Fresh thinking

Posted on October 24, 2011
By Dr Muriel Newman

With the Rugby World Cup now almost behind us – and a HUGE congratulations to the All Blacks for their win and to all of those who made the tournament so successful – the country’s focus will soon turn to politics. With the 2011 general election just four weeks away, we should expect a flood of well rehearsed policy announcements from all political contenders aimed at attracting our votes. Since this is the season for new ideas we thought we would share some of the initiatives that we have come across during our NZCPR research work, that are being used by countries around the world to address their public policy challenges.

With the state of the economy weighing heavily on everyone’s mind, the US State of Texas might be able to teach us a thing or two. Texas has a small government, with a legislature that meets for only 90 days every two years. Taxes are low and there is no state income tax. As a result, its economy thrives as large and small businesses generate new jobs. Unemployment rates have been below the national average for more than a decade. In spite of weak state sector unions, public services are said to be superior, with education test scores higher than those in many other states.

Americans have been voting with their feet and moving to Texas at double the rate of any other state. Texas is also a magnet to families from abroad, who are attracted by a small, low-tax government that encourages creativity and opportunity.¹

Lesson for NZ: smaller governments create jobs, opportunity and wealth.

Another example of economic transformation comes from Canada. In the mid-nineties, the country was an economic basket case – described by the Wall Street Journal as “an honorary member of the Third World”. But within three years the budget was balanced and 11 years of budget surpluses followed.

This remarkable turnaround was achieved through reigning in government spending, reducing the size of the public service, tightening up on welfare, and slashing company tax rates. By recognising that it is the business sector that creates economic growth – not the government – Canada has continued to reduce corporate taxes giving Canadian businesses a significant competitive edge. Company tax in Canada – now at 16.5 percent – will be reduced to 15 percent next year. This rate compares favourably with the company tax rate in some of the world’s economic power-houses such as Hong Kong with a company tax rate of 16.5 percent and Singapore on 17 percent.²

With Europe’s average corporate tax rate having now dropped below 25 percent, it is clear that New Zealand’s 28 percent rate is out of step. Our high company tax is penalising exporters who are already disadvantaged by our distance from world markets. Imagine the boost to Kiwi businesses if New Zealand’s company tax rate was reduced to 15 percent to match that of Canada. What a boom in jobs and growth that would create!

Lesson for NZ – lower company tax drives economic growth.

Sweden’s progressive approach to education has long demonstrated that it is competition between schools to attract students, as well as the ability of parents to choose the best school to meet the needs of their children, that are the key factors needed to improve the educational achievement of students, and the working conditions of teachers.

School choice was introduced in Sweden in 1992. It is based on the concept of each child being issued with a virtual ‘voucher’, which is equivalent in value to the average cost of educating a Swedish child in a state school.Parents can then use this ‘voucher’ to ‘buy’ their child a place at the school of their choice – either a state school, a private for-profit school, or a private not-for-profit school. With educational funding following students, state support flows to the most popular schools. These virtual vouchers cannot be ‘topped up’, so private schools participating in the scheme cannot charge additional fees.Nor can schools select students on any basis other than first-come, first-served.

Before the voucher system was introduced into Sweden, there were virtually no private schools, but by 2008 around 10 percent of all students attended private schools.³

Lesson for NZ – educational achievement is improved through competition and choice.

For the past 10 years, public and private hospitals in Lombardy in northern Italy have competed directly for patients. In doing so, they are reported to have created one of Europe’s most efficient health-care systems.

Like many other countries, health-care in Italy is paid for by the state, with patients charged a small co-payment. As a result, most Italians don’t buy private health insurance, creating a virtual monopoly of state hospital provision. With little incentive to improve services or rein in costs, inefficiencies in the public hospital system were rampant, with long waiting lists for non-emergency treatment a tell-tale sign.

However, in 1997 the government decentralised the country’s health-care system to provide regional control over public hospital funding. This gave regions the power to adopt their own quality standards, to set their own reimbursement rates, to decide which hospitals qualified for public funds, and to withhold reimbursement if hospitals did not meet their standards.

