Rational analysis not an ideological wishlist

Labour leader, Phil Goff, labelled the Treasury’s Briefingto the incoming Minister of Finance as an "ideological wishlist".  However, far from being ideological, the briefing represents the rational consequencesof sound analysis.   Implementing the policies recommended in the briefing wouldmake New Zealanders better off, encourage our best and brightest to remain in New Zealand and enhance the fairness of our society.   The Treasury should be thanked andpraised for producing a clear, honest, and well constructed summary of theeconomic issues facing the country over the next few decades.   We ignore theirwarnings and recommendations at our cost.

The briefing correctly focuses on medium term economicperformance     Treasury notes that economic growth is a dynamic process ofcreation and destruction; the creation of new firms, new investments and newmethods of production drive growth and replace the old, less productive firmsand methods of the past.   It may seem perverse, but economic downturns areimportant for the longterm performance of an economy as they encourage thereallocation of resources from poor performing activities or management teams.  

In contrast the consequences of the current global financialcrisis seem so severe that it is better to prop up the failed management teamsthan to risk a precipitous collapse in economic activity.   But ultimately our wealthdepends on making the best use of the resources available to us.   Waste andprivilege ultimately just make us collectively poorer. Our ability to make thebest use of the resources available is what will generate the fastest expansionin wellbeing.   If the expansion is not adequate people will simply vote withtheir feet and go where prospects are better – humans have always been willingto migrate.  

The difference between well performing and poor performingeconomies is not the motivation of individuals but the fairness of the rulesand laws at rewarding effort and innovation.   As a rule of thumb, simple andtransparent economic rules typically outperform complicated systems.   The morecomplicated are the rules, the more opportunity there is for the unscrupulousto exploit the rules for their private gain, the more costly it is for thescrupulous to comply with the rules, and the more costly it is for thegovernment to administer and police.  

The Treasury’s policy recommendations from the briefing arein line with this precept.   For example the tax system has got increasinglycomplex in recent years, and Treasury’s proposals would do much to simplify thetax system.   A flatter personal tax system would remove distortions andinequities in the labour market.   It would also reduce incentives for trustsand the channelling of personal income through businesses.   Such vehicles benefitindividuals but at the cost of higher taxes elsewhere.   Also the extra incomemade by the lawyers and accountants that set up and manage these arrangements representa diversion of resources from other business activities.  

Likewise the current system for taxing income from savingand investment is highly complex and far from uniform.   If the returns fromdifferent investments attract different rates of tax this means that investmentdecisions will be unduly influenced by tax rules rather than on the soundnessof the investment decision.   Investment should be the prime wealth creatingactivity for the nation, but every time an investment decision is influenced bythe tax system it represents a lost opportunity.  

Unfortunately, actual economic policy will be inferior tothat recommended by Treasury.   There are several reasons for this.   The firstis timing.   Treasury and other departments cannot deliver their briefings untilafter the government has formed.   Given election pledges and coalitionformation horse trading, the government is already committed to many policies.    

Then there is political expediency, a dirty term that refersto protecting the interests of special groups.   These groups try to convince usthat what is good for them is good for the country, but really they are justtrying to protect their privileged position.

Finally there is the self interest of politicians.  Politicians depend on our votes, which means that they will generally implementpolicies that are beneficial to us.   But this does not mean that the policiesoffered will necessarily be the best possible.   National’s tax cuts are a casein point.   The key economic benefits, as identified by Treasury, will come froma removal of the top tax scale.   Instead National is proposing to drip feed taxcuts.   This works great if your interest is to make voters beholden to yourgovernment (indeed this is a lesson learnt from Labour), but in reality all itmeans is making do with a poor and unfair tax system.  

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