20 May 06
Economic Transformation
The Budget is an annual summary or plan of the intended revenues and expenditures of a government, providing a public blueprint of their economic agenda.
This week, the Labour Government expressed in a loud and clear fashion that, despite calls for tax cuts and official advice in favour of lowering taxes, they do not intend to deviate from their tax and spend approach (view full text of budget view).
Treasury, of course, plays a key role not only in preparing the budget but in providing quality economic advice. In light of the potential growth benefits from lowering taxes, Treasury’s strong recommendation in their briefing papers to the incoming government was to: “reduce the higher marginal rates on personal income (33% and 39%), the marginal rate on company income (33%), and the high effective marginal tax rates at low to medium incomes (in particular for secondary earners)”.
(click hereto view http://www.treasury.govt.nz/briefings/2005/default.asp)
Instead of accepting that advice and listening to the public demands for tax cuts, Labour has chosen to take us on a course, which will see a further slide in living standards and a widening gap with Australia .
This decision brought a predictable response from the Australian Treasurer Peter Costello, who said in an interview on ABC radio: “If there are Kiwis who have skills and who want to come to Australia as skilled immigrants of course they would be welcome in Australia . If they can play rugby union they will be doubly welcome.”
The National Party has capitalised on Labour’s failure to deliver tax cuts with billboard slogans that say: “Labour now accepts there’s a place for tax cuts. It’s called Australia ” and “290,000 Kiwis just got a tax cut. In Australia .” These messages are bound to strike a chord.
In spite of tax revenues having grown by 50% since Labour’s first budget in 2000, and operating surpluses having totalled a massive $28 billion in over-taxation during that period, it is clearly not enough for Labour. Being true socialists, they believe that individuals cannot be trusted with their own money, and that government knows best how to spend it. The problem is that that view is misguided: a large proportion of taxpayers’ money is wasted not only through the deadweight cost of collection, but also through poor quality spending decisions and bureaucratic failure.
Take the situation with health, for example, where a fifty percent increase in funding over the time Labour has been in power has not significantly increased the number of operations being performed. Instead it has produced an explosion in administration and costs, with tens of thousands of patients being dumped from hospital and specialist waiting lists.
While Labour has given the health sector another big boost in this budget – $3 billion over four years – the money is not being allocated to alleviate the waiting list crisis, but has been largely targeted for public health initiatives. In a climate where cancer patients are having to wait six months or longer for specialist assessments, the announcement that $74 million will be tagged to fight obesity is bizarre.
Obesity occurs as a result of people eating too much of the wrong food and not getting enough exercise. Having the state get into the business of funding gym memberships and stomach-stapling operations – in yet another attempt to woo the Maori vote – while people die of cancer is unbelievably cruel.
It brings to mind a quote by William H. Borah, a Republican Senator from Idaho , who in the early 1900s stated: “The marvel of all history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments.
In the budget documents, Treasury clearly signals the downturn: “Businesses have been facing inflationary pressures in the form of rising inputs and capital costs, as well as higher labour costs. The previously high exchange rate has also seen increased competition from imported goods. These forces have been reflected in declining margins and weaker business confidence. Businesses are unlikely to offset the fall in margins through sales volume growth over the coming year, leading to a fall in profits in 2007. Implicit in the central forecast is a judgement that businesses are in a position to see through the cyclical downturn in their profits as their balance sheets remain strong after a period of growth.”
“Businesses have been facing inflationary pressures in the form of rising inputs and capital costs, as well as higher labour costs. The previously high exchange rate has also seen increased competition from imported goods. These forces have been reflected in declining margins and weaker business confidence. Businesses are unlikely to offset the fall in margins through sales volume growth over the coming year, leading to a fall in profits in 2007. Implicit in the central forecast is a judgement that businesses are in a position to see through the cyclical downturn in their profits as their balance sheets remain strong after a period of growth.”
(see http://www.treasury.govt.nz/forecasts/befu/2006/18.asp)
They have made a key assumption that faced with an economic downturn, businesses will not embark on aggressive cost-cutting. However, expecting small business owners stressing out over falling sales, rising costs, and burgeoning wage bills not to consider dramatically cutting costs is ridiculous. An economic downturn creates an enormous human cost as families worry themselves sick about business survival, job security, rising prices, and higher mortgages.
That’s why it is so callous that the response of Labour – and United Future and New Zealand First – to a downturn of the scale being predicted where consumption is expected to decline 6 percent, house prices 5 percent, and growth falling to one percent, is to let the economy bottom out rather than stimulating it.
Treasury have already outlined the way to stimulate economic growth to the greatest degree in a paper entitled New Zealand Economic Growth: an analysis of performance and policy (click here to view Treasury paper ).
From a purely growth focus without taking into account other welfare implications, moving to a flat tax rate for both personal and corporate tax rates is likely to have the greatest impact on economic growth as it conforms most closely to the BBLR (broad based – low rate) principle. While in depth analysis of this option has not been undertaken by Treasury, theory and some empirical evidence suggest a positive effect for economic growth. Some initial approximate calculations suggest the fiscal cost of moving to an 18 percent flat tax rate for example would be $4.7 billion. This calculation does not consider dynamic effects including labour supply responses, effects on revenue from other taxes, savings from reduced administration and compliance costs, or revenue from other base broadening changes.
That means that if an additional $1.6 billion of funding is found from within Labour’s $57 billion budget, and added to the $3.1 billion of spending that remains unallocated, then a low flat tax of 18 cents in the dollar is affordable and could be introduced.
In an article “The Detroit of Europe”, posted on our NZCPD “Articles and Research of Interest” page, Steve Forbes tells the story of the amazing transformation of Slovakia after the introduction of a low flat tax of 19 percent (click here to view). Real economic transformation of a similar sort could be ours if we had a government with the vision and the courage committed to introducing a low flat tax.
A low flat tax would not only create a critical competitive advantage over our trading partners – delivering growth, prosperity and higher living standards – but it would also bring with it the sweet revenge of seeing the tables turned and talented Kiwis and Australians flooding back across the Tasman!
The poll this week asks, On a scale of 0 to 5 (5 being better than 0) how would you to you rate the NZ Budget 2006 as a prescription for economic growth? To take part in our online poll
Reader’s comments will be posted on the NZCPD Forum page click to view .
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