Cat’o’nine lives or cat’o’nine tails?

Michael Cullen has delivered his eighthout of a likely nine budgets.   Although we expect to only have to endure onemore, we are likely to face the consequences of his complex and prescriptiveinterference in the economy for many years to come.  

The budget included a number of policiesthat should be positive for the economy:

  • The reduction in the corporate tax rate from 33 to 30%
  • The support for early childhood and primary education
  • The moves to introduce a hypothecation of fuel excise taxes (iededicating fuel tax towards addressing transport-related issues)

But these few positives are outweighed byfundamental flaws in the government’s approach to economic management.   Inparticular, it has a penchant to prescribe rather than promote individualchoice.   A natural result of this predilection for prescription is that policybecomes unnecessarily complex.   Two obvious examples from this budget are theKiwiSaver scheme and the business initiative that accompanied the ratereduction.  

If one really wants to encourage saving,one needs to discourage consumption.   The obvious way for the government toachieve this goal is to simply raise the GST rate and/or reduce the tax oninterest income.   This would use the existing toolbox of taxes without the needfor introducing a complex saving scheme.   But raising the GST rate is too starkand obvious.   The opportunity cost being imposed on people is too clear.   It’sbetter to mask the costs via an oblique saving scheme that can be sold, viagovernment bribes, as a form of government support.

At heart KiwiSaver is another form of tax.  The only fundamental difference between the tax funded contributions toKiwiSaver and the tax funded Superannuation Fund is who manages the funds.   Essentiallythe government is stripping you of your choice of how you use your income by siphoningmoney away until you are old.   The only difference between New ZealandSuperannuation, the Superannuation Fund, and KiwiSaver is who manages the moneyand how much return you receive.   On that basis the Super Fund and KiwiSaver schemesare likely to provide a better return than the government does through the NewZealand Superannuation (which is limited to the pace of wage growth).   But doesthis compensate you for your lack of choice to use your money as you wouldprefer?   Consumption is ultimately what life is about – why should thegovernment be prescribing when and how much we should spend?

The government’s business supportinitiatives are similarly prescriptive.   On the surface support for R&Dactivities and developing overseas markets appear to be positive support forthe business sector.   But reducing the tax rate further would have beensimpler, supported income growth wherever it comes from, and runs less risk ofdistorting the behaviour of business activities.

One of the government’s arguments forpromoting saving has been to deepen local finance markets and thus promotegrowth through easier access to funds for local businesses.   This argument representshighly flawed reasoning.   New Zealanders have access to almost limitless creditthrough international capital markets.   Deepening the local finance marketsdoes not significantly expand this credit.   Ultimately lowering the cost ofcredit requires borrowers to convince lenders that the perceived risks arelower.   Improving the average returns from New Zealand investments is the soundest way of doing this.   But with a focuspurely on the amount of saving, a continued expansion of the government sector,and an increasingly complex regulation environment, there has been little inthis budget to enhance the returns on investment in New Zealand.   

Interestingly, The Treasury’s economicforecasts do not suggest much confidence in the ability of the policy initiativesto increase investment or economic growth.   Indeed, the only impact seems to beto decimate private consumption growth.   Treasury forecasts below 2%pa privateconsumption growth over the next four years – one has to go back to the depthsof the early 1990s recession to have such a weak household sector.   We dearlyhope that they are wrong, but their forecasts do not signal confidence that thegovernment’s policies will generate an economic transformation – at least not apositive transformation.     

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