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Treasury Advice Too Complacent about Growth

17 November 2005

Treasury Advice Too Complacent about Economic Growth

"The proposals in the Treasury Briefing to the Incoming Government, while useful, represent only small steps toward improving New Zealand's business environment and delivering on the goal of lifting New Zealand into the top half of the OECD", New Zealand Business Roundtable executive director Roger Kerr said today.

Mr Kerr said it was encouraging that the Treasury was recommending reforms such as reductions in personal and corporate tax rates, a slowdown in the growth of government spending and a review of its quality, tariff reductions and a rethink of government policies on climate change, the Resource Management Act, roading, electricity and privatisation.

"These are areas where we have been advocating reform for a number of years, and we are pleased to see the Treasury putting forward advice that is consistent with that of the OECD, the IMF and others."

Mr Kerr said the Treasury paper agrees with the Business Roundtable's assessment that the county is not 'on track' to lift GDP per capita into the top half of the OECD in the next decade. However, the briefing paper is silent on whether Treasury thinks New Zealand is likely to close the gap with the OECD average or with Australia materially, or at all, under current policies. This could fuel complacency about New Zealand's growth prospects.

Treasury's own forecasts show a declining trajectory of growth going forward and recent policy changes will - over time - act to reduce the economy's growth potential.

It was disappointing that the Treasury has not recognised business community concerns about the damage to business productivity from the endless barrage of ill-justified and intrusive regulation in product markets, the workplace, banking and securities markets. More such regulation, for example of telecommunications, has been foreshadowed.

To dismiss the need for changes other than to the RMA on the grounds that New Zealand ranks well internationally "in the majority of these areas" is to ignore the large potential for improvement and is a recipe for mediocrity.

Similarly, the discussion of government spending fails to note the problem that spending has grown too fast simply because economic growth has filled the government's coffers. The Treasury should be considering improvements to the fiscal rules in the Public Finance Act that would improve the accountability for spending to taxpayers, and engaging in the debate about whether explicit tax and expenditure limits would be desirable.

Lastly, the briefing paper does not sufficiently emphasise that economic growth is primarily dependent on good institutions and policies that are consistent with high levels of economic freedom and allow entrepreneurship to thrive.

It does not, for example, examine the case for compensation for regulatory takings or the impact of MMP on the quality of policy making and levels of government spending.

"And although Treasury Secretary John Whitehead has said that Treasury is well aware of research showing the importance of economic freedom for growth, there is no mention of the concept in the briefing", Mr Kerr concluded.


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