Leviathan Continues to Stifle Growth

14 December 2004

Leviathan Continues to Stifle Growth

"The government is still spending most of the economy's 'growth dividend' and there is no sign of an acceleration in New Zealand 's long-term growth rate", the executive director of the New Zealand Business Roundtable, Roger Kerr, said today.

He was commenting on the release of the Budget Policy Statement (BPS) for 2005 and the December Economic and Fiscal Update 2004 (DEFU).

Mr Kerr said the salient facts about New Zealand 's growth performance contained in the documents were as follows:

* Annual growth in real gross domestic product (GDP) has averaged 3.7 percent per annum over the past five years.

* This growth rate is the same as the average 3.7 percent growth rate achieved since 1993. Finance minister Michael Cullen is quite wrong to say recent years have been exceptional. (Nevertheless, it is pleasing to note that, contrary to its past rhetoric about "failed policies", the government now acknowledges in the DEFU that " New Zealand 's recent growth performance can be attributed to past structural reforms that began in the mid-1980s.")

* However, for the four years to 2009, growth is projected to fall away to under 3 percent a year on average. Real per capita growth is projected to average under 2 percent a year, less than half the rate needed to achieve the government's 'top priority' goal of lifting New Zealand living standards into the top half of the OECD income rankings.

"This is conclusive evidence that the government's goal is not being achieved on present policies", Mr Kerr said. "Core Crown operating expenses are expected to rise by a full 2 percent of GDP between now and 2008/09. The high and rising levels of government spending are curbing growth prospects."

The Business Roundtable believed that in the interests of better economic performance, tighter disciplines on spending and taxation needed to be introduced into the Fiscal Responsibility Act.*

It also supported the 2001 McLeod Tax Review recommendation that the tax scale should be lower and flatter to support growth.

"Given expenditure discipline, there is far more scope than the government is acknowledging to cut taxes", Mr Kerr said. "There is no reason why a medium-term programme of tax reductions would put undue pressure on monetary policy. In fact, the government's large spending increases create a proportionately higher risk.

"Nor does capital expenditure require large surpluses, as the government is arguing. More such expenditure, for example in infrastructure, could be financed privately.

"This year's Working for Families budget package was essentially about redistribution, not growth. It is disappointing that the government is still over-spending and over-taxing and is not focused on growth. If it is serious about growth being its 'top priority' goal, it should abandon its failed policies and put in place a more credible strategy", Mr Kerr concluded.

* See Bryce Wilkinson, Restraining Leviathan: A Review of the Fiscal Responsibility Act 1994 , New Zealand Business Roundtable, www.nzbr.org.nz

ENDS

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