Like I said, don’t get your hopes up. DPF rates Key’s Opening Statement to Parliament with a “B”. I’d give it a “C”, although I’m tempted to give it a D (i.e. fail), because Key has simply disregarded the Tax Working Group and 2025 Taskforce’s recommendations (his reactions to Capital Markets will be out next week).

Key ought to have done something about the tax status of property. That would’ve given the government better leverage to to get income, trust and corporate tax rates down (NB: I’m not totally convinced of the need for a land tax, but think LAQCs should go). Increasing GST to cut income tax was a good move, but there is little mention of cutting spending save for better enforcement of welfare rules. To do it, Key will break a promise on not increasing GST. He should’ve broken his promises on superannuation thresholds and the age of eligibility.

Bernard Hickey is saying I should get a one-way ticket to Australia because of Key’s failure to introduce a land tax. Personally I’d rather do what my parents did in the 70s and go earn the big money in Europe to save. Or join my mates in Hong Kong or Singapore. But I digress…

The MoF has put out his pre-budget feelers while setting the date for the Key Government’s second budget at 20 May. I’m pleased to see the above statement, albeit hidden at the end of the press release, especially after seeing this disaster in a Treasury working paper:

Ugly, isn’t it? The red line is what we can afford, the blue line is the trend we’re spending on. So while Mr English might talk about jobs and growth (and don’t get me wrong, these things are important) the real underlying issue he must address is our unsustainable rates of spending.

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…

It’s not often that you’ll hear me say this, but The Standard has raised some legitimate concerns about whanau ora. No, not about the privatisation of welfare – that’s a reality already, and has been since the dawn of time thanks to religion. We all know the Salvation Army, city missions, St Vinnie’s, food banks, People’s Centres and Habitat for Humanity provide social welfare services. These groups are private sector organisations, which most people on the left either deride as being “Tory charity” or institutions for religious nut jobs. Privatising welfare simply means giving these groups a greater role in delivery.

No, The Standard’s legitimate concerns on whanau ora are around accountability:

Let me make clear that I know most community groups do excellent work and are staffed by fine people. But that doesn’t mean we just take it on trust that this is always the case. We need accountability to protect against abuse.

Given the constant stream on tender watch of utterly wasteful government spending at the department level, troughing MPs and other assorted cost overruns in budgeted projects (Auckland Harbour Bridge anyone?) how on earth does the government proposed to ensure that public money won’t be wasted under whanau ora? The government spends a whopping $19 billion per year on welfare. The task of keeping track of that money, and monitoring outcomes (such as whether Maori-based trusts are able to better equip recipients for work) will only be made much harder by whanau ora.

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…

In the comments to my last post on monetary policy, Charles Chauvel states that FCK hasn’t properly read the Inquiry into the future of Monetary Policy report, and that “nothing” Phil Goff said in his speech to Federated Farmers is incompatible with the inquiry. FCK begs to differ. Let’s look at what Goff says:

Labour wants to see a step change in our export performance.

Fair enough. There’s plenty of things we could do to make our businesses more competitive – for Government, that’s mainly about reducing the costs of doing business, things like business tax, compliance, ACC, etc.

We want policy that will keep our exchange rate as stable and competitive as possible.

Nothing wrong with wanting stable exchange rates. How exactly do you achieve them though? Even Brazilian central bankers don’t think they can keep their currency “stable”. New Zealand’s dollar was pegged until 1985, and suffered a number of speculative attacks prior in 1984, following the general election. The value of the dollar became a political issue – on the one hand a devaluation would mean a decrease in New Zealander’s quality of life (as the price of imports increase), but would help exporters (as their products would become more competitive). You cannot easily reconcile these two sectors.

Pumping billions of dollars into foreign reserves to keep the dollar at a “stable” rate is tantamount to pegging it. As we saw during the 80s, the Reserve Bank would have to either borrow billions to keep foreign reserves (not a particularly good strategy given our high level of foreign debt) or keep the Official Cash Rate (OCR) low, which of course leads to inflation. Then you’ve got the problem of making the rate “competitive”. A competitive rate is contradictory to a stable rate. Certainly, export businesses would benefit from certainty of a stable exchange rate. But the point here is that Goff is contradicting the inquiry’s report by putting it forward.

We want to reduce interest rates for businesses and home-owners, so that we put more money into the pockets of New Zealanders.

This statement contradicts itself. Sure, reducing interest rates will put more money into the pockets of New Zealanders. But ignoring inflationary pressures will mean the value of what’s in their pockets will decrease faster than before as prices rise. Again, you can’t have your cake and eat it too – this statement contradicts what the inquiry states.

Working New Zealanders with mortgages will benefit from policy that tilts the emphasis away from its current sole concern with the holders of wealth, to a focus on creating wealth.

