Economic Fitness

The NZ Institute has published an analysis of NZ’s lack of economic fitness, and that it is not all about the “recessionary flu”. The Institute notes:

Achieving a step change in New Zealand’s economic growth rate is essential to improve the fiscal position. Unless New Zealand radically improves its growth prospects, basic amenities such as quality free education, health services, environmental protection measures and security in retirement may be at risk.

Yep, we need more pro-growth policies. The recession is a good reminder of how important economic growth is.

Both tax and spending measures should also be on the table to control the deficit, to make room for growth-boosting policies, and to maintain and strengthen support for at-risk individuals through the recession to avoid creating a future social deficit.

A $10 billion a year deficit must be curtailed. The interest on public debt would indeed threaten education and health funding.

The next two proposed tranches of income tax cuts should be cancelled on the grounds that they would contribute to the structural deficit and likely do very little for growth.

Long term, tax cuts are part of higher growth, but I agree these one are unsustainable.

Other spending areas that have contributed to the increase in government spending between 2003 and 2008 of 1.6% of GDP should be carefully reviewed with the aim of achieving their objectives more effectively at lower cost going forward. These include: the Working for Families tax credit system, and health expenditure.

WFF is very inefficient. There is huge wastage or churn as you take money from taxpayers to give it back to the same taxpayers. Welfare should be targeted to those most at need.

The tax mix should also be on the table as part of a long-term rebalancing exercise. Creating new sources of revenue (such as from taxes on property) will create room to finance the cost arising from future demographic pressures. Another objective is to more lightly tax productive investment and savings (for example through gradual reductions in company tax and taxes on savings overtime), while making residential property investment less attractive. This will help to address the structural imbalances in the New Zealand economy.

This is a big call, but one that does have to be looked at.