progress, and these are within our own control.

Obstacles to growth

Government measures that will affect future economic performance in a detrimental manner include:

The growth of Government spending.

The increase in the top tax rate.

The restoration of the ACC monopoly.

The re-regulation of the labour market.

The slowdown in the pace of tariff reductions.

The growth in state ownership of businesses.

Increasing regulation of banking, telecommunications and electricity.

Ratification of the Kyoto Protocol.

More central control of health and education.

More lenient welfare rules.

* This is an abridged version of a speech Business Roundtable executive director Roger Kerr gave in Masterton yesterday.