Does it really? Working Kiwis with mortgages will certainly benefit, because inflation will increase the value of their houses far beyond what they borrowed to buy them – inflation fueled by lower interest rates. But will that actually tilt the emphasis towards “creating wealth”, especially in the export sector? Not a bit – in fact the opposite. Making property a more attractive investment proposition not only helps the Bob Jones of the world, it also means that most working Kiwis will go back to our old habit of putting everything we’ve got into acquiring a family home, and no new capital into exporting. Again, contradicting what the inquiry said.

Price stability and low inflation will still need to be important objectives for the Bank.

It’s hard to see how after Goff’s previous statements. Incidentally, this is the only statement that appears to not contradict the findings of the Inquiry into the Future of Monetary Policy report.

A reader has kindly reminded FCK of Parliament’s Inquiry into the future monetary policy framework, reported just over a year ago, when Labour had a majority on the Finance and Expenditure Select Committee. The report, written at the direction of former Minister of Finance Dr Cullen, was intended to re-enforce Labour’s commitment to bipartisan support for price stability and inflation targeting. Goff’s speech yesterday repudiated that commitment.

The key findings of the committee were (emphasis by FCK):

• confirms the importance of maintaining price stability as a vital component of a healthy and well performing economy.
• agrees that monetary policy remains the primary means for maintaining price stability.
• acknowledges that the Policy Targets Agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand recognises the important role price stability plays in supporting the achievement of wider economic and social objectives, and that it requires the Reserve Bank, in pursuing its price stability objective, to operate monetary policy in a manner that avoids unnecessary instability in output, interest rates, and the exchange rate.
• acknowledges that New Zealand’s monetary policy approach, emphasising central bank independence and inflation targeting, is standard among, small, open, and developed economies.
• acknowledges that New Zealand’s monetary policy operates in a similar manner to countries with wider mandates, such as Australia and the United States.
• acknowledges that at times of strong inflation pressures, the costs of maintaining price stability are often borne disproportionately by the export sector.
• acknowledges that a range of economic factors and resource constraints have contributed to recent inflation pressures and to how quickly monetary policy has affected inflation outcomes.
• acknowledges that factors other than monetary policy—such as sustained improvement in trend productivity—play a key role in lessening the adjustments required to maintaining low inflation over the medium term.
• believes that constraints on the availability of natural resources, particularly crude oil, are likely to be increasingly significant contributors to inflation.
• heard extensive evidence concerning supplementary stabilisation instruments, such as a mortgage interest rate levy, an interest-linked savings scheme, and other taxes that might complement interest rates in managing inflation, but did not find the arguments
  in their favour compelling enough to support them being pursued further at this time.

What’s fascinating is that Labour are now essentially repudiating their own inquiry, or at least arguing that price stability has a much great affect on the export sector and that it is incompatible with “wider economic and social objectives”. The question is, why? Charles Chauvel should have enough of a background in business (being a former board member of Minter Ellison Rudd Watts and Meridian Energy) to know that price stability is important to all sectors of the economy.

Update: The inquiry was not directly by Michael Cullen. Mea culpa.

Labour leader Phil Goff has announced that the party is abandoning the bi-partisan consensus on monetary policy, and would remove inflation-based targets and thus the independence of the Reserve Bank if elected. Labour obviously doesn’t feel it pumped up inflation enough last time they were in office with their fiscal imprudence. Matt Nolan gives more of an insight here, looking at Cunliffe’s badly-put argument for abandoning price stability. Basically the argument is that a focus on inflation means we ignore exchange rates and employment, which is nonsense.

What intrigues FCK the most about this withdrawal from reality is the view that price stability is not important to working New Zealanders, and the current system only favours the rich. No Right Turn says:

people like John Key don’t see the value of their assets eroded by inflation. But its very, very bad for everyone else, with interest-rate driven spikes in unemployment and mortgage pain, and crashes in export earnings due to the resulting shifts in the exchange rate.

Always half-right, Idiot/Savant ignores the fact working New Zealanders also have assets to erode in value (KiwiSaver anyone?) and will be the first to be hit by rising prices for groceries and other consumer items, driven by higher rates of inflation, due to having lower disposable incomes.

Moreover, it’s businessmen like Olly Newland, Bob Jones and Alan Gibbs who benefit the most from higher levels of inflation. All of them made a killing in property development during the 80s because high levels of inflation gave them a higher return on capital from buying and selling property, much higher than they could expect with lower levels of inflation. Certainly, when the Reserve Bank Act 1989 was implemented it led to higher levels of unemployment, and has from time to time spiked and hurt homeowners. But higher unemployment largely subsided during the mid-1990s, and apart from a downturn during the 1998 Asian crisis has been improving ever since. Even today unemployment rates are only roughly equal to those seen in 2001, not 1991.