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Focus on Productivity and Growth Missing in Budget

Focus on Productivity and Growth Missing in Budget

“The positive moves in the budget, especially on company tax, are overshadowed by the absence of a strategic direction and of effective policies to lift the economy’s sagging growth rate”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“Moreover, excessive and wasteful government spending – up a massive $3.8 billion in the next financial year – and cost-increasing regulation will continue to stifle productivity growth, conflict with monetary policy, and damage the export sector. There are serious worries about the value for money of much of the $21 billion of extra government spending since 2000, such as in the public health system where productivity seems to be declining.”

Mr Kerr said that the budget’s forecasts of medium-term GDP growth were in line with other forecasts and only 2.5 percent a year on average. This was well below finance minister Dr Cullen’s 2001 budget target of 4 percent or more, below the growth rates forecast in the recent Australian budget, and below New Zealand growth rates in the 1990s.

“On present policies income gaps with Australia will continue to widen”, Mr Kerr said. “Dr Cullen should have followed the advice of business organisations, the OECD and the IMF to slow the growth of government spending and cut taxes more.

“In framing fiscal policy he is placing too much emphasis on the demand side of the economy and not enough on the supply side. Stronger incentives, including lower taxes, are needed to encourage workforce participation, investment and non-inflationary growth. Inflation, after all, is ‘too much money chasing too few goods’, and one way of reducing inflationary pressures is to increase the economy’s productive capacity and supply of goods.

“He is also placing too much emphasis on the operating surplus, whereas it is government spending and regulation that is fuelling inflation in the domestic sector of the economy. There is nothing monetary policy can do to shield internationally competing industries from the crowding-out effects of high taxes and unproductive government spending.”

Mr Kerr said that the movement on business taxation was pleasing but still left New Zealand with a headline company tax rate that did not ‘stand out from the crowd’ internationally.

Moreover, it was disappointing that the government had not followed the advice of the McLeod tax review and several business organisations and cut personal and trust rates in tandem with the company rate. The cut in the company rate would be of little benefit to many small firms, farmers and other unincorporated businesses.

Mr Kerr said higher incomes from faster economic growth and more broadly based tax cuts would also encourage savings. By contrast the KiwiSaver measures were more likely to change savings patterns than to increase total savings. The compulsory employer element was a completely unjustified intrusion into voluntary workplace arrangements and, given that its ultimate cost would largely be borne by workers, would be resented by many employers and their staff.

The tax measures would also increase the complexity of the tax system. New Zealand was adding about 100 pages annually to an Income Tax Act already 2400 pages long, whereas the entire tax code of Hong Kong, with an essentially flat tax, came to around 200 pages.

“The budget is another missed opportunity”, Mr Kerr said. “The forecasts make it clear that, after three terms in office, the government will have made no progress on its former ‘top priority’ goal of moving New Zealand up the OECD income ladder.

“It is disappointing that it has not listened to the widely shared views among the business community, international organisations and independent commentators on how New Zealand could be doing so much better if it reduced government involvement in the economy and created a freer environment. The time has come for debate on stronger fiscal and regulatory responsibility constraints.”

_17 May 2007


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