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Pragmatism rules New Zealand too

By Peter V O'Brien

Friday 4th July 2003

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Pragmatists and pressure groups are gradually undermining the market purist fortress that has dominated government economic policies since 1984.

The sappers did well recently, although they dug at the fortification for years.

A grant of up to 12.5% of costs to film-makers who produce their works in New Zealand is the latest in a list of subsidies, handouts, bailouts, grants, development assistance and other euphemisms for government intervention policies.

The government "saved" Air New Zealand and propped up Tranz Rail, with an initial payment of $44 million to cover the company's urgent payments.

Tranz Rail's situation has yet to be clarified. It will come when the outcome of Australian-based Toll Holdings' bid and the effect on the government's counter-proposal are known.

The outcome has no effect on the government's willingness to support a private-sector company, albeit one that could be considered a key element in the country's infrastructure, distribution industry and commuter system.

Intervention in Air NZ was a little different, because the "essential" nature of the airline was debatable and related more to possibly misplaced nationalistic fervour than to the carrier's necessity to survive, given other air transport options.

General assistance for regional development and aid to developing business could also be seen as desirable but is contrary to free-market philosophies.

The policy for film-makers was dressed up as a part repayment of costs and/or a grant, when it was no more than a subsidy. It could also be considered a partial tax-break, given the 12.5% figure.

A film-maker's costs in New Zealand seem to include 12.5% goods and services tax.

I am not going to fall into the trap of assuming a 12.5% rebate of total costs, including GST, is the equivalent of the 12.5% GST levy but it was a strange, almost arbitrary figure.

A cost of, say $100 plus GST is a total cost of $112.50. Repaying 12.5% of $112.50 reduces the amount to $98.44, less than the $100 base.

Costs in New Zealand would include payments to employees, an interesting matter when considered in light of the 12.5% grant, rebate, or whatever.

The need to spend at least $15 million here to get the rebate provided that amount is 70% of total production costs or $50 million for 12.5% on all local costs, seemed another arbitrary decision.

Someone must have decided a "cheapo" of less than $15 million was insignificant, might require too much administration or would attract another host of wannabe "artists."

All recent handouts, bailouts and subsidies were based on the rationale of economic benefit to the country.

That cry went up when the government gave money for an American's Cup challenge.

Many countries subsidise industries when it suits them in the interests of their politicians and the latter's constituents, to the chagrin of New Zealand farmers and other earners of foreign exchange.

We became the purists, a stance that could be seen as ludicrous, given a population little more than a medium-sized overseas city.

Recent developments here showed the paradox of opposing others' subsidies while now selectively doing the same.

Put another way, the government applauds the reduction of support elsewhere but has no problem with its current ad hoc decisions.

It was enthusiastic about the EU's decision last week to change farm produce subsidies from an output to lump sums based on land holdings.

The government should not count potential agricultural exports to the EU until they get into European supermarkets.

Reports about the EU move said French and German farmers had strong reservations.

We will see what happens to the EU scheme after French farmers, in particular, have blocked roads and driven tractors down the Champs Elysee and Germans have reacted in traditional manner.

The world is pragmatic. The New Zealand government should admit it is pragmatic when such a stance suits it and purist when giving a nod to market dogma. It would then acknowledge political, economic and financial reality.

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