New Zealand's Economic Detour

New Zealand's Economic Detour

Monday 18 Mar 2002 Rodney Hide Speeches -- Economy

Speech to Remuera Rotary Commerce Club of Auckland 6 pm, March 18 2002

Helen Clark has set New Zealand on a sharply different economic track to anything we have experienced before. The problem is that her track lacks economic coherence and is spooking business and investors.

She bumped up the top rate of tax to 39 cents and then two years later ran a conference asking business what government could do to help innovation. That prompted one Christchurch businessman to put up a banner declaring, "Taxation Will Increase Until Innovation Improves!"

She agreed that more money needed to be spent on Auckland roads but put up petrol taxes to pay for it. She then allowed Jim Anderton and the Greens to collar half of it for regional development, bikes and walking tracks. She put up petrol taxes to put one quarter of one percent into Auckland's roads. That money could be found in the Government's petty cash drawer.

The real hold up for roads for Auckland is not money but the Resource Management Act - something that Helen Clark believes is democracy in action. Without a major rethink on the RMA, the money for the roads will just pile up in another government sock along with Cullen's super fund.

But the incoherence is even deeper. Helen Clark re-nationalised Accident Insurance because "competition is bad". She then collared $80 million from taxpayers to put into Kiwibank to promote competition. Both ways taxpayers and consumers lose. Investors and economic commentators can't figure it out. Does this government think competition is good or bad? And does it really believe that competition needs a government-subsidised competitor?

The aim in economics is to be clear and logical and to explain the trade-offs. The aim in politics too often is to fudge and to confuse and to suggest that many things can be had for nothing.

Michael Cullen's state-run Super Fund is a classic example of politicians ignoring any trade-off. The plan is to build up the Fund up in the early years and then run it down. Michael Cullen believes the Fund will assist in paying for super in the future and thereby reduce - or eliminate - the concern over the future costs of super.

This is economic nonsense.

Cullen's State Fund can't change the costs of super in any way. The number of retired people who qualify for the pension and the size of the pension are what determine the cost of super, not whether or not there is a Fund.

The Fund simply brings forward the costs of super. As a result, in the first 25 years, taxpayers must pay $65,000,000,000 into the Fund. In the following 75 years, that $65,000,000,000 is paid out plus interest. The interest isn't a free handout - it is simply compensation for not having had the use of that money for all those years.

"There is no free lunch" and what is paid out has to have first been paid in. The Fund doesn't reduce the costs of super - it simply shifts them. Of course, to the extent that the state invests poorly then the fund puts the costs of super up not down.

The Cullen nonsense fund shows just how economically illiterate the present government is. There is no understanding of economics or business. The Greens believe that "every time we buy 'cheap' imports we not only support a sweatshop mentality in the Third World, we help to destroy our own country's primary production through global warming". That's the thinking behind the party that props up Helen Clark. What do they think we should do, buy expensive imports? Or not import at all? Last week, we had Labour MPs in Parliament attacking the "Warehousing" of the New Zealand economy. But the Warehouse is great. It's made bikes, toys, stereos much more affordable for New Zealanders. And look at what a great job that company has done for young New Zealanders, giving them a job, and teaching them to be proud and good workers. What's wrong with that?

Government MPs believe that successful businesses must be exploiting either workers or customers and probably both. They are also snooty. They sniff over their glasses of chardonnay that the Warehouse is "crass commercialism".

Helen Clark knows she is in trouble on the economy. There are three problems. The first is that her government has no coherent economic policy. The second is that Labour, Alliance and the Greens have no credibility on economic matters. The third is that our economic performance has been poor despite a strong world economy, high commodity prices, favourable weather and a low dollar.

Let's deal with New Zealand's economic performance first. Our growth rate for the year through to June 2001 was only 2.3 percent - that's with the best economic conditions for decades. Current Treasury forecasts are for New Zealand to average only 2.5 percent a year for the next ten years.

That compares to their estimate that New Zealand must grow between 4.6 and 7.4 percent a year to achieve Helen Clark's goal of getting into the top half of the developed world's economic ladder in ten years. They see no sign that New Zealand is going to come close to the targeted growth rate.

