New Zealand Centre for Political Research - www.nzcpr.com
NZCPR Weekly
Is Our Government Too Big?
In this issue, NZCPR Weekly highlights the critical contribution that wealth creators make to our economy, Guest
Commentator former Secretary of the Treasury Dr Graham Scott shares his concerns about the state of the state, and the
weekly poll asks NZCPR readers whether our government is too big. To support the NZCPR in promoting a free and open
society through research and publications - and to receive your free electronic book - please click here>>>
How big should our government be? To what extent do we want politicians to decide how we should be living our lives?
These are important issues to consider in election year.
In 2000, Dr Yegor Gaider, the director of the Institute of Economies in Transition, and a former acting Prime Minister
of Russia, visited New Zealand and spoke about the challenges of moving from totalitarianism to a free market economy.
In his speech “The Struggle for a Free Economy and Society in Russia” he explained how after three generations of living
under communist rule, the tipping point for the people was “the right to be free – to run their own lives, to be able to
travel where they wanted, choose the government they wanted, read the books they wanted, and have many other basic
liberties. They wanted an end to totalitarianism”.
He went on to describe how “Real socialism, as opposed to imagined socialism or the textbook socialism of some thinkers,
is, above all, totalitarian rule. A functioning socialist society and socialist economy requires a very strong,
relatively well-organised, extremely cruel, totalitarian political regime. Such a regime eliminates the complicated,
delicate mechanisms that evolved over a period of centuries to create the modern market economy. It eliminates civil
society because civil society is itself an enormous threat to totalitarian control”. (To read this fascinating speech,
click here>>>)
Dr Gaider’s insight highlights the stark contrast between the political extremes. From those who believe that
governments cannot be trusted to act in the best interest of individuals, to those who believe that individuals cannot
be trusted to act in the best interest of society. The question that each of us needs to be asking ourselves is whether
we think that we have the right balance between state control and individual freedom and liberty in New Zealand?
The present Labour Government has been described as the most socialist government in our history. During their time in
office there has been a massive expansion of the state. Government spending is now more than $20 billion dollars a year
higher than when they first came to office in 1999, the core public service workforce has increased by 55 percent over
that time from 29,000 to 45,000, and under their command the state now intrudes in unprecedented ways into our private
lives, directing how we should raise our children, what we should be eating, and what we can and cannot say in election
year.
Dr Graham Scott, a former Secretary of the Treasury and Prime Ministerial advisor, is the NZCPR’s Guest Commentator this
week. In his paper, “Some Concerns about the State of the State in New Zealand”, Graham questions whether this expansion
of state influence is desirable:
“The public service is under more pressure to conform to political direction than it has been since the professional
apolitical civil service was established almost a century ago. This pattern of deeper political control was signalled
early and has been implemented. So we are headed for an election debate not just about the usual tussle over policy
settings but also about whether this expansion of state influence is desirable or whether it is undesirable”.
Graham goes on to warn that “There is enough evidence around to suggest that the sum total of the way in which the
government has expanded the use of state powers and the particulars of how it has done this, is doing more to hold back
the development of the economy than to promote it. Its drive to transform the economy might be much assisted by more
focus on transforming itself”.
And he reminds us that in spite of the political spin, government is not a benevolent force: “it is wise never to forget
that behind the rhetoric about partnership and stakeholder consultation, governments are using the coercive powers of
the state for much of what they do. Nothing matters more in an advanced democracy than the rights and constraints the
government has in the use of the coercive powers of the state. A good government uses them sparingly, effectively and
wisely”. Click the sidebar link to read the article>>>
Let's never forget that it is people who create wealth, and governments that consume it. When people create wealth at a
rate greater than government consumption, living standards increase. But when governments impose impediments to growth
and expand the state sector too rapidly, living standards decline.
When Labour became the government, out of the 30 OECD countries New Zealand ranked 20th in GDP per capita (Gross
Domestic Product measures the value of everything produced in the country). Since then both Spain and Greece have
overtaken us and we have fallen two places to 22nd, just ahead of Korea, Portugal and the Czech Republic. Once Labour
implements their proposed climate change policies, our downwards slide will escalate.
Can anything be done? Of course it can.
In a free market economy, wealth is created when motivated individuals are able to pursue their dreams through working
hard and making money. Having a positive attitude to wealth creation within a country is absolutely essential to our
social well-being.
The ability to create wealth is a function of productivity. The more productive an enterprise is, the greater the wealth
that will be created. The problem for New Zealand is that the productivity rate has been steadily declining. Our latest
figures are dismal. They show that since Labour has been in office, productivity has averaged only 1.1 percent. That is
less than half of the productivity growth of the 1990s. To move back up the OECD ladder, productivity growth would need
to be 3 percent or more. (For more information see “Dismal Productivity Figures”>>>)
Australia’s productivity and GDP per capita OECD rankings are higher than New Zealand’s. In effect, Australians are a
third richer than New Zealanders. Imagine what a difference it would make to your life if your weekly income was a third
larger. It would undoubtedly improve your quality of life and that of your family. You would invest, purchase goods and
services provided by others, and support worthwhile causes. All in all the increase in your own wealth would create
wealth around you, helping to make the country a more prosperous and productive place. Perhaps it would also reverse the
outflow of 30,000 Kiwis a year going to Australia.
Of course productivity gains can only occur if government puts the right incentives in place. Such a framework would
need to include lower taxes, less regulation, and a reduction in red tape and compliance costs. There are many other
factors, of course, but these are a good start.
The key is a reduction in the top rates of personal tax. The main driver of wealth creation in any economy is the small
business sector which can account for 95 percent of all enterprises and employ between 65 and 70 percent of all workers.
A large proportion of small business owners pay tax at the individual income tax level. Cutting the top rates of tax
flows on as a direct incentive for small business owners to expand and grow their business, creating wealth and jobs in
the process.
The reality is that in a free country, people only make the extra effort to create wealth if it is rewarding. If it is
too hard, with the hurdles too great and the returns too small, then many people with good ideas will not bother to even
try to get their enterprise off the ground. Unless this situation is turned around, there is nothing to suggest that New
Zealand’s slide in living standards will not continue.
None of this is rocket science. Treasury has given this advice to the Labour Government each time they have won an
election. Their recommendation has always been to reduce the country’s tax burden. A lower tax environment would give
the entrepreneur more money to expand and grow his business, thereby increasing the country’s productivity. A lower tax
environment would give consumers have more money in their pockets to demand more goods and services, increasing the
country’s productivity in order to meet that demand.
So while the private sector is instrumental in increasing productivity and creating wealth, most of the money consumed
by government neither improves productivity nor increases wealth. That’s why the size of government and cost to the
economy is such a big issue in the run up to the 2008 election.
ends