While many regions essentially maintained the status quo, giving public hospitals preferential treatment, Lombardy took a different approach. It increased quality standards, set new reimbursement rates, and made public and private hospitals equally eligible for public funding. That meant that any hospital that met their quality standards and charged an accepted reimbursement rate, qualified. Patients were then free to choose between state-run and publicly funded private hospitals – their co-payment the same in either case.

As a result of the competition between public and private hospitals competing for patients and funding, services improved across the board. Patients in Lombardy receive among the widest array of treatments in Italy, and are covered for a longer list of prescription drugs than almost anywhere else in Europe. Waiting lists are a thing of the past.Today, it’s difficult for people in Lombardy to even tell the difference between public and private hospitals.⁴

Lesson for NZ – patient care can be improved through competition and choice.

As we watch the unrelenting rise in the price of power in New Zealand – driven largely by politicians passing almost the entire cost of the world’s most stringent emissions trading scheme onto householders – we can see no relief in sight. With the government’s commitment to renewable energy favouring the use of expensive wind generation, the problem can only get worse.

This week’s NZCPR Guest Commentator is acclaimed author and journalist Matt Ridley. Winner of a numerous literary awards including the coveted Hayek Prize for 2011, Matt, a former Science and Technology Editor for the Economist, explains in his article Gas against wind how technological advancements have meant an end to power price rises in some countries around the world through the discovery of enormous reserves of inexpensive shale gas:

“Which would you rather have in the view from your house? A thing about the size of a domestic garage, or eight towers twice the height of Nelson’s column with blades noisily thrumming the air. The energy they can produce over ten years is similar: eight wind turbines of 2.5-megawatts roughly equal the output of an average Pennsylvania shale gas well in its first ten years.

“Difficult choice? Let’s make it easier. The gas well can be hidden in a hollow, behind a hedge. The eight wind turbines must be on top of hills, because that is where the wind blows, visible for up to 40 miles. And they require the construction of new pylons marching to the towns; the gas well is connected by an underground pipe.

“What’s that you say? Gas is running out? Have you not heard the news? It’s not. Till five years ago gas was the fuel everybody thought would run out first, before oil and coal. But a chap called George Mitchell turned the gas industry on its head. Using just the right combination of horizontal drilling and hydraulic fracturing – both well established technologies — he worked out how to get gas out of shale where most of it is, rather than just out of (conventional) porous rocks, where it sometimes pools. The Barnett shale in Texas, where Mitchell worked, turned into one of the biggest gas reserves in America. Then the Haynesville shale in Louisiana dwarfed it. The Marcellus shale mainly in Pennsylvania then trumped that with a barely believable 500 trillion cubic feet of gas, as big as any oil field ever found, on the doorstep of the biggest market in the world.”

While some exploration companies are looking at the shale gas potential in New Zealand, at this stage it is unclear whether any reserves of a commercial nature exist. But what Matt Ridley has highlighted is that free markets provide powerful incentives for innovation that can create ground-breaking solutions to seemingly insurmountable problems. In the long run technology-driven progress can provide enormous benefits for consumers and economies alike.

Lesson for NZ – markets free from excessive regulation can overcome resource scarcity.

With serious concerns that the welfare system was forcing taxpayers to subsidise drug dependency, the US State of Florida passed a law in June to re

quire recipients of the equivalent of the Domestic Purposes Benefit to pass a drug test as a condition of receiving cash assistance. Non-cash benefits such as food stamps and housing aid are not affected by the new law. If a beneficiary fails the drug test, they will lose their benefit for a year unless they undergo rehabilitation (although their child assistance can be paid to a third party to administer – as long as they also pass a drug test). If they fail the test a second time, they will lose their benefit for three years.⁵

Here in New Zealand, with many workplaces now drug testing employees to ensure they are drug free, it has been suggested that drug-testing of recipients of all work-tested benefits should become law – since it is a condition of welfare receipt that the recipient is ready and available for work. If they are taking drugs, then they have broken their side of the bargain, as many employees will refuse to give them a job.

If New Zealand was to follow Florida’s lead, then recipients of all taxpayer-funded benefits would be drug-tested to ensure that taxpayers were not being forced to subsidise drug dependency.

Lesson for NZ – taxpayers should not be forced to subsidise drug dependency.