Treasurer Michael Cullen has set more modest sights: he hopes New Zealand will achieve four percent growth in five years' time. It's a sad target. It's so tragically mediocre. And still on our present course we won't achieve it. That's why Michael Cullen has said five years - he knows he will be long-gone by then.

It's not as though we haven't achieved Michael Cullen's target before. We have. And we did so for five consecutive years. For the five years to 1996 - before Winston Peter's disastrous spend up - New Zealand averaged four percent annual growth. At that time Michael Cullen was ranting and raving in opposition, claiming that National was "butchering" the economy. He promised to increase government spending by over $2 billion a year to grow the economy by four percent a year. Winston did that spend-up instead and flattened the economy.

Even so, New Zealand's average growth rate over the 10 years to 2001 was 3 per cent.

Treasury's forecast for the next ten years is 2.5 percent a year - assuming no hiccups.

The evidence is plain. New Zealand's economic performance is deteriorating, not improving. We are not doing well despite enjoying the best economic conditions since the 1960s.

Treasury is forecasting a poorer performance over the next ten years than we achieved over the last ten - and that at best was only mediocre

Working New Zealand families are feeling poorer since Helen Clark came to power. There is a reason for this. They are.

The Statistics Department tells us that a construction worker is $32.80 a week better-off after two years of Labour and the Alliance in power. But the worker has lost $6.40 in tax. He or she is only $26.40 a week better-off after tax. The drop in the dollar has also effected a wage cut. Prices have risen six percent. The same worker is having to pay an extra $37.77 a week for the same basket of goods. The worker is $11.30 a week worse off than when Labour and Alliance came to power. That hurts. And that's precisely the situation for workers throughout New Zealand. If they smoke a packet of cigarettes a day, they are another $7 a week worse off.

There's another dollar a week after Helen Clark hiked petrol taxes to suck in another 200 odd million. It wasn't needed. Of course more should be spent on roads. But we don't have to raise taxes to do it, just make our spending better. The money on hand-outs to business would be far better spent on roads and tax cuts.

The Labour and Alliance Government propped up by the Greens has no credibility on the economy. The Greens are economic wackos. Their economic policy calls for an eco-organic nation where we live in communes with our energy coming from the sun, waves and the wind. The Greens oppose an open economy. Their mantra is for "local people to be in local jobs using local resources," just like the primitive tribes that the Greens want us all to emulate.

The Alliance now have no policy at all. They campaigned on lifting the top rate of tax to 47 percent. They made a submission to their own government's McLeod Tax Inquiry in favour of their wacky Financial Transactions Tax. Their aim was to bring the "$10 trillion of financial transactions into the tax base". The McLeod Review thought their plan was nutty and said so. Alliance Leader Jim Anderton has been reduced to being the economic Father Christmas handing out $10,000 here and there to businesses he thinks worthy. He taxes them hard and then sprays a little back. And calls it good business!

Michael Cullen is smart. He knows most of his caucus are nutty. But he is not used to business or economics, he doesn't like business people, and they don't like him. He's remembered for declaring in 1998 that, "Auckland now sits atop the nation like a great crushing weight. " According to Labour's economic genius Auckland was then a deadweight dragging the rest of the country down. He now says it isn't, because of his policies. Go figure.

The Labour Party has systematically rolled any MP who had any understanding of business, economics or how markets work in the post-Rogernomic purge. Hopeful candidates were tested for their economic literacy and dumped if they showed any. The result is the Labour caucus you see today.

The third problem is the lack of any economic policy. There is no coherence to anything that Labour and the Alliance have done. Investors and commentators are left confused.

The spin that is offered up instead of a programme makes matters worse. Helen Clark's "Innovative New Zealand" policy is just a slogan - a stream of words, taskforces and talkfests. It doesn't an economic strategy make. Businesspeople say that they don't need another committee or taskforce. Just sound sensible economic policy. That means low tax, stable, simple laws, with the laws enforced.

Helen Clark this year gave a speech at the London School of Economics titled "Implementing A Progressive Agenda After Fifteen Years Of Neo-Liberalism". The speech is an important one. Helen Clark for the first time explains her economic thinking - such as it is - and also makes plain that she views her government as following a different path to that followed by both Labour and National since 1984.

