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Hide Speech: Jim's Jobs Machine Spins Wheels

Speech by ACT Finance Spokesman MP Rodney Hide, delivered 12pm, Tuesday 9 April, 2002 to Financial Planners and Insurance Advisers Association at Turnbull House, Wellington.

The Alliance meltdown has served a useful purpose for Jim Anderton. It has diverted attention toward politics, away from policy. Jim's much touted "Jobs Machine" is spinning its wheels and the Deputy Prime Minister has proved no more adept at "picking winners" and laying his hands on the economy than politicians of the past.

Jim's business hand-outs have done nothing for the economy - the 2.4 percent result for last year was desultory. The Labour-Alliance government have made it much tougher for business and we are all the poorer as a result. Public cash sprayed around business by Mr Anderton doesn't compensate for high taxes and high compliance costs. Indeed, the handouts contribute to the general economic malaise. Putting business on welfare in no way builds a strong economy.

Thankfully for Jim, the fight with his own party has diverted attention from his policy failures.

Alliance president Matt McCarten is right when he says the fight is not over philosophy, policy or strategy. It is over list places. The Alliance scored eight percent last election. That entitled them to 10 MPs. No one believes they can get anywhere near that this election - least of all the Alliance MPs.

The fight is over who is where on the list. The problem is made all the worse for the Alliance because it comprises disparate parties. Their party list at the last election was:

1. Alliance - Jim Anderton 2. Mana Motuhake - Sandra Lee 3. New Labour - Matt Robson 4. Democrats - John Wright 5. Alliance - Phillida Bunkle 6. New Labour - Laila Harre 7. Democrat - Grant Gillon 8. New Labour - Liz Gordon 9. Mana Motuhake - Willie Jackson 10. New Labour - Kevin Campbell

Three of the top four places were taken up party leaders. It was even tougher in 1996. Then Greens co-leader Jeannette Fitzsimmons was at number three and Liberals leader Frank Grover (remember him?) was at five. The leadership of the five constituent parties took out the top five places on the Alliance party list. Things were made easier in 1999 with the departure of the Greens and Frank Grover's decampment to Christian Heritage.

Alliance MPs believe that cuddled up to Labour, they are only good for four MPs at the next election. That means Jim Anderton winning Wigram and getting three or so percent.

Willie rolled Sandra Lee as Mana Motuhake leader to get up the Alliance list. Grant Gillon rolled John Wright as leader of the Democrats.

But Jim and Sandra have stuck together. There was no room for Willie in the top places. Matt Robson was always to be ahead of Laila - Jim rightly saw her as his threat. Liz Gordon was out. No one has a place for Kevin Campbell or Phillida Bunkle.

Most importantly, there was no room for President and parliamentary aspirant Matt McCarten.

Matt, Laila and Willie figure that they can hit the five percent threshold if they decamp and bring in six or more MPs. They were dog tucker if they stayed with the Alliance. There you have it. John Wright has shot up Jim's list. Sandra stays at two. Kevin and Phillida don't know what to do, because they don't know who will be more successful. And no one wants them.

The spectacle now is an open fight over money, members and votes. It won't be pretty. The Greens, the two Alliance parties, and Winston Peters are set to slug it out for the same vote. It will get tougher and more acrimonious. The strategy of Laila Harre, Matt McCarten and Willie Jackson must be to go harder on the government to differentiate themselves - and Helen Clark and Jim Anderton have to keep up the appearance of stability and business as usual. Helen Clark is banking on the "New" Alliance party not getting close to five percent and not wanting to precipitate an election. She is probably right. But the "New" Alliance's failure to get traction will see them just going ever harder against the government. Laila will be eventually expelled from Cabinet.

So much for politics. Now policy.

Jim Anderton famously declared on election night 1999 that it was the end of "hands off" government. The government now was to be firmly "hands on". And so it is.

Jim's two big policy wins have been Kiwibank and his "Jobs Machine". Both policies are in serious trouble.

Kiwibank has all but failed before it has even been rolled out. The taxpayers have been suckered with an $80 million bill so that NZ Post could play at being in finance. The roll-out has been shaky. The bank won't have the reach or service that was promised. Postshop owners are having to be beaten into the bank with the threat of losing their franchise if they don't go along with it. They are not happy. For many of them, the Kiwibank will prove a major financial risk and cost - and they know it.

