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Insights - New Zealand Initiative

Insights - New Zealand Initiative

Issue 17/2013 - 17 May 2013

In this issue:

Budget 2013 - slow and steady wins the race | Oliver Hartwich
Casino crony capitalism | Luke Malpass
Education shock in Germany | Rose Patterson
All things considered ...
On the record

Budget 2013 - Slow and Steady Wins the Race

Budget 2013 confirms the government's determination to achieve fiscal surpluses by 2014/15 by stopping the growth in government spending.  Adjusted for inflation and population growth, projected government spending in 2014/15 will be 6% lower than in 2008/9, the year in which John Key's government took office.

Given that in 2008/9 core crown operating spending was 34.5% of GDP, up from 28.6% in 2004, there was clearly need for tight control of government finances.

It would be hard to find any economist supporting the view that it was sound for governments to spend fiscal surpluses in good times and then raise spending further in order to 'cushion' any subsequent recession.

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Even so, these projections represent a very commendable achievement given the pressures to further increase government spending and borrowing in the aftermath of the global financial crisis and the Christchurch earthquake.  We only have to look at Australia, Europe, and the United States to see how different things could have been for New Zealand.

The Budget shows the government remains determined to continue its programme of significant welfare reform, increased accountability for outcomes in education, partial privatisation, reform of the Resource Management Act, and achieving cost savings and productivity gains from the public sector. The thrust to ease up the supply of land for housing is a more recent, but also welcomed, focus.

Even so, there is a big gap between what the government is doing and what might be done to allow New Zealanders to better achieve their potential. The outlook for economic growth, export growth and the unemployment rate leave much to be desired.

Taxes are too high because wasteful and unnecessary spending is too high, for example, on interest free student loans and on New Zealand superannuation.  High tax rates hold back income growth.

Unemployment remains too high in part because labour laws discourage job creation and high effective marginal tax rates deter job search. The waste of human capability is bad socially and economically.

International competitiveness would be improved by more vigorous action to raise public sector productivity and reduce tax and regulatory burdens.

Predictably, but regrettably, the Budget does little to defuse the fiscal time bomb that an ageing population poses for future spending on health care and retirement incomes.  There is much still to be done after this still-laudable budget.

Casino crony capitalism

Early this week, the government announced a rather distasteful plan. In return for giving regulatory favours to the Sky City Casino in the form of more favourable gambling regulations, the casino will build a massive conference centre.

The natty new conference centre, called the New Zealand International Conference Centre (NZICC) will allegedly provide 1,000 jobs during construction and 800 during operation – and attract 33,000 people per year. The government has evidently been persuaded that an international conference centre will be of such importance, that a special deal is justified.

Whether government should be involved in regulating casinos is another question, but given that it is, dishing out favourable treatment to one gambling provider in return for building a swanky convention centre surely breaches every rule of regulation. The law should be blind to the player, be rules rather than exceptions, and should not involve deals with individual players on the understanding they’ll do the government a solid deal.

What’s next, a meat works being given an effluent dispensation if it builds a kindergarten?

In this context, the ‘safe gambling’ precautions have acted as a useful smokescreen. Giving mates rates to a business would not fly in any other industry, because in other industries competition is valued. But it seems to be tolerated because of public concern about gambling.

There is also grounds to argue against it on poor taste: New Zealand will now have an international convention centre to attract the good and great (although it is unclear why it will attract people to Auckland as opposed to Singapore or Bali) directly funded by a gambling racket. The government is protecting a casino for a kickback: the conference centre.

Don’t misunderstand me, I am not against gambling and couldn’t care less how many pokies or blackjack tables Sky City Casino has. People are entitled to a punt. Gambling is as old as prostitution and regulating against it is about as successful as regulating against human nature.

However, this deal is low-rent stuff. It is not, as one business leader said, "a good example of creativity and sound planning." It is a worrying sign of crony capitalism, of which the public should be sceptical.

And judging by the polls on the matter, most people are.

Education Shock In Germany

Germany found in 2001 that their 15-year-olds ranked well below the OECD average in maths and reading in the Programme for International Student Achievement (PISA) study. They also had one of the largest gaps between high and low performing students in the world.

This sent the Germans into ‘PISA shock’.

Much of the large difference in student achievement between low and high performers has been attributed to the class structure built into the German school system. In most German states, children go to primary school till the age of nine or 10, and are then separated into one of three types of school.

In the traditional system, kids who are deemed not-so-academically bright go to Hauptschule (secondary school), generally leading to blue-collar jobs.

The brighter kids go to Realschule (middle school), leading to white-collar positions.

The brightest kids of them all go to Gymnasium, a grammar school preparing them for university.

The 2000 PISA study found that a child whose parents went to Gymnasium, of equal ability to a child whose parents went to Hauptschule, is three times more likely to go to a Gymnasium. Children are "divided between those deemed to pursue careers of knowledge workers and those who would end up working for the knowledge workers, mainly along socio-economic lines,” says Andreas Schleicher, head of the PISA study at the OECD.

The good news is that following the two less academic forms of schooling, Hauptschule and Realschule, students from around age 15 can now enter the country’s vocational training scheme in Germany. This three-year programme sees young people spending three to four days per week doing an apprenticeship in one of 350 professions of their choice, and the remainder of their week studying theory in school.

Although Germany’s vocational training system is seen as one of its greatest educational successes, it’s still unfair for kids from poorer backgrounds. In many states, Hauptschule kids are less likely than Realschule kids to get apprenticeships. They are stigmatised because Hauptschule essentially serves the educational ‘leftovers’.

Recognising that the system is not fair for all, many states have combined Realschule and Hauptschule into one school type. This, and a raft of reforms introduced since the shocking PISA 2000 results, has resulted in improved performance, particularly among the low-performing groups.

Germany is a great example of a country reflecting on its performance and taking a serious look at its system. ‘PISA shock’ jolted the Germans to reform.

All things considered ...

Graph of the Week, courtesy of Capital Economics. Budget statistics show how tight this government’s control of spending growth has been compared to the 2001-2009 period. 
This excellent and controversial documentary claims Margaret Thatcher was not really a conservative, but a working class radical hero who took on the Tory grandees.
Academic sludge of the week. The same lady who wrote about the s*xual politics of meat complains that academics aren’t accorded enough respect.
Fran O'Sullivan is right – the government hasn’t done a very good job of explaining the benefits of the partial privatisations it is undertaking.
It looks like there is going to be more charitable sector involvement in social housing.
The IMF is positive about New Zealand’s fiscal management. The fund is right, but it does lay it on a bit thick.
It’s not the graph of the week, but it is a great graphic showing how Australian Treasurer Wayne Swan promised a surplus under any and all circumstances, only to come up some $19.4 billion short.

On the record
Open the doors to migrants, Luke Malpass, The National Business Review, 17 May 2013
ASK ME ANYTHING: Oliver Hartwich, The National Business Review, 17 May 2013
Europe's slasher stalks Slovenia, Dr Oliver Hartwich, Business Spectator, 16 May 2013
Educating the budget-holders to invest, Colin James, Otago Daily Times, 14 May


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