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Home / Business / Economy

Norman Gemmell: Bill English has left a strong legacy in tax reform and managing spending

By Norman Gemmell
NZ Herald·
19 Dec, 2016 04:00 PM4 mins to read

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if Prime Minister English is proud of himself for anything, it might be the social investment approach he initiated. Photo / Mark Mitchell

if Prime Minister English is proud of himself for anything, it might be the social investment approach he initiated. Photo / Mark Mitchell

Opinion

• Professor Norman Gemmell hold a chair in public finance at Victoria University, Wellington. He was a Treasury official at the time of the 2010 tax reforms.

Bill English has gone, but "up" (to the ninth floor) rather than "out". After eight years as Minister of Finance he hands over the portfolio to Steven Joyce. Now seems like a good time to ask whether those years were successful ones?

He inherited an economy in mid-2008 already showing signs of heading into a slowdown if not a recession, which was then hit in late 2008 by the global financial crisis. The GFC put a dramatic brake on tax revenue growth and raised recessionary expenditures through unemployment and social welfare benefits.

By 2010, Mr English's deteriorating fiscal health may not have quite resembled that of Ralph Fiennes' character in The English Patient but it certainly was not looking like recovery would happen any time soon.

The budget balance rapidly shifted from a healthy net debt of 5 per cent of GDP inherited from Labour Finance Minister Michael Cullen, to 20 per cent within three years. It peaked at over 25 per cent in 2013, boosted by a spending shock from the Canterbury earthquakes.

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But with determination deficits were brought under control, debt is on a downward track and the Treasury now (2016 half-year economic and fiscal update) forecasts net debt reaching 19 per cent by 2021.

This is no mean achievement. Cutting government debt in good economic times is difficult enough for finance ministers, who invariably face Cabinet colleagues who want to spend more but resist any tax increases. For Mr English to cut government debt in the difficult economic times of the GFC and its aftermath was a much bigger challenge. That he achieved it without much, if any, resistance from his own party (and little from the political left) will mark him out as an especially successful finance minister, both politically and fiscally.

And remember, this was all done while delivering in 2010 what has been described as the "biggest tax reform for a generation" and radically restructuring public spending. First he challenged public servants to deliver more for less (perhaps not too difficult given the profligate expansion under Dr Cullen) and then to refocus social spending to where his new data-driven social investment approach suggests it can be most effective.

If you doubt debt reduction, tax reform and public sector restructuring represent a major legacy, look at the fiscal efforts, or lack of, in other countries over this period. The eurozone continues in a fiscal mess, refusing to acknowledge its fiscal budgets are unsustainable. As for major tax reform, almost no OECD government has had the courage to risk its political capital with the electorate by doing anything other than raise tax rates on the highest earners-an easy vote winner with the middle income majority during an economic crisis.

But if Prime Minister English is proud of himself for anything, it might be the social investment approach he initiated. This seems genuinely to reflect his social conscience and to leave a legacy that commentators from both the political left and right will eventually (if not yet) acknowledge as significant and worthwhile.

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If so, it will have been achieved despite initial foot-dragging by policy officials, many of whom even now appear half-hearted in their support of the process.

It is always dangerous to try to reach a verdict on a minister's public achievements as soon as his or her term of office comes to an end. But eight years since Mr English was handed the fiscal reins is plenty of time to build a legacy.

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So while it is perhaps too soon to be making judgments on the success of his social investment approach to welfare and other spending, a verdict on his handling of the country's public debt and tax system can certainly be reached. In my view, these will likely remain as signal achievements of his time in office while facing significant economic headwinds and under a prime minister whose appetite for anything radical seemed lacking.

By persuading John Key and the rest of Cabinet to risk a voter backlash when he made tax the centrepiece of his 2010 Budget, Mr English risked his own ministerial and political future.

Instead, if rumours are to be believed, not only did Mr Key bask in the unexpected glow of positive publicity that followed the 2010 reforms, apparently he was up for a repeat performance in 2011.

Perhaps wisely they decided one big tax reform success in a parliamentary term is about as many as you can expect. But it certainly should be regarded as a major English legacy.

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