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Treasury Economic Briefing: Comment


Treasury Economic Briefing: Comment

The executive director of the New Zealand Business Roundtable, Roger Kerr, said today that the Treasury's Briefing to the Incoming Government 2002 contained useful data on New Zealand's economic performance but that its ideas on ways of achieving the government's goals for economic growth were unconvincing and at variance with orthodox OECD thinking.

The Briefing unequivocally states that "New Zealand's growth performance over the 1990s has been significantly better than in the previous two decades." It points out that "over the 1990s and more recently, employment growth has been the best in the OECD, and current unemployment levels are below the OECD average", reflecting the impact of labour market reform in the late 1980s and early 1990s. Inflation outcomes and the government's financial position have also greatly improved, as has the current account position, although external liabilities remain high.

The upshot, according to the Briefing, is that "since 1992, growth in New Zealand's real per capita income has been closer to that of other developed countries."

"It is clear from the Briefing that talk of 'failed policies of the past' is nonsense", Mr Kerr said. "It is time to move on and examine why New Zealand has done less well in recent years and how to achieve faster growth in the future."

The Briefing rightly says this task is urgent: "we need to find ways to get more ambitious about our relative growth performance, and quickly."

Curiously, however, it contains no comment on the policy slippage of recent years and its inconclusive speculation about the implications of the New Zealand economy's size and location overlooks the clear evidence from modern economic research that the institutional and policy environment is the dominant factor in explaining economic performance. No reference is made, for example, to New Zealand's fall in the rankings of economic freedom or the costs of a lack of stability and predictability in policy directions.

Even more extraordinary is the absence of any significant comment on crucial areas that the OECD, representing the mainstream views of its member governments, has made on New Zealand in its recent reports.

The OECD has drawn attention to problems with government spending, the merits of the McLeod Tax Review's recommendations for a lower and flatter tax structure, the dubious value of industry policies, the gains from phasing out tariffs, the backward moves on ACC and employment law, the benefits of privatisation rather than nationalisation of industries, regulations that are stifling growth such as the Resource Management Act, the case for more choice and competition in health and education, and the need to address welfare dependency and superannuation policies.

None of this mainstream analysis, which featured in Treasury advice in the past, is emphasised in the latest Briefing. On fiscal policy, there is some discussion of poor quality spending but not of the overall tax burden, and no reference at all to the key McLeod Review recommendations. The commentary on regulation shows no serious recognition of business sector concerns. For example, the statement is made that New Zealand's "labour market regulation and institutions are generally sound." One wonders how many Treasury officers have experienced the problems of small business owners dealing with opportunistic personal grievance claims. Similarly, while compliance costs are mentioned there is no discussion of the larger economic costs of many regulations.

Instead of examining such fundamental obstacles to growth, the Briefing focuses on peripheral matters which cannot possibly have a significant bearing on the country's growth rate. Although it warns that the economic costs of ratifying the Kyoto Protocol "are potentially significant", it fails to offer clear-cut advice on actions that should be avoided if New Zealand is to achieve faster growth.

"Overall, the most worrying feature of the Briefing is that Treasury has failed to highlight the fact that New Zealand has no likelihood of reaching growth rates of the order of 4 percent or more a year under existing policies, or to explain clearly to the public the major changes that would be necessary to achieve that goal", Mr Kerr concluded.

"New Zealand cannot hope to match the performance of more successful OECD countries, such as Australia, Ireland and the United States, without significant policy adjustments in the direction of more mainstream, market-oriented OECD approaches. Stronger policy leadership is needed and other sources of advice should be tapped for ideas on how to implement proven pro-growth strategies with greater urgency."


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