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Opinion: Budget indicates Labour has forgotten economic growth goal

By NZPA

Sunday 30th May 2004

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Finance Minister Michael Cullen's fifth budget was most instructive from an economic viewpoint in what it didn't say.

There was no mention of the goal of returning New Zealand's living standard to the top half of the OECD club of wealthy nations.

Two year's ago Dr Cullen was talking about a realistic possibility of getting the sustainable growth rate above 4%.

Instead, growth has slid from 4.4% last year to 3.3% this year and Treasury is forecasting 2.8% in 2005 and 2.5% the year after. It is then picked to be 3.4% in 2007 but forecasts that far out aren't worth the paper they are written on.

No question this was a political or social rather than economic budget. The $2.4 billion of new spending for 2005 rising to $3.8 billion by 2008 is about delivering a social dividend that Labour is banking on to give it a chance to retain the Treasury benches for a third term.

Sure Dr Cullen can point to New Zealand's growth rate being 3.5% over the past three years against the OECD average of 2.2%. But that has had far more to do with luck -- currency rates, commodity prices and poor relative performance by Japan, Germany and France -- than any policies enacted by the Government. And it is insufficient advantage to lift New Zealand's OECD placing significantly.

In terms of achieving the forgotten goal of climbing the OECD ladder, the budget was stultifyingly lacking in imagination.

With budget surpluses around the $6 billion to play with Dr Cullen had room to do something different.

He put forward the arguments against lowering the corporate tax rate -- that New Zealand companies are not overtaxed by international standards and that a lower corporate rate really only benefits foreign investors because locals, thanks to dividend imputation credits, get clobbered by the 39% personal tax.

But other than veiled threats of capital gains or payroll taxes, Dr Cullen offered nothing fresh.

He has doggedly clung to orthodox economics, rejecting a restructuring of the type that would make a paradigm shift as occurred in Ireland, for example.

Part of Ireland's economic miracle was created by its decision to cut its normal corporate tax rate of 32% to just 10% for manufacturing activities and export activities. (That rate is to be raised to 12.5% in 2006).

While costly, such a move does not have to be mutually exclusive from delivering a social dividend.

And even though this was a big spending budget, there is a strong argument to say surpluses of nearly 4% of GDP amount to what social scientists call inter-generational theft.

Normally, this occurs when Government's run big deficits, such as the during Muldoon years. But the argument can equally apply to a Government taxing and saving too much. Dr Cullen argues that the baby boomer generation, which is paying the bulk of taxes will get the benefits through the Super Fund, but that only accounts for just over a third of the $5.7 billion 2005 surplus.

Deutsche Bank chief economist Ulf Schoefisch says it's both unjust and bad for growth.

"This policy of inter-generation transfer to the disadvantage of the present generation subtracts from the growth potential of the economy.

He labelled the budget as too defensive in terms of saving for an ageing population.

"The only way to really get through that demographic problem is to generate a stronger economy and stronger tax base."

Student loans should not be funded through the budget surplus because they benefit the next generation, he argues.

Westpac chief economist Brendan O'Donovan agreed the budget contained little to enhance growth.

"What we are talking about is redistribution of the growth dividend, but nothing to do with driving growth," said New Zealand was embedding quite a high level of government expenditure which would become problematic with an ageing population, he said.

Dr Schoefish does not simply advocate tax cuts as many on the political right do.

"The main initiative is on social policy, which is good and we can afford it, but it doesn't quite gel with the intention to create a stronger economy going forward."

He suggests "super-enhancing measures" such as big funding boosts to elite tertiary education organisations, something that countries such as Israel have derived huge benefits from. He also advocates much stronger measures to attract foreign investment and bigger infrastructure spending.

The budget included $500 million of business-related iniatives, the bulk of which was a $155 billion package tagged for research science and technology. But that is spread over four years and pales in comparison with the $6 billion package over five years announced by Australia this month.

Dr Cullen set a new goal of reducing gross government debt to 20% of GDP by 2015. Having easily surpassed the earlier target of 30% -- currently its around 25% -- the Protestant work ethic-driven minister has set a new goal.

It may sound admirable to cut debt, but in the meantime New Zealand is stuck with some totally inadequate infrastructure as demonstrated by TransPower's admission this week its 50 year-old South Island lines won't do the job. Most companies operate with a debt ratio of 40 to 60%, and by reducing debt so radically, Dr Cullen is not leveraging New Zealand's economic reputation and is limiting growth.

He said the Government is considering launching an infrastructure bond to fund some infrastructure development, but this Government appears fixated on the politically squeaky wheels such as Auckland. There is no vision. What about an ambitious project to build a four-lane highway from Auckland to Wellington, for example? That would boost regional growth, bring the main artery from second world to where it should be and give the entire economy a huge lift.

Unsurprisingly, National Party leader Don Brash believes tax cuts would have delivered a better result than the income and accommodation support.

He says New Zealand is overtaxed.

"The size of the Government's surplus, currently around 4% of GDP, is huge by any international or historical standards and we're saying this is a measure of the extent to which New Zealanders are being overtaxed, and have been over-taxed for some years, and some of that surplus should be returned to the people who generate it."

Interestingly though, Dr Brash understands tax cuts cannot deliver sufficient help to low income families and he accepts "to some degree you have to use the kind of mechanisms Labour has used to deliver incomes to the poorest because tax cuts don't give enough."

"We don't accept the total mix, but we accept that there has to be a mix of both the tax credits, handouts and tax cuts."

Dr Brash damned the Treasury forecasts for the 10 years ahead that look like showing lower growth, than the last 10 years.

"Despite the Government saying that increasing our growth rate, catching up to the top half of the OECD is our highest priority, the budget indicates that that has not happened, is not going to happen.

"We are simply not narrowing that gap between us and other developed countries like Australia."



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