Tim Hazledine: Taxing tourists makes perfect economic sense now

COMMENT:

Since when is a border tax on an export industry a good idea, asked Brian Fallow in the Herald last Friday.

I can answer that. March 4, 1985. That's the day the NZ dollar was freely floated on the foreign exchange market. Before that, we had a fixed exchange rate along with controls on imports to protect domestic import-substituting industries.

That system had its merits, but it definitely created an imbalance between the supply and demand for foreign currency – a shortage – such that the value to New Zealand of an additional dollar earned exporting exceeded, in general, the value of an additional dollar earned in the local marketplace.

All this was swept aside at a stroke of Roger Douglas' liberalising pen when he suddenly floated the Kiwi currency. That brought its own problems of macroeconomic instability, but at least now there could never be a permanent shortage of foreign currency and thus no reason to favour exporting over other legal and useful market activities.

Here is how it works. Suppose, for example, there is a sudden drop in world prices offered for our dairy exports. Earnings of US dollars and Chinese yuan will fall, so an imbalance will open up between the supply of these and the demand for them from our importing sector.

There will be a temporary excess demand for foreign currency, or, equivalently, an excess supply of the Kiwi dollar. Result: the Kiwi will depreciate against the currencies of our trading partners.

Then, the market adjustments will swing into play. Dairy exports will be cut back. Exports from every other sector, benefiting from our lower dollar, will increase. Imports, for the same reason, will decrease. Balance will be restored.

Bottom line: don't privilege exports with subsidies and other artificial supports – there is no need nor economic justification.

But hang on, didn't Brian Fallow (an excellent journalist, usually) refer to a tax on tourism exports, not a subsidy: specifically the piddly little $35 "visitor conservation and tourism levy" to be charged to just some overseas visitors from next year?

Yes he did, but a levy on incoming tourists should be seen not as a revenue-grabbing tax, but as user pays: specifically, as a congestion charge.

Like our other major export industry, dairying, tourism in New Zealand has now grown to the extent that it is facing an inexorable "land" shortage, with the result of driving up costs at the margin. Nowadays, the absence of a levy or charge is actually an implicit subsidy.

In the case of dairying, farmers who are spared paying for the use and disposal of clean and dirty water (and get the free use of the atmosphere to dump their greenhouse gas) have simply overrun the capacity of our limited arable land base to cope with these things.

In the case of tourism, the inevitably limited supply of prime natural attractions (people surely don't come here to visit our cities) is generating queues, crowding, inflated prices, all of which truly make nearly everybody worse off.

Fallow suggests the new levy is in any case too low to significantly affect behaviour, and I agree with him. It is much too low. It should be set around $250-350, at least in peak season, to effectively deal with the costs that additional tourists impose on each other and all of us.

Such a levy would not be "mean-spirited" or "inhospitable". On the contrary it would make the visitor experience for those who really want to come here (and the experience of local tourists) that much more enjoyable, at the expense only of burning off marginal tourists who would choose instead to go somewhere else (or to delay their New Zealand trip to the off-season, when the congestion charge would be relaxed).

It is more than 34 years since we floated our dollar but too many journalists, politicians, civil servants, industry lobbyists — and even some economists who should know better — are still stuck in the mind-set of ancient days when you had to collect five shilling postal orders to get foreign exchange; when the mission was to push the supply of commodity butter, cheese, milk powder, meat, logs etc; when land was cheap.

None of that holds any more: we've lost the old world, and we will not be making the best of the new if we don't change our ideas.

• Tim Hazledine is a professor of economics in the University of Auckland Business School.