Election 2020: Economists pick the tough policies that NZ really needs

There's not much good to be said about the events of this year, but if they provide impetus for improving our economy and dealing with some of its underlying structural problems, that would be a silver lining.

Never waste a good crisis, as the saying goes.

Both major political parties say they plan to grow the economy out of Covid debt.

But while there is broad consensus about the need to improve productivity and grow higher value sectors like technology, neither Labour nor National seems to have an appetite for any dramatic policy shifts.

With the growth paths of the past decade – dairy, tourism and immigration – hitting limits or being shut down altogether by the pandemic, it's not clear what will drive growth from here on.

So with that thought, we asked some independent economists to tell us what they think should be done to transform New Zealand's economy into a more productive, more equitable place.

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Freed of political constraints, their ideas ranged across the spectrum – often defying traditional left/right labels.

Property taxes, compulsory savings, reform of the Resource Management Act and Overseas Investment Act, an overhaul of the education system, serious environmental action – one thing they have in common is that they've been in the too-hard basket for too long.

Tax reform remains a popular idea and one that does go to the foundations of the economy.

New Zealand came close to a capital gains tax last year, but the idea was shot down in Cabinet by coalition partner NZ First.

The idea was then killed off by Jacinda Ardern when she ruled it out altogether as long as she is PM.

Despite that, many economists and tax experts still see a capital gains tax or property tax as the missing piece of New Zealand's fiscal policy puzzle.

New Zealand is the only country in the OECD that doesn't tax increases in property values.

Changing that, with a capital gains tax, is a policy with appeal to those on both the left and right of the political spectrum, and with solid support in the financial market community.

As the Tax working Group pointed out, it could have been offset with lower personal income taxes or a lower corporate tax. Or the revenue could have been retained by government and used for social initiatives.

Tax reform is needed "to ensure that investment is directed into productive areas where it will enhance and encourage business and economic growth," says Infometrics economist Brad Olsen.

"Instead, we have a situation where income from different sources is taxed differently, meaning that relatively unproductive property attracts a disproportionate amount of capital," he says.

Dr Ganesh Nana from economic think tank BERL agrees.

"Whether it is a land tax, wealth tax [or]CGT is for the technicians to argue," he says.

BERL Research Director Dr Ganesh Nana. Photo / File

"But as a principle, we'd agree that our current mechanism - taxing income and goods and services, but not property/wealth - is not working and is not fair.

"We've had enough of the arguments – the next Government must decide one and implement fast."

Whatever it chooses will be inevitably criticised as wrong by various vested interests, he says.

But Nana is wary of treating any one idea as an easy solution to New Zealand's economic issues.

"I worry that our search for the one silver bullet is doomed from the beginning," he says.

Ultimately it will require a suite or package of policy changes to transform the economy, says Nana. For him, that means a more comprehensive effort to reduce the social impact of housing costs.

He'd back a rent freeze for two or three years, although he knows it would be politically challenging, to say the least. "I can hear the howls of outrage already," he says.

Nana believes we should rephrase the housing argument in terms of "right to shelter", and our obligation as a community to provide such shelter to all.

He says the Government should stand ready to buy properties off those who wish to get out of the market.

Those properties could be "added to public sector housing stock with a proportion passed to a range of iwi providers for housing/community developments based on a range of 'transition to ownership' programmes".

But academic economist Professor Robert MacCulloch argues the time has come to give up on "the endless divisive arguments about capital gains tax and find another solution".

"New Zealand should introduce mandatory savings accounts for all workers which cover health, retirement, housing and risk (like unemployment)," he says.

SIXIDEAS

Singapore has mandatory savings accounts and owes much of its economic vibrancy to them, he says. And Kiwis are poor savers who put most of their savings into property, he notes.

Savings-based welfare reform would be another way to deepen our capital base and improve productivity.

"Also, to reduce inequality, we need welfare reform," he says.

"Low income workers need to be empowered and move from dependence to independence by having access to their own source of capital."

MacCulloch argues that the proposed savings accounts would solve the problems of the ageing population that is expected to put ever-more pressure on the health and pension systems in the coming decades.

"Most government spending is on welfare - and the welfare state has not been much reformed for nearly 100 years [since Michael Joseph Savage set it up]. It is no longer fit for purpose."

Cameron Bagrie, of Bagrie Economics, argues that an unflinching commitment to micro-economic reform is what will bring the most positive change.

"Don't get too caught up in the big picture macro stuff – we have most of that in good order," he says.

