Mediocre Growth Outlook

Mediocre Growth Outlook and Government Spending Surge Confirmed in Budget Documents

“The 2007 Budget Policy Statement makes no mention of the government’s former ‘top priority’ goal of raising New Zealand per capita incomes to above the OECD average”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“Moreover, its economic projections to 2011, which point to average real GDP growth of under 3 percent a year – below average growth rates since the early 1990s – confirm that achieving that goal within any reasonable timeframe is not in prospect.

“In addition, entrenched imbalances in the form of inflationary pressures and a large current account deficit are expected to persist.”

Mr Kerr said that too many unsatisfactory government policies are hampering a better economic performance.

“Among them is a massive expansion of government spending. Core crown expenses as a ratio of GDP are projected to rise by a full 4 percentage points, from 29.2 percent, to 33.2 percent, in the 3 years 2004-2007. Election promises account for a good part of these increases. There are no signs of significant savings from reviewing base spending.

“Clearly there is ample scope, given greater constraint on government spending and lower operating surpluses, for medium-term tax reductions, which would improve the growth outlook without increasing inflationary pressures.

“Tax reductions should take the form of moves to a lower, flatter tax scale as advocated in the 2001 McLeod Review”, Mr Kerr said. “Instead we are seeing a proliferation of selective tax concessions and measures such as ad hoc adjustments to the international tax regime which are complicating the tax system and, by costing revenue, putting the goal of achieving a flatter structure further away.”

Mr Kerr said that on top of government spending pressures the productive sector of the economy was carrying an increasing burden of poorly justified regulations, such as recent interventions in network industries and the labour market (including a big rise in minimum wages), and prospective Kyoto measures.

“The weak private sector investment outlook, the lack of signs of any long-term trend increase in labour productivity, and the mediocre growth outlook suggest New Zealand is unlikely to match the performance of Australia and other faster-growing countries in our region unless policy settings are substantially revised”, Mr Kerr concluded.

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