The economy has been hit by a 20% appreciation against the US dollar in just three months, the worldwide investment pause over Iraq, and now the shock of the America's Cup loss. The latest figures show manufacturing to be stalling. Farm incomes this year will be down, and farm spending has slowed. The Letter believes we may have just passed one of those critical turning points.

The good news

The good news is that government has considerable remedies.

Interest rates: NZ with low inflation and falling import prices has some of the highest interest rates in the OECD. Tax revenue: Government tax revenues are running $435m above projection. Dr Cullen has the reserves to make significant tax cuts.

Compliance costs: Government's own advisory panel on compliance costs reports that red tape is a very significant problem for small business. Fixing this costs nothing to implement.

The bad news

The new Governor of the Reserve Bank feels he lacks the market's confidence to cut interest rates. Dr Cullen wants to ‘save' the surplus in his risky fund. Margaret Wilson wants to impose new compliance costs and Helen Clark believes business is the enemy.

Tax

The latest OECD report Taxing Wages shows that last year NZ increased the tax paid by the average worker more than all but one OECD country.

Dr Cullen told parliament, "It (the cause) reflects a relatively high increase in average family earnings, which is due to NZ's strong growth over the period." The same OECD report shows that in 19 OECD nations the average wage increased more than in NZ. Ireland is an example; last year average wages increased 7% and tax decreased 6.2%. There is a widespread understanding in the OECD, including centre left governments, that high taxes restrict economic growth. There is a worldwide movement to lower taxes, except in NZ.

Research by the parliamentary library shows that the real net take home pay of the average worker is 2.4% lower today than when Labour took office. The biggest fall in real pay is in above average incomes where the pay just reaches the new 39-cent tax bracket. Those people – school principals, key middle management, highly skilled workers, and top young professionals – have seen a big fall in real income. Under Labour it has been this group, the professionals in their thirties, who have been leaving for Australia – a pattern of migration NZ has never before seen.

The Cullen scheme

In the last 14 months over $324 million has been lost from the government superannuation scheme – that is over 10% of the civil servants' entire savings scheme. The Cullen Super Scheme is also going to be gambled mainly on overseas equities. Due to delays, today not one dollar has been lost – all $2 billion is still in a treasury account earning 6%.

The Letter believes the best investment strategy is to stop over taxing and allow Kiwis to decide how they will invest their money. $2 billion a year is enough money to give every working taxpayer a $1,000 tax cut.

What has happened to National?

Last week Dr Brash put out a discussion paper 'Prosperity for all New Zealanders'. The document is economically literate, intellectually sound, and poses real policy choices.

The National Party has not produced a policy paper of this quality since Ruth Richardson. If NZ were to adopt the policy framework outlined, the country would grow at 4%. Politics is about priorities. List order invariably reflects the priority of the author. National's economic priorities: 1. Size of government. 2. Improve the tax system – cut taxes. 3. Improve education – literacy and numeracy. 4. Reform the welfare system – cut welfare. 5. Reduce compliance costs. It's a priority rating ACT would not quarrel with.

Brash's paper does not cover labour market reform or the problem of superannuation and lacks specific policy proposals, but ACT has practical workable solutions for each area. Despite the fact that the short 20-page document is a more coherent policy position than Labour's entire budgets put together, The Letter predicts this won't stop the media claiming National has no policy. Indeed, the Herald reporter who seems to have strayed from the fashion pages to the business section wrote a juvenile piece about what the business audience was wearing and suggested we were bored. If the reporter had known anything about economics she'd have realised we were just stunned to be listening to an economically coherent speech from a National MP.

National's problem is an even wider one. The same day that Dr Brash issued a paper calling for smaller government and lower taxes, National MP Katherine Rich was on state radio complaining that the new TVNZ charter had got only $10 million from the government "not enough to make anythink (sic)". National's Nick Smith, the previous day had been on the Holmes Show proclaiming that anyone in his electorate who has three children and decides to have twins ought to be provided with a state house. Brash's paper is on ACT's website at http://www.act.org.nz/brash.

Labour's alternative welfare policy

Also on ACT's website and no longer on Labour's is John Tamihere's speech to the Knowledge Wave Conference. His criticism of state welfare and what it is doing to Maori society is worth reading. The PM, by publicly silencing him and saying that he should raise the issues in cabinet, and Maharey, patronisingly telling Tamihere in question time how to put a paper to cabinet, have given him a license to do so. The Letter is sceptical that welfare is better when administered by Maori Trusts other than the state bureaucracy but we do concede that the Pipi Trust and the Waipareira Trust do drive a better class of car. Tamihere's speech is on http://www.act.org.nz/tamihere.

A living treasure

On Friday night (14 March) before the ACT Annual Conference in Wellington there is a cocktail party in the Grand Hall of Parliament. Roger Kerr, Director of the Business Roundtable has agreed to give a keynote speech. While Dr Kerr has spoken to regional ACT meetings, he has never addressed an ACT conference. He is an original thinker, a living treasure. You can register online at http://www.act.org.nz/conference.

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