Treasury releases September working papers

Treasury releases September working papers

The Treasury today released eight new working papers in the September instalment of its Working Papers series.

This quarter’s set of papers includes: Measuring Economic Growth in New Zealand (Paper 02/14) Striking a Balance: Centralised and Decentralised Decisions in Government (Paper 02/15) New Zealand’s Family Assistance Tax Credits: Evolution and Operation (Paper 02/16) Education and Maori Relative Income Levels Over Time: The Mediating Effect of Occupation, Industry, Hours of Work and Locality (Paper 02/17) Protection against Government Takings: Compensation for Regulation (Paper 02/18) Modelling New Zealand Consumption Expenditure over the 1990s (Paper 02/19) Institutions and Decision Making for Sustainable Development (Paper 02/20) Determining the Discount Rate for Government Projects (Paper 02/21)

A full list of the abstracts from all six papers follows.

The papers can all be found at http://www.treasury.govt.nz/workingpapers.

The Treasury Working Papers series contains work in progress on a variety of economic and financial issues. The series aims to help increase understanding of Treasury and its work, and to make this work available to a larger audience. The working papers build internal capability, as well as generating more informed debate on key issues. The series has been running since 1998.

The views expressed in the Working Papers are those of the authors and do not necessarily reflect the views of the New Zealand Treasury. The papers are presented not as policy, but with a view to inform and stimulate wider debate.

ENDS Treasury contact: Elisa Eckford - 04 471 5127/025 208 0746

02/14 Measuring Economic Growth in New Zealand Peter Mawson (Treasury)

Abstract: This paper examines New Zealand’s ranking in the OECD based on real GDP per capita. The fall in ranking experienced by New Zealand implies that real GDP per capita growth in New Zealand has been relatively poor in comparison to other OECD countries. The paper examines the history of New Zealand’s growth rate and explores the differences between various techniques for measuring average growth rates. The approaches are all shown to be variants of the average annual growth rate but differ in terms of the weighting structure used. Ultimately, the most appropriate technique depends on the underlying data generating process. The implications of data construction techniques for measured growth rates are discussed and differences between the growth rates obtained from different data sources are illustrated. The paper also illustrates the sensitivity of New Zealand growth rates to the sample period chosen.

02/15 Striking a Balance: Centralised and Decentralised Decisions in Government Natalie Brady (Treasury)

Abstract: This paper identifies factors to be looked at when considering the extent to which decisions within government should be centralised or decentralised. In practice, the solution is almost always likely to involve a balance between centralised and decentralised decision-making. Nevertheless there are a number of common factors that are generally applicable to questions of centralisation and decentralisation. This paper identifies those factors in order to provide some guidance for decisions regarding the location of decision rights. Rather than being prescriptive, the paper simply presents the relevant issues for consideration. Centralisation (or decentralisation) is a complex and multi-dimensional issue. It is partly for this reason that the paper does not suggest any specific solutions. The solution in any particular case will involve tradeoffs between the factors identified in the paper as well as value judgements regarding the ranking of the various factors.

In determining the degree of centralisation, various factors are in tension. Advocates of centralisation often contend that it ensures uniform and consistent standards, minimises inequalities, avoids the duplication of services, allows for the achievement of economies of scale, and increases coherence and coordination. Advocates of decentralisation, on the other hand, point to the enhancement of local autonomy and empowerment, greater customisation and innovation, and increased participation as benefits of decentralisation.

Economic, social, managerial and constitutional perspectives offer a number of theoretical frameworks that are useful in considering issues of centralisation/decentralisation. This paper draws together ideas from across these perspectives. It concludes that the solution is likely to be characterised by a “tight/loose” pattern whereby there is “tight” or centralised control over the major objectives that is then joined by “loose” or decentralised discretion over the ways in which those objectives are achieved to varying degrees.

02/16 New Zealand’s Family Assistance Tax Credits: Evolution and Operation Patrick Nolan (PhD student at Victoria University)

Abstract: The Family Assistance Tax Credits provide income-tested (and in some cases work-tested) financial assistance for families with financially dependent children who are living at home. This paper describes the evolution and operation of the Family Assistance programmes. This description clarifies how these programmes have evolved and operate and provides a basis for future research. The topics discussed in this paper are as follows: the programmes that preceded the Family Assistance programmes; the changing levels of assistance, abatement regimes and eligibility criteria for each of the Family Assistance programmes; the roles of the Inland Revenue Department and the Ministry of Social Development in administering the Family Assistance programmes; the definitions of income in operation in the social welfare and tax systems, the calculation of the taxation and abatement of social welfare benefits and the calculation of Family Assistance entitlement; the calculation of the impact of the Family Assistance programmes on the financial rewards from work; and the fiscal cost to the government of the social assistance system in general and the Family Assistance programmes in particular.

02/17 Education and Maori Relative Income Levels over Time: The Mediating Effect of Occupation, Industry, Hours of Work and Locality Sholeh A Maani (University of Auckland)

Abstract: This paper examines ethnic differences in the relationship between educational attainment and income in New Zealand over the period 1986 to 1996. In particular, it uses a 50% sample from the Census in each of those years to determine how far ethnic differences in income are explained by educational qualifications, access to higher paying occupations and industries, hours of work, locality of residence and marital status. The study is restricted to all those employed.

