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Government Must Abandon Failed Policies

Government Must Abandon Failed Policies

"The projections for the economy in the Budget Policy Statement show that the government's growth strategy is failing," Roger Kerr, executive director of the New Zealand Business Roundtable said today.

The government has targeted annual rates of economic growth of 4 percent or more to lift New Zealand 's average income levels into the top half of the OECD range.

"In each of the forecast years, growth falls well short of 4 percent and averages only just over 3 percent", Mr Kerr said. "This is below the annual average of 3.6 percent achieved over the past decade. It is also below the BPS projections for Australia . The gap between New Zealanders' living standards and Australians' is set to widen.

"The outlook confirms the assessment in last week's OECD report on New Zealand that the economy's growth rate has increased significantly due to the earlier economic reforms, but that, in the OECD's words, "a further acceleration - necessary if New Zealand is to move back into the top half of the OECD ranking, as the government is intent on doing - is still not in sight".

Mr Kerr said that the outlook also contained risks, in particular a 5-year period of forecast current account deficits averaging over 5.5 percent of GDP a year, which will further increase New Zealand's already very high level of external liabilities.

"Too much attention in the BPS is focused on the healthy state of the operating balance and not enough on the use of the fiscal policy to promote growth", Mr Kerr said. "Growth will be held back by a level of government spending relative to GDP which is no longer forecast to decline. Lower and better quality central and local government spending is necessary to promote faster growth.

"All of the focus is on income redistribution in the form of reducing tax rates for those on low incomes, thus widening the tax scale, and on increasing welfare spending. Only growth ultimately helps those on low incomes as well as the community at large, but there is no focus in the BPS on wealth creation and a better environment for business expansion. The McLeod committee recommendations to lower and flatten the tax scale to promote faster growth are again ignored. Recent and planned policy changes, such as those to employment law, will reduce, not increase, productivity growth.

"The OECD report was highly critical of the government's economic directions", Mr Kerr said.

"Most of the media have not given this important report the attention it deserves. The OECD's advice to the government was very much in line with what the New Zealand business community has been saying. Finance minister Michael Cullen has said that by the middle of next year it will be clear whether the economy is moving to a higher growth path. The BPS projections already indicate that this will not happen. If the government is serious about what it calls its "top priority" objective of faster growth, it should now accept that the time has come for it to heed the advice of business and the OECD and abandon its failed policies", Mr Kerr concluded.

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