Prime Minister Clark brands Jim Bolger, Bill Birch and Winston Peters as neo-liberals! I would call myself a classical liberal. I don't mind Helen Clark calling me a neo-liberal. But that Helen Clark calls Jim Bolger, Bill Birch and Winston Peters neo-liberals shows just how far to the Left she actually is.

Helen Clark recognises that change was called for in 1984 but laments that "At that time, however, third way options were not developed in the social democratic menu". The problem that Helen Clark sees was that there was no alternative to Treasury's "neo-liberalism" and no "smart active government" to foster new businesses.

"Smart active government" is oxymoronic. There is nothing smart about government. Just look at the record and look at contemporary experience. People languish in queues in pain outside state hospitals. Our state schools can't cope with the number of pupils turning up at term start. The state is blundering around the country with enormous powers under the Resource Management Act knocking over wealth-generating investments and undermining nature conservation at every turn. Having seen many of Helen Clark's Ministers in action, I have to say she must have had her tongue firmly in her cheek when she declared her government "smart".

The reason that government blunders every which way is that bureaucrats and politicians don't have the information and incentive that prices, profit and competition bring. They have the tax dollars but no incentive to control costs or attend to people's needs.

Helen Clark told her audience in London that New Zealand was on quite the wrong track through the 1980s and 1990s. As a result, "In the 1990s the economy marked time". In Clark-speak, 3 percent a year for ten years is "marking time". Three percent is not great - but it's hardly marking time. It's also easy to spot Helen Clark's vulnerability on the economy. Her achievement last year was 2.3 percent - that's worse than "marking time".

She concludes that for 15 years New Zealand has been on the "wrong track" and that New Zealand's economic policy for those years had "failed to deliver either prosperity, or a fair society".

Enter then her new Government. Now they are armed with "new social democratic models to hand". She here refers to Professor Anthony Giddens' work. Giddens is a sociologist, the head of the London School of Economics and Politics, and a "Third Way" architect.

"Third Way" theory is an attempt by the Left to rehabilitate the state. The first way is democratic capitalism. The second is state socialism. The theory is that both these Ways don't work and are too ideological. Hence, the "Third Way" - something in the middle between markets and government.

So modern Labour parties drop their commitment to state ownership of the means of production. They talk tough on law and order. They say they want to work with business. They loosen their ties to the union movement. And they never mention the "S" word.

Giddens explains in his book "The Third Way" that social democracy can only survive if it finds a "Third Way" because in the 1970s the "Welfare consensus" had broken down and Marxism had finally become discredited. Communism has failed. Welfarism has failed. But according to Giddens socialists must keep the values that drove communism and Welfarism and "make them count where the economic programme of socialism has become discredited". He doesn't explain why communism failed and socialism is discredited. He simply wants to create a new language to re-wrap the mistakes of the past. His books don't set out an economic theory but are rather a sociological analysis of contemporary society infused with a pot pöuri of political ideas.

Prime Minister Helen Clark describes "The Third Way" as a means "for the state to take a leadership role in strategies for economic development, using the full ability it has to facilitate, co-ordinate, and broker, and using its funding powers to maximise investment and participation in education and skills training".

Ms Clark says she does not hanker after the Fortress New Zealand days like the Alliance retards. She is not a socialist. That doesn't work, she says. Neither is she a Rogernome - that's too uncaring. She's opting for the "Third Way". But that's the puzzle. What is it?

The Economist has attacked the Third Way for its obvious hollowness. They say that trying to give an exact meaning to this political philosophy is "like wrestling with an inflatable man. If you get a grip on one limb, all the hot air rushes to the other."

The aim of the Third Way theorists that Helen Clark follows is to retain a big state in the wake of the communist meltdown and the manifest failure of the welfare state. Professor Giddens writes that Lefties must accept the logic of "1989 and after". But rather than abandon the philosophy he just wants to tweak it. He quotes Tony Blair and Gerhard Shröder's "Europe: The Third Way" which declares that, "The state should not row, but steer". That is, there is no need to own the factories just direct them in what they do. That's the key difference in economic management between Joe Stalin and Adolf Hitler. Hitler didn't mind the factory owners making a buck - he just wanted to be able to direct what they produced. He wanted to steer, not row.

