The Prime Minister will make a big speech tomorrow at the opening of Parliament. Apparently it’s going to set out the government’s tax policies. Be prepared to be disappointed. That way if the package is good, you’ll be elated.But seriously, tomorrow’s speech needs to articulate a way forward – a wishy-washy yes maybe speech won’t cut it. Luckily, I suspect the way it’s been talked up in the media implies JK’s office knows it.

It won’t be Labour that ends John Key’s dream run. No, 2010 will be the year that makes or breaks John Key’s premiership. Showing some testicular fortitude now by moving the country towards significant changes in how much tax we pay, and what we pay it on, will significantly alter our future course as a country. Allan Bollard is right – we won’t catch Australia if we don’t make some bold changes.

Fixing the tax system is not a silver bullet though. The government must also address our long-term spending problem; the fact we are living beyond our means. Because today’s spending problem is tomorrow’s debt problem – and that debt will unnecessarily burden future generations. That’s why I care about these issues – because of our future generations. I don’t want them burdened by some previous government’s inability to control its own spending, as my generation was during the 90s thanks to Muldoon’s spending binge of the late 70s and early 80s. So come on John, show us you’ve got a pair and give us the step change we need.

A while back I mentioned a report by Business NZ called “Setting New Zealand Apart” a blueprint for creating productivity growth and making the New Zealand economy more competitive internationally. Read alongside the “nuggets” of the 2025 Taskforce Report and Tax Working Group, the reports ought to provide a good basis for John Key’s Government over the next two years into the 2011 election. This is the first post in a five-part series on these “nuggets”.

We already know in the 70s this country fell behind Australia, and it was only in the 1990s and 2000s that we started to first tread water and then catch up, albeit slowly. Labour’s spending binge from early 2005 – 2008, relentless expansion of regulation and strangulation of business in general helped kill the growth off again. New Zealand’s productivity statistics 1978 – 2008 show some serious problems for our capital productivity, good growth for labour productivity (thanks to a lot of us working longer hours for less) and sluggish growth of ‘multi-factor’ productivity (that’s the two others – labour and capital – combined).

Productivity Growth

While productivity isn’t the silver bullet that will save our economy, it does matter a lot. Anyway, here’s the 50 recommendations Business NZ made, what the Government is doing to implement them, and what the 2025 Taskforce recommended:

1. Create a “New Zealand Productivity Commission” to keep on top of new regulation and review existing regulation.

While I’m generally opposed to new bureaucracies, the Productivity Commission (along the lines of the Australian Productivity Commission) would be a good thing. The 2025 Taskforce states such a body would have expertise in micro-economic policy.

2. Make regulatory bodies more accountable.

We should ensure that regulators get it right first time. An investigation into the possibility of a wider merits review process would provide a strong start. This could provide a framework to safeguard against inappropriate regulation and provide more accountability for decisions.

3. By mid 2010 deal to the top five areas of red tape for business.

The top five areas are:

1. Tax;
2. health and safety in the workplace;
3. Employment Relations Act;
4. ACC;
5. the Holidays Act.

The Government is set to introduce legislation on the Holidays Act and has already amended the Employment Relations Act for greater flexibility. The two sticking points seem to be ACC and Tax. Key won’t want to scare the horses with further ACC changes, and tax is a no-go area thanks to Mr English’s determination that there won’t be further tax cuts. I suspect the Government won’t move on tax until 2011, hoping a tax cut might bolster its support in an election year.

4. Develop a national Infrastructural Plan.

This is already underway, as a part of the Treasury, and should be out in the next couple of months.

5. Develop a national Transport Plan.

There doesn’t appear to have been anything done on this yet. C’mon Steven!

6. Electricity

Gerry’s made good progress at cutting red tape and axing the useless Electricity Commission. But more needs to be done to create a more competitive environment.

7. Telecommunications

Business NZ recommends going back to a “light-handed” regulatory environment.

8. Phase two of RMA

The report recommends creating a technical experts group to deal with water issues, something which matters greatly in rural areas. Good stuff. Meanwhile they also proposed codifying the right to compensation for the removal of property rights and / or restrictions on land use. Again, this is a good thing, and something that is missing from the Bill of Rights.

9. Include property rights in a Bill of Rights Act.

This is a fairly simple change in law – however, its implications for Government and New Zealand’s constitution generally are wide-ranging. That doesn’t mean it’s not worthwhile. Perhaps National can get a proposal for property rights in the Bill of Rights Act in its Constitutional Inquiry this year?

10. Ensure that decisions that may result in access to resources being closed off have the value of their future use explicitly recorded as part of
their cost-benefit analysis.

