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Government Gives Up On Growth

Government Gives Up On Growth

“With the 2004 budget the government has abandoned any pretence that its top priority is economic growth”, Roger Kerr, executive director of the New Zealand Business, said today. “No long-term strategy is laid out for making New Zealand a high productivity, high wage, high employment economy.

“The budget is almost all about wealth redistribution (dividing the pie), not wealth creation (making the pie bigger). Beyond the short term, this is a losing strategy for helping people to get ahead, including those on low incomes.

“The budget also confirms that minister of finance Michael Cullen’s report card for getting the economy on to a higher growth path by his own deadline of mid-2004 is – in NCEA terminology – “not achieved”. The budget projections are in fact for lower annual GDP growth rates, averaging under 3 percent a year for the next four years, compared with 3.5 percent for the past 10 years. In per capita GDP terms, the decline is from 2.5 percent to 2 percent a year. Moreover, no increase in labour productivity growth is projected and no reduction in the unemployment rate.

Mr Kerr said that positive aspects of the budget included:

the reduction in the gross debt target to 20 percent of GDP;

a recognition of the importance of supporting families, and making work a more attractive option than welfare; and

some of the decisions on economic development and industry/research collaboration, although business at large prefers lower taxes to corporate welfare. Moreover, such spending can have at most only an infinitesimal impact on a $138 billion economy.

Offsetting these, however, were major negative features:

an extraordinary $14 billion of planned additional government spending over the next 3 years, which is bound to put more pressure on interest rates and the export sector;

more low quality spending, such as the extension of allowances to greater numbers of tertiary students, and an absence of initiatives to get greater value for money for taxpayer dollars;

the missed opportunity to align tax policy with growth objectives by lowering high personal and company tax rates. The highest marginal tax rates and taxes on capital income are the most damaging to growth. The Treasury had recently advocated this approach, estimating that all rates could be reduced to a flat rate of 18 percent for an annual cost of $4.7 billion;

the failure to heed overseas lessons of welfare reform which clearly show that greater incentives to work need to be coupled with tighter administrative rules, including time limits on benefits, to reduce welfare dependency. Modifications to benefit abatement rates are likely to have only a weak effect, and they increase the effective marginal tax rates further up the income scale faced by those exiting welfare; and

the absence of announcements on changes to growth-reducing policies such as inflexible employment laws, over-regulation of business, the Resource Management Act, electricity and roading bottlenecks, and the Kyoto Protocol.

“In too many respects the budget takes us back to the bad days of election-year auctions”, Mr Kerr said. “By spending more than an additional $10,000 for every household in New Zealand over the next three years, the government clearly believes it can spend taxpayers’ money better than taxpayers themselves, which is simply not credible. There is a strong case for amending the Fiscal Responsibility Act to impose greater discipline on government spending and return windfall revenue gains to taxpayers”, Mr Kerr concluded.

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