Over the period under study, the gap between Maori and European incomes increased. This reflects Maori lower educational qualifications and concentration in occupations and industries that experienced low employment growth at a time when income returns to educational qualifications increased. Those with higher educational qualifications also experienced growth in hours of work, reflecting increasing demand for skills. Nevertheless income returns to qualifications were higher for Maori than for non-Maori in both years. This reflects the particular and increasing disadvantage faced by Maori with no qualifications compared to Europeans with no qualifications and the fact that the gap between mean incomes of Maori and Europeans reduces as qualifications rise. Maori participation in higher education increased strongly over the period.

Controlling for a wide range of characteristics, Maori residing in rural areas are more disadvantaged than any other group. Maori are also less likely to be married. Not being married is associated with lower incomes for males.

By 1996 there was little difference among ethnic groups in access to managerial and professional occupations for people with higher educational qualifications. Overall, most of the ethnic gap in incomes can be explained by differences in the characteristics of the groups, rather than by differences in the way in which these characteristics are translated into income. 02/18 Protection against Government Takings: Compensation for Regulation? Kevin Guerin (Treasury)

Abstract: The paper responds to recent debate in New Zealand on the power of the government to take private property, directly or through regulatory constraints. This aspect of regulation has received less attention in New Zealand than it warrants. This paper addresses the issue of which protections against takings are appropriate, and the role of compensation as a protective device. A taking can be broadly defined an act by which a government assumes or assigns control over all or part of a property right held by a private party. Government regulation is typically not treated as a taking. In practice, compensation is normally required only for physical takings, such as the acquisition of land, and is not available for takings through regulation, such as restricting the right to use land in a particular way. New Zealand has three options for improved protection against takings: a tighter regime for scrutinising the quality of regulation, more restricted takings powers, and extended compensation provisions. The desirability and practicality of a greater role for compensation requires, however, more detailed consideration. The paper aims to stimulate further debate in this area as an aspect of the wider debate on regulatory quality.

02/19 Modelling New Zealand Consumption Expenditure over the 1990s. Khoon Lek Goh and Richard Downing (Treasury)

Abstract: This paper presents two models of consumption for the primary purpose of forecasting consumption expenditure growth in New Zealand. The models, which are consistent with a range of consumption functions including the life-cycle and permanent income hypothesis, are error correction models with the long-run equations estimated using both the conventional ordinary least squares procedure as well as the Stock and Watson procedure of leads and lags. Unlike earlier New Zealand studies, actual data on household net wealth, rather than proxies or derived series were used. This allowed the wealth variable to modelled in disaggregated form. Mortgage equity withdrawal by households and funds brought into the economy by immigrants are two novel variables included in the consumption models. Migrant transfers were found to have an influence on short-run consumption growth, but not mortgage equity withdrawal although the latter did contribute to a higher overall model fit. Net non-financial wealth was found to have short-run influence on consumption but not in the long-run.

02/20 Institutions and Decision Making for Sustainable Development Basil Sharp (University of Auckland)

Abstract: Economic theory provides a coherent framework for analysing the elements of growth and sustainable development. Robust policies and appropriate institutional structures are essential to achieving sustainable development. Environmental problems are rooted in failed markets and their resolution requires government taking some kind of action – to establish property rights, set standards of liability, apply polluter pays taxes, or regulate. There is ample evidence showing that market based instruments can achieve the same environmental outcome at considerably less cost relative to command and control. Rational policy must seriously consider the use of market-based instruments.

A framework for considering the quality of institutional structures vis-à-vis achieving sustainable development is presented. The framework is applied to aspects of the Resource Management Act 1991. Although the Act aims to promote sustainable management it is the primary legal foundation for sustainable development policy. One result of the Act was to devolve a great deal of environmental management and policy to local government. To a limited extent the Act is permissive and creates opportunities for local and regional government to find effective and efficient ways of achieving environmental outcomes that suit their communities. There is a clear preference for command and control in situations where statute provides a legal framework for market based instruments. But the options for using market-based instruments are limited. There are instances where attempts by regional administrators to implement market-based instruments are thwarted either by statute or by coordination difficulties at higher levels of government. Barriers to using market-based instruments are identified along with suggestions for institutional reform.

02/21 Determining the Discount Rate for Government Projects Louise Young (Treasury)

Discount rates are widely used in the public sector to assess policy proposals where costs and benefits accrue over long time periods. Socially optimal policy choices require an appropriate choice of discount rate. This paper assesses the applicability of the two key theoretical approaches to selecting discount rates in the public sector. The two key theoretical approaches considered are the social rate of time preference and the social opportunity cost. Estimation issues in determining the rate using these two approaches are reviewed. The social rate of time preference is considered to be the appropriate approach. When estimates of the social rate of time preference are unavailable or clearly unreliable and the Government is considering financing a project, the social opportunity cost should be used. The social opportunity cost can be used as a proxy for the social rate of time preference. The paper presents an example using the capital asset pricing model in a weighted average cost of capital formula to determine a social opportunity cost.