Seems practical. Perhaps some sort of legislative “ratchet clause” on the value of the land’s resources?

Part II coming soon…

The Capital Markets Taskforce report is out. It’s not pretty – they show that New Zealanders have little confidence in capital markets, and so they naturally put their money into bricks and mortar. The problem with that is New Zealand needs to export more if we’re to grow the wealth cake, and we can’t export houses. We’ll never catch up with Australia if we carry on only investing in property. Something needs to be done to energise our capital markets – fixing the regulatory regime (i.e. Giving the Securities Commission some teeth by removing NZX’s regulatory functions) is one good recommendation, while floating the State Owned Enterprises (SOEs) is another.

But true to form, the Government has rejected the idea of floats for SOEs to give our capital markets a kick along, and give mum and dad investors a chance to put their money into robust investments (and for those worried about those evil foreigners with their efficient business practices and world-class business standards, under this model the Government would still have controlling shares, for now). Granted, National promised to the electorate not to sell anything off for its first term in office, as Commerce Minister Simon Power points out. But that doesn’t mean this idea should be rejected outright. National can easily put the policy forward in 2011 – it won’t lose them the election on current polling. They’ve just got the have the balls to do it.

The task force points out that New Zealand taxpayers’ have $25 billion tied up in all sorts of investments in the SOEs – a post and parcels service, a railway company, a bank, a communications company, a television company, a coal miner, four electricity generators, an airline and all of their related businesses, etc. One of them, Air New Zealand, is already a listed company on the share market, a model that works very well.

The report shows that compared to the rest of the OECD, New Zealand has a high proportion of state-asset ownership – near to 90%; nearly as much as Australia:

State Owned Enterprises, ownership by country.

Interestingly, almost all of the northern European countries (you know the ones like Finland, the ones that get lefties all excited) have a lower proportion of SOE ownership than New Zealand. The critical thing is that most of these countries out perform New Zealand in terms of wealth, wage rates and standards of living.

Marcia Russell’s excellent documentary series Revolution got me thinking about this Government and our future as a country. Revolution’s basic premise is that by 1984 New Zealand had become a “fortress” desperately fighting to hold on to a post-war New Zealand that could no longer be sustained. I sometimes wonder if we’ve learned that the only course of action in the face of economic challenges worse than taking no action is taking retroactive action to try and preserve the status quo…

1. Is, apparently, encouraging saving

I was very cynical about this when KiwiSaver was launched. Only just the other week I speculated that it might have killed our already low rate of savings. However, the National Business Review reported yesterday that a survey by Colmar Brunton in August showed that 64% of people currently saving are also saving for their retirement, up from 58% in February this year, back to the high of 65% reached in February 2008, just before the recession struck. There’s a trend building:

2. John “Minto Bar” Minto hates it:

“Kiwisaver began the privatisation of government superannuation. It gives the biggest benefits to those on the highest incomes while reducing government responsibility to provide retirement income through taxation.”

All excellent reasons to support KiwiSaver: privatisation, rewards those who earn more and therefore rewards hard work, reducing government expenditure (well, only if the government had the balls to introduce means-testing for superannuation or raise the retirement age) and dependence. And pissing off an old socialist is such fun.

With time I also think the Government could phase out the incentives for joining KiwiSaver as the 2025 report suggests, as eventually they will start to actually hurt saving. It doesn’t make much sense to tax people then churn their money back to them in the form of savings incentives.

3. Encourages a culture of saving and investment:

Ok, anecdotal evidence only – from KiwiBlog the other day:

…what struck me, was the difference it has made at an individual level. I can’t imagine before KiwiSaver, three young women (who still have massive student debt) would be talking about their investments, who is getting the best rate of return etc. Developing that culture of savings and investment literacy at an early age is possibly KiwiSaver’s greatest claim to fame.

So, I’m a convert – KiwiSaver provides a means to privatise superannuation and encourage savings and investment. And it pisses off socialists like John Minto.

This country needs step-change. Gareth Morgan is willing to provide it:

• A Comprehensive Capital Tax (CCT) on all land, buildings, plant and equipment. Raises NZ$19 billion.
• A flat income tax rate of 25% on all corporate, personal and trust income.
• NZ$10,000 guaranteed minimum income for every adult to replace all benefits (which means the first NZ$40,000 of income is tax free).
• GST to remain at 12.5%

Don’t know if I agree with a Comprehensive Capital Tax on everything (it’s likely to hurt industries who’ll simply flee to countries where there’s lower labour costs and not capital tax – India or China perhaps?). However, Gareth appears to have more testicular fortitude than our current Minister of Finance, who despite his rugged southern man persona prefers to dismiss good ideas as “too radical” and offer piss-weak bandage solutions for gaping wounds.

