Economic Direction Sound, Harder Decisions Needed

Economic Direction Sound but Harder Decisions Required

“The 2009 Budget is a first step on the long road to:

- repairing the damage of the economic mismanagement of recent years

- raising the economy’s rate of productivity growth and correcting structural imbalances, and

- achieving the government’s goal of closing the income gap with Australia by 2025”,

Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

“The Budget recognises the need to shift resources from the domestic economy to internationally competing industries. This is necessary to reduce the current account deficit and New Zealand’s vulnerability to external funding constraints. Firmer plans for faster adjustment are desirable. There is no need, for example, to allow the unemployment rate to rise to 8 percent of the labour force as forecast in the Budget.”

Mr Kerr said that, in this context, the plans for curbing government spending growth were inadequate. Core Crown expenses are expected to grow by as much as $3 billion this year, and it was sobering to note that they are forecast to rise from 32% of GDP in 2007/08 to 37% in the government’s term of office.

“Given these trends, this cannot be described as a tough budget. Increasing the government spending share of the economy at the expense of the private sector is inconsistent with achieving faster economic growth. Beyond the Budget, focused attention on entire spending programmes and agencies and on public sector productivity is required. Also needed is the introduction of a legislated fiscal rule as recommended by the OECD and a firm, dated commitment to the government’s goal of reducing all income tax rates to a maximum of 30 percent.

“Clearly the deterioration in the economy forced the government to reconsider its commitments to maintain spending on programmes such as Working for Families, interest-free student loans and broadband and its commitment to implement further tax cuts. Choosing to break the commitment to tax cuts is unfortunately an inferior option from a growth perspective. Suspending automatic contributions to the Cullen Fund makes sense.”

Mr Kerr said that, more generally, there was a disconnect between the adjustment and productivity goals and announced policies.

“If New Zealand is to seriously aspire to Australian income levels, it cannot continue to avoid ‘third rail’ issues such as the superannuation eligibility age (which is to be lifted in Australia to 67), privatisation of commercial businesses, improvements in labour market flexibility and welfare reform. The demographic outlook and the need for New Zealand to compete successfully with dynamic, fast-growing countries are very challenging.

“Starting next week, the government must get to work on the next phase of its economic strategy”, Mr Kerr said.

“A focus on all feasible growth-enhancing measures, requiring many more ‘rolling mauls’, is the key to both promoting a high-income economy and restoring a sound budget position more rapidly.

“The government must not repeat the performance of the previous government of talking the talk about lifting New Zealand up the international income rankings and not walking the walk.”

ENDS

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