The problems are deep-seated. Here is a new one that hasn't been reported yet: NZ Post trumpets they can accept ParcelPost packages up to 25kg in weight, 1.05m in length and 2.5m in combined length and girth. The problem is that parcels near this size can't fit through the new Kiwibank grilles. This was pointed out to NZ Post by franchisees as soon as they saw the plans. No changes have been made.

So, when a customer turns up with a large parcel the poor post office staff have to open the heavy security door, defeating the security's entire purpose, in order to collect the parcel. It won't take long for beagle boys to figure this out.

There is another problem. The scales up against the grille can't weigh the larger parcels. This problem too was predicted and appears not to have been rectified. I have had several reports of customers being very pleased at how light their parcels have weighed because Post staff have been unable to balance them properly on the scales.

So much for "hands on" banking.

The other great economic initiative is the "Jobs Machine". $96 million has been set aside to be sprayed around as Jim Anderton and his bureaucrats best see fit.

The idea is that this money is supposed to "oil up" the wheels of industry. The cogs and wheels are all spinning but there is no traction. The problem is the weight of tax and compliance that's crushing down on business. Labour and the Alliance have just piled on more weight. Last year with the best economic conditions for decades, New Zealand only managed a paltry 2.4 percent growth. This compares to the average of three percent through the 1990s and four percent for the five years to 1996.

The Business Roundtable's Roger Kerr has summarised the burden government imposes on business and innovation as follows:

Taxes in New Zealand are high by historical standards and relative to those of more successful countries. Any moderately successful business person faces a combined rate of tax approaching 50 percent, having regard to a 39 percent income tax, GST of 12.5 percent and ACC and other levies. They spend half the year working for the government. This tax burden in turn reflects spending by governments at all levels equal to around 40 percent of gross domestic product (GDP), which is far higher than historical levels and well above that of countries such as the United States, Ireland, Australia and many Asian countries.

Taxes are also the main source of business compliance costs. The costs of complying with tax have been estimated to be around 2.5 percent of GDP, or as much as the government spends on defence and law and order. The government's decision to increase the top tax rate to 39 percent greatly complicated the tax system and required 47 pages of new legislation. Proposals to cut the company tax rate without cutting personal rates would make the situation even worse.

In the last two years the regulatory creep has turned into a gallop with a tariff freeze, the removal of competition in ACC, the re-regulation of the labour market, energy efficiency regulation, further controls on company takeovers, a more restrictive Commerce Act, greater regulation of electricity, gas and telecommunications, together with plans to extend regulation of health and safety, expand the Holidays Act, ratify the Kyoto Protocol, and much else.

All of this will have added over $26,000 dollars a year to the costs of a medium-sized business by the end of this parliamentary term, according to Business New Zealand.

A compiler of a business compliance manual noted recently that over 60 pieces of legislation affect the day-to-day running of every business. The cost is huge.

Against this, Jim Anderton is chucking around about $96 million for Industry and Regional Development.

It is a sum of little consequence. Suppose, to begin with, that the government's $100 million programme is new money: manna from heaven.

New Zealand is roughly a $100 billion economy; national income or gross domestic product (GDP) is a bit over that figure a year. That income is produced from a stock of productive capital that has been estimated to be about $300 billion. On this basis we use about $3 of capital to produce $1 of national income - or, as an economist would say, our capital to output ratio is about 3 : 1.

If we were given an extra $100 million as manna from heaven, what could that amount of investment get us by way of extra national income? With a capital to output ratio of 3 : 1 and on the assumption that the productivity of the new capital is the same as that of the capital already in place, the answer is about $33 million a year.

That $33 million is an addition to our national income of $100 billion; in other words it is an increase of 0.033 percent. Dr Cullen is aiming to take New Zealand back to an annual average growth rate of four percent. On the very best of assumptions, the "Jobs Machine's" contribution to this target is infinitesimal.

Let's now look at the benefits of the Machine in terms of jobs. There are about 1.8 million people employed in the New Zealand workforce. This means that each worker on average is backed by around $167,000 of capital. If the government injects an additional $100 million into the economy (still using manna from heaven), and assuming $167,000 is needed for each job, it follows that about 600 new jobs will be created each year. Over the life of the Employment Contracts Act there was a net increase in employment in New Zealand of around 300,000 jobs, or around 37,500 a year (not all due to the ECA, of course). With the government's 'Jobs Machine' creating 600 jobs a year at most, it will take over 60 years for it to match the annual increase in employment that New Zealand recently achieved.