"Get stuck in and go hard on microeconomic reform. The little things."

One thing he'd love to see is more competition in New Zealand, to drive down the cost of things like building products and groceries.

He notes the Commerce Commission was given an extra $30 million in the Budget and says more of that would be good.

Labour has just announced it would run a supermarket competition inquiry - similar to the one it ran on fuel prices.

Bagrie would also like to see comprehensive reform of the Resource Management Act (RMA) and Overseas Investment Act (OIA).

NZ Initiative chief executive Dr Oliver Hartwich is on board with both those ideas.

National has promised to scrap the RMA and Labour say it will reform it. But Hartwich is sceptical that either really has any intent to get bureaucracy out of the way of development.

"From what I've seen, we'll just be replacing one bureaucratic nightmare with another," he says.

Dr Oliver Hartwich, the Executive Director of The New Zealand Initiative. Photo / Supplied

"What we need to do is reform it with property rights as the first principle, and incentivise building and provide councils with better incentives to allow and promote local development."

Hartwich also sees encouraging more foreign investment into this country as crucial to boosting economic growth and improving productivity.

"Rebuilding New Zealand's economy will need a lot of money. That's why adding new bureaucratic hurdles for foreign investors is absurd," he says. "The Treasury has long advised that the Overseas Investment Act is too onerous. After Covid-19, it is time to abolish the act."

And while we're at it, let's take a look at Treasury itself, Hartwich says.

He'd like to see a return to a more rigorous approach of cost-benefit analysis after several years of broader focus on "wellbeing".

"The Living Standards Framework was an ambitious project," he says.

"However, it has distracted the Treasury and bound its analytical resources. Let the Treasury perform solid cost-benefit analyses for all major spending initiatives. If it forgets to deliver, you should demand to see them."

The other big issue for Hartwich is our education system, which he believes is failing too many young people and leaves us behind in basic literacy and numeracy.

Education - or its failings - is a common theme with the economists.

NZIER principal economist Christina Leung sees addressing equality of opportunity as key to New Zealand's future.

"This starts with education," she says. "The fact that where a child lives largely determines the school they will get into, which in turn influences the quality of education they get and the career path they are likely to go down means that children do not start from a level playing field."

Christina Leung is a principal economist with the New Zealand Institute of Economic Research. Photo / File

Parents who can afford to buy a house in a "good" school zone are already giving their child a head start in life, she says.

"Much more effort is required for disadvantaged individuals to achieve the same outcome – they are starting a few steps behind the starting line."

It's not about achieving equality of outcome, says Leung.

"[That] would reduce the incentive to work hard, and notwithstanding the fact different people have different goals in life, but that the outcome you achieve should reflect the amount of effort you put in.

"Having the same quality of education across all schools would go some way to achieving this level playing field, but it would require a large amount of resources to be invested."

More investment in the education system is about getting the foundations of society right, says Bagrie.

"If you want to set the foundations for an innovative and dynamic economy, then it starts with the children and the earlier the better."

Infometrics' Olsen wants to see more attention go on vocational training too,

That would involve a National Skills Plan to provide a comprehensive assessment of skills needs and mismatches.

Stronger government oversight in that area "could reduce reliance on foreign skills and develop talent pathways, helping to give employers more confidence about the talent pipeline and lowering unemployment in a post-pandemic environment," he says.

Olsen would also like to see a government Digital Business Investment Fund "to accelerate the movement of New Zealand businesses into the digital age".

"Administrative systems and sales channels could be streamlined, enhancing sales potential, reducing costs and pressures on small businesses' leaders, he says.

That would have the added benefit of forcing the workforce to become more highly-skilled and productive as lower-skilled positions became redundant.

And finally, we need to get more serious about the growth potential inherent in the environmental reform that we know is coming.

"We need to draw some lines in the sand; at the moment there is a lot of talk about it and then a whimper when it comes time for action."

Environmental investments are an area that is increasingly delivering good financial returns, he says.

Ultimately, the broader problem in our policy debate, says Bagrie, is one that won't be solved by one great idea.

"We need to embrace the long game and focus less on the short game," he says.

"Short-termism has been a plague. We see it in government decision-making and firms and investors prioritising near-term profits over long-term outcomes."

• Tax reform
• Compulsory savings
• More competition – a Commerce Commission with more teeth
• Education/skills overhaul
• Streamline bureaucracy – remove the RMA and OIO
• Serious environmental reform