Govt Spending 1994 – 2010

This is the most worrying graph for me out of the Taskforce 2025 report. Because New Zealand’s economy was growing strongly, Government spending as a proportion of GDP was actually shrinking until 2005 (which is why about 1998 it increased; as the economy contracted due to Asia’s economic meltdown spending as a proportion of GDP increased); which was a good thing. However, Labour spent up large to win the 2005 general election (Working for Families, Interest-Free Student loans, etc) and then again from 2005 – 2008 in order to keep its supporters in Parliament happy (Gold Card, superannuation increases, etc). By 2008 they’d “spent the lot”, to paraphrase Dr Cullen, and with the economy contracting while Government spending continues to grow, spending is skyrocketing.

This matters because the trajectory of Government spending is unsustainable. We’re borrowing heavily at a time when net debt to GDP is passing the 100% mark – this is in the same region as economic basket cases like Dubai and Iceland. Yet the Government’s response is that reducing spending back to 2005 levels is “too radical”.

John Key has predictably stated that the Government will “keep its promises”, and therefore won’t be implementing the report of the Taskforce 2025. The Standard gives the cookie-cutter response of the left – Dr Brash is evil, ridiculous and silly all at once. One quote really says it all for me:

The neoliberal agenda has never been about growing the pie. It’s about taking a larger slice for the rich; stealing from the poor. Look at the ‘nuggets’ and you see that’s exactly what they want do. It’s all about weakening workers’ rights, lowering their wages, and cutting the social wage to enable a transfer of wealth to the wealthy.

Herein lies what I think is the key contradiction of social democracy: if you want better wages, better conditions for workers and better social services, you need a wealth-generating economy to pay for it. While The Standard might whine that the “neoliberal agenda” is about taking a larger slice for “the rich”, the fact of the matter is that wealth disparity has been getting worse in New Zealand since our economy began to under perform – at least a decade before 1984 (albeit, things did get worse post 1984 – when we had to pay for the previous ten years’ pissing around). Labour might’ve talked about getting New Zealand into the top half of the OECD, an admirable goal, but they did precious little to go about reaching it. Their lack of fiscal restraint has pumped up inflationary pressures in the economy.

Anyway, here’s the reports recommendations, from the NBR:

• Replacing the top tax rate of 38 cents in the dollar and business rate of 30 cents in the dollar with a top tax rate of between 20 and 25 percent;
• Limitations on some universal benefits. Those included interest-free student loans and subsidies for early childhood care education;
• The Government to reduce operational spending to 29 percent of gross domestic product by 2012-13;
• Use the NZ Superannuation Fund to pay back borrowing and change the age of entitlement;
• Impose congestion charges in cities to pay for roads;
• No capital gains tax.

These recommendations are made on the report’s following principles:

• Sharpening private incentives to invest, to save, and to work;
• Minimising the regulatory obstacles the government puts in the way;
• Managing the public sector’s own huge assets much more effectively;

All good starting points. The report also recommends that some policies not be implemented:

• Greater research and development support (i.e. tax credits for R&D);
• A new government financial institution;
• “Sectoral-based” growth strategies (i.e. tax credits for certain sectors of the economy)
• Initiatives to lift workplace productivity;
• Compulsory private superannuation savings scheme;
• Exchange rate regime; (we’re looking at you Labour)

All interesting proposals. I’ll comment further once I’ve had a chance to read the report in full.

Radio New Zealand is reporting the Taskforce 2025 will recommend cutting government spending to 2005 levels, to achieve a flat tax of 20 – 25%.

That would mean reducing expenditure from $64 billion to $44 billion (that’s right, government expenditure grew $20 billion over four years).

As you’d imagine I’m rather excited about the Taskforce 2025 report’s announcement tomorrow at 1:30pm. It appears some of the recommendations have already been leaked to the media – apparently there’s plenty of spooky tax cuts, spending cuts and privatisation.

This looks like Politricks 101 to me – leak the “extreme” recommendations of the report (i.e. what Espiner has reported) and disassociate yourself from them, only to accept the more moderate recommendations (perhaps some tax cuts and base re-allocation, sinking lid spending cuts, etc). Key’s argument that National campaigned on not privatising or cutting spending is credible from this perspective, but not if he wants to close the gap with Australia. The moderate path will be enough to win National another term in office – but then what?

Key ought to use the Taskforce report, and the Tax Working Group, to form the basis of his campaign in 2011. That would give a National-led government a mandate to make change, inject vitality into business and the economy at large.