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Taxpayer money-go-rounds hampering growth, says NZ Initiative

Friday 21st November 2014

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Income redistribution schemes such as Working for Families, which pay back money people have often already paid as tax, are a barrier to the economic productivity improvements that could easily overcome projections showing New Zealand faces a long term government debt problem, says a new paper from the New Zealand Initiative, a think tank.

Authored by economist Bryce Wilkinson and research assistant, Khyaati Acharya, the "Guarding the Public Purse" report suggests New Zealand has slipped behind best international practice in its control of government finances and would benefit from establishing an office of Parliament akin to Australia's Parliamentary Budget Office to independently monitor progress towards the government's published fiscal goals.

A table in the report shows that New Zealand was a pioneer on fiscal rectitude with the introduction of the Fiscal Responsibility Act in 1994, ahead of similar legislation subsequently implemented in 21 other countries that belong to the rich countries' club, the OECD,  but has since lagged other countries in the range of budget rules it imposes on governments.

Some 22 countries, including New Zealand, had rules requiring publication of explicit budget and public debt targets, but New Zealand was not among 13 to have a rule targeting the level of government spending as a proportion of the economy, unlike 13 other countries.

Using 2013 projections of public debt published by the Treasury and showing a serious threat of a public debt build-up as the New Zealand population ages, the report says that problem could be more efficiently dealt with by having a more productive, faster-growing economy as by cutting spending or raising taxes.

However, that would require pursuit of policies that raised economic productivity.

"Increasing labour force participation by raising the age of eligibility for New Zealand Superannuation, lowering the minimum wage, improving educational outcomes for the tail end of school leavers and reducing the extremely high effective marginal tax rates imposed on some welfare recipients," are cited as ways to increase productivity, along with "reducing unnecessary spending on transfer payments to those on middle and upper incomes."

The Resource Management Act was also a "stand-out obstacle to investment and productivity, but is hardly atypical," the report says. "Less restrictive product and labour market regulation would be pro-growth."

Among its main recommendations, the report says "corrective policy actions should focus on reducing barriers to achieving higher economy-wide productivity growth, in part by reducing the degree to which national income is needlessly churned through the tax-benefit system and increasing the role for competition and price discovery in the provision of goods and services."

The report warns it will become increasingly difficult for future governments to deal with issues created by the ageing population, such as the age of pension entitlement and public health care.

By the mid-2050's, people aged over 60 will comprise around 37.6 percent of eligible voters and, because older people vote more than younger people, could account for 50.2 percent of those actually voting, based on analysis of the 2011 election.

In New Zealand's favour, however, is the fact that these future problems "arise primarily from demographic and health care cost factors rather than from the burden of existing (government) debt", which remains low by OECD standards.

The proposed independent budget office would monitor the government's compliance with fiscal responsibility principles, the Treasury's expenditure control and assessment procedures, the credibility of the government's fiscal plans and the performance of government agencies.  The office would also service Parliament's finance and expenditure select committee.

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