That's on the best of assumptions. Now to the problems.

The investment funds involved are not manna from heaven. They are taken from citizens who would have spent them differently, and each dollar spent by the government costs more than a dollar to raise. The disincentive effects associated with taxation, combined with the administrative costs for the government and the taxpayer, mean that it probably costs $1.50 to raise a marginal dollar of tax revenue. So in raising $100 million the government knocks some $50 million off the economy - from the very beginning it is further from its goal of raising national income. The Government's investment projects have to be very profitable to make up that deficit and yield a normal return. If there were investment projects around that were that profitable, it would be surprising if private entrepreneurs hadn't spotted them. Tax-financed investments are almost by definition economic losers on average. Taxes need to be treated like the scarce resource they are, and not used for projects that could be financed without incurring the deadweight costs of taxation.

Capital, skilled labour and other resources are drawn away from other firms or industries when governments fund a particular firm or industry. Resources are shuffled around the economy, away from activities that can stand on their own feet and into activities that are only viable because of government subsidies. We invest more into activities that are less competitive. The result from a national point of view is that resources are misallocated and potential national income is lost.

Also, each dollar taken from someone will probably be spent less wisely. The decisions in so-called economic development programmes are made not just by entrepreneurs putting their own money at risk but also by politicians and bureaucrats risking taxpayers' money. We have seen plenty of that. It cost $96,000 to change the Ministry of Commerce's name to the Ministry of Economic Development. Industry New Zealand spent nearly $3 million on consultants in its first year, and $5 million in the first two.

It is symptomatic that bureaucrats at the head office of the Ministry of Economic Development recently spent $5,000 on a posh coffee machine.

The Ministry is expected to hand out a certain amount of money every financial year. Yet in the first two-thirds of this financial year, it has dished out less than half of its allocated cash. Jim Anderton is even finding it hard to give away other people's money!

Business hand-outs waste resources through the unproductive activities associated with government assistance programmes. They are inevitably bureaucratic and costly to administer. They encourage business people to spend time lobbying rather than growing their businesses. Taken very far, they breed a culture of political favouritism or worse, as we saw in Asia and indeed in New Zealand in earlier years.

The waste of resources was amply displayed by John Warman who manages PaintPlus Colour Systems in Glenfield. He told the New Zealand Herald that applying for an enterprise award was a "distraction" and that he did not take up his full $7,400 award.

The government has proved itself amazingly inept at "picking winners" even by government standards. Last year Jim Anderton and Helen Clark fell over themselves praising Bill Lloyd and Sovereign Yachts for coming home to New Zealand. The promise was "hundreds of new jobs and export earnings of more than a hundred million dollars a year". Jim Anderton "facilitated" Sovereign Yachts' development at Hobsonville airbase through a thicket of government mandated procedures and processes. It took five months, and it is estimated that by themselves, Sovereign would have taken ten years. Four hectares of valuable defence land was sold for a song. Our own super yacht builders with a proven track record here at home missed out.

The result after one year: just 40 jobs, despite the promise of 150 jobs immediately.

The same with New Zealand Yachts at Whangarei. It was another flagship enterprise. It was even opened by Prime Minister Helen Clark.

It has failed to meet its initial sales targets. It is 30 percent through one $10 million yacht, despite expecting to start work on two by last July.

In May, then Trade NZ general manager Dennis Maconaghie said the company was on the shortlist for $440m worth of work. But the company has yet to secure an order beyond the yacht under construction, despite having space to build seven.

NZ Yachts predicted it would create 200 jobs by last Christmas. But union organiser Derek Overmire has said only about 115 jobs have been created and workers are less skilled and paid less than at the company which previously occupied the same site.

The fact is that Jim Anderton is not better at picking business winners than he is at picking List MPs. The government's "hand's on" "Jobs Machine" is failing to deliver, just as was predicted.

We can't succeed economically by taxpayer-supplied perks to business. We have tested that policy to destruction under the late Sir Robert Muldoon. The policies that will deliver economic success to New Zealand are those policies that help every business, not just the companies picked as winners by politicians and bureaucrats. Those winning policies are lower taxes, less red tape and the support of a government that respects private property and contracts instead of trampling both.


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