Professor Giddens concedes that, "A successful market economy generates far greater prosperity than any rival system". What he wants is government to harness that power to political ends.

He says the "three key areas of power - government, the economy, and the communities of civil society - all need to be constrained in the interests of social solidarity and social justice". What he doesn't do is explain just how the balance between these competing powers is to be set.

He calls for a "strong state", progressive taxes, wealth taxes, and large state investments. He says that that governments should continue to take from the rich to give to the poor.

Following the work of Professor Giddens, Helen Clark believes that the state must "take a leadership role in strategies for economic development". That means that politicians and bureaucrats must decide the industries that are the key to New Zealand's future and get in behind them. It's a return to "picking winners" and Jim Anderton's boast that it is now "Hands On" government. But what special ability does government have to pick successful businesses or industries? It doesn't have any. Besides, the industries and businesses that New Zealand will do well in over the next ten and twenty years are not known by anyone. They will be unknown in advance. They will be discovered by a multitude of entrepreneurs applying their brains, capital and blood and tears to making a dollar. Some will succeed. Others will fail. In hindsight the successes always look obvious. But they are never obvious until they are a success.

And the history of government picking successful winners - whether businesses or industries - has been woeful. Their picks are based on politics, not commercial reality.

The problem is that "picking winners" means "picking losers" too. The chosen industries benefit at the expense of the unchosen ones. Helen Clark would be better-off making business easy for all businesses rather than just some. We shouldn't be dragging entrepreneurs into lobbying politicians and bureaucrats to have their industry and their business picked as a winner. They would be better-off concentrating their attention on business, not politics.

Helen Clark says the state must use "the full ability it has to facilitate, co-ordinate, and broker". Of course, the state should facilitate business, just like it should "facilitate" all of us. That's best done by maximising each and every person's freedom by ensuring low tax and simple and stable laws. Of course, what Helen Clark's "Third Way" really means is to facilitate the chosen businesses and industries through the thicket of rules and regulations that the state has first erected as an obstacle.

We have seen this approach. Jim Anderton "facilitated" Sovereign Yachts' development at Hobsonville airbase through a thicket of government mandated procedures and processes in five months. It's estimated that they would have otherwise taken ten years. That's good news. But why facilitate just one business? Why not facilitate them all? Other yacht builders have complained to me that their proposed developments are tied up for years in mad Resource Management Act processes and yet there is no relief for them. That's because "Third Way" economics is about power and control. The politicians in power get to decide who will and who will not be facilitated, so you had all better behave.

The power to decide which businesses get the "fast track" is centralised in Wellington but the knowledge of business is dispersed through the entire country. That's why decision-making is best decentralised and co-ordinated by prices. But Helen Clark wants to control and to dictate. She doesn't believe in "neo-liberalism" that allows people to make their own decisions for themselves.

This is Helen Clark's "Third Way". She has hiked taxes, re-monopolised the labour market, re-nationalised accident insurance, increased red-tape, and passed retrospective tax laws back to 1986.

Her Way - the Third Way - is the Wrong Way. We should be allowing greater freedom, not less. We should be deregulating, not re-regulating. We should be getting government out of business, not having it stick its beak into every business in the country. We should be reducing taxes, not increasing them.

The ACT party has been working hard to finalise its tax policy for this election. We have been helped considerably by the McLeod Tax Review. That report makes it clear that we can drop the middle income tax rate down from 19.5 cents to 18 cents, the company rate of tax down from 33 to 28 cents and the top personal rate down from 39 and 33 to a single rate and we can do so immediately. All we would need to do is dedicate to tax cuts the money that Cullen has set aside for his state fund. That money would be far better left in taxpayers' pockets than played with by government-appointed fund managers.

Those tax cuts could be achieved immediately. But we can and should go further. We should be looking to flatten the tax code in New Zealand to one rate and that rate should be 18 cents. We should be aiming to do that over five to ten years. We can do it. With an ACT party in government we will.

Business has got harder under Helen Clark. Decision-making has been re-centralised. It's no surprise that New Zealand's economic outlook is deteriorating. Prosperity is closely tied to freedom. We are losing both. We don't need smart government. We need less government.

ENDS

For more information visit ACT online at http://www.act.org.nz or contact the ACT Parliamentary Office at act@parliament.govt.nz.