Loopy ideas likely to unravel NZ’s sound economy

It has stuck in my craw for some time that our cousins over the ditch have been doing better than us economically. There was a time when the New Zealand economy was a serious laggard, riddled with onerous regulation, high tariffs and import barriers, and big government boondoggles.

To be sure, the transition to a more open economy with smaller government and less regulation was a relatively painful experience for many New Zealanders. But under the careful stewardship of prime ministers John Key and Bill English, it has become something of a poster child in terms of successful reforms and fiscal consolidation.

While the New Zealand economy went into recession during the global financial crisis, the rebound was quick and substantial. The Key government simply refused to pump prime the economy with money it did not have — a marked contrast with the spend­athon initiated by the Rudd government here.

By the same token, Key was keen to continue the process of tax reform, lifting the rate of the GST to 15 per cent in October 2010, from the previous rate of 12.5 per cent. Note that there are very few exemptions to the GST in New Zealand.

The income tax schedule now carries a top rate of 33 per cent, which begins at $NZ70,000 a year and over. There is no income tax-free threshold, with the lowest rate of income tax standing at 10.5 per cent.

The argument is that everyone benefits from the public goods — defence, roads, schools, health — that the government provides and so it is only reasonable that everyone contributes.

Mind you, the income tax schedule in New Zealand does not throw off average rates of tax that are vastly different from Australia and the proportional contributions that income tax makes to the budget are broadly similar between the two countries.

The main benefit of New Zealand’s income tax schedule is the relative absence of discouragement for hard work, saving and risk-taking.

When it comes to managing the budget — and there is no upper house in New Zealand’s parliament to block savings — New Zealand has managed its fiscal affairs extremely well.

Notwithstanding the drain on the budget associated with the Christchurch earthquakes, the budget returned to surplus in 2015 and was expected to be strongly in the black in the future. (By 2020, the general government fiscal balance was forecast to be 3 per cent of gross domestic product.) Net core crown debt peaked in 2013 and has been falling since.

Its labour market also has performed strongly during the past several years, with unemployment at less than 5 per cent. Its employment rate of 77 per cent of the working-age population is the fourth highest among the OECD and its participation rate is fifth highest. Its labour market has been performing better than Australia’s.

When it comes to inequality, New Zealand has outcomes broadly similar with Australia’s. There is little evidence that income inequality has worsened during the past decade, although wealth inequality has been affected by rapidly rising house prices, a phenomenon with which we are familiar.

Acknowledging that some individuals and families do have high ongoing rates of welfare dependence, the New Zealand government embarked on an innovative approach using detailed data sets to identify the most vulnerable people as well as interventions with the highest rates of success.

The approach certainly involved stick and carrot — parts of the social welfare sector in New Zealand were opposed to the government policy — but the argument was that unless something was done to change the course of events, the outcomes would involve high rates of poverty, intergenerational transmission of poverty and high budgetary cost.

So what explains the unexpected elevation of Labour’s Jacinda Ardern to the role of prime minister? And what does it tell us about the likely stance of the government after she made the truly remarkable claim that “capitalism has failed New Zealanders”?

A glib answer is that the country’s suspect voting system meant that a party with only 9 per cent of the vote — New Zealand First under populist politician Winston Peters — could dictate who would lead the country. After all, the National Party under English lost only one seat and was the party with the highest proportion of the vote by a large margin.

A more serious answer relates to some of Labour’s policy proposals that appeal to New Zealand First, particularly in relation to cuts to immigration and “free” higher education.

Take immigration. Like Australia, New Zealand has opted to implement a substantial immigration program, including of international students and skilled temporary workers. With a population just more than 4.5 million, the net overseas migration figure has been running at about 70,000 a year.

Labour’s proposal is to reduce this number by between 20,000 and 30,000 a year — between 29 per cent and 43 per cent. By anyone’s standards this is a substantial cut and would be targeted at overseas students and temporary workers. If Australia were to do the same, the cut would be between 60,000 and 90,000 a year.

There is no doubt that this policy proposal appeals to New Zealand First and contrasted with a lack of resolve by the National Party to commit to reduce immigration. In turn, the high rates of immigration to New Zealand are commonly connected with the very rapid rise in house prices in Auckland, but in other parts of the country as well.

And while it is true that planning restrictions have reduced the construction of new houses in the past, the rate of new dwelling construction has been at an all-time high recently. Not unexpectedly, the cost of construction also has risen strongly.

Throw in the idea of “free higher education” — or at least, three years of an undergraduate degree — and it is not entirely unexpected that Peters made the call he did.

But coupled with some of Labour’s other loopy policy ideas — forget about sound fiscal policy and the association with the Greens — my hang-up about New Zealand’s superior economic performance will quickly come to an end. But there are lessons for Australia, particularly in relation to immigration.