A BETTER WAY

By Lowell Manning

As I write this, I’m aware of the Leaders’ debate (Clark & Brash, 22nd August TV1), the “economic” debate (Economics spokespersons National Radio 23rd August) and various media reports relating to economic and tax policy for the upcoming New Zealand election.

The positions adopted by the parties all hold some merit when viewed from that party’s perspective. Their problem is that to make some people winners by attracting them to their cause they can make nearly everyone else a loser.

The spirit of W.Edwards Demming, one of the world’s greatest business gurus, springs to mind (Windows on the World, National Radio 23rd August). He said some 3% of business problems appear in statistics while the remaining 97% relate to systems and human capital.

This is, I suggest, in direct proportion to the world’s monetary structure where some 3% of it’s money represents debt-free money and the remaining 97% privately owned interest-bearing debt created for profit.

I don’t mean to be glib about this. Most people have no idea how our financial system works. The statistics bandied about fail to tell us what is really happening. That’s because of the 97% we don’t know much about.

So here is my take on what the parliamentary parties are saying

Labour: Extend the working for families package, remove interest on student debt, increase some core government spending. Yes, there are a number of targeted groups here, specifically students and those on less than the average wage. But its effect is to cement in a low wage economy where business is effectively subsidised by tax-funded handouts.

National: Change the tax thresholds to reduce tax. Reduce company tax to 30%. Yes, the tax thresholds needed changing. Yes, the policy is clever. And yes, nearly everyone will get something. But the big winners are high-income earners because the “benefit” of shifting the thresholds accumulates through the tax scale. So the target group here is those above the average wage. Those on pensions and benefits get almost nothing.

New Zealand First: NZ is a low wage economy. Increase wages, increase productivity and develop an export plan. Yes, we are a low wage economy sinking into the third world because we have not inflated as much over the years as Europe, the US and Japan. Yes, everyone wants to increase productivity. But New Zealand has never been an industrial economy. We have survived thanks to an extremely efficient primary sector based on targeted research and development. Historically the increases in hourly wage rates x the number of hours worked equals inflation. (According to data just out, wages rose by a paltry 2.8% in the year to June, barely enough to cover inflation, even on the average.) So most New Zealanders have had little or no benefit from their increased output. And there is a net disincentive for exporters from wage increases because they flow directly into prices. We can’t turn around a $10 billion per year current account deficit that way. We can’t export away the $100 billion accumulated current account debt unless we match Chinese slave wages and conditions. I can’t see how the NZ First policy can be a goer.

Greens: Generally support Labour policy but will shift taxation more towards environmental taxes (and if they had their way) a capital gains tax. Increase minimum wage to $12/hour. Yes, progressive environmental taxes would help reduce energy waste and pollution. A capital gains tax (or even a wealth tax like the one that exists in the Netherlands) might direct a bit more investment into productive enterprise. Together they could “pay” for the universal income tax cut of $15/week the Greens propose by making the first $5000 of income tax-free (at a “cost” of around $2 billion/year). The Green package adds a little spice to Labour policy though the outcome is still to make winners from those below the average income at the expense of those above it.

Act: Cut taxes so people have more money in their pockets thereby increasing the incentive to work. Reducing the top tax rate and company tax to 25% and axe the Cullen fund. Yes, this will make high-income earners big winners. But the proposals would require substantial cuts to core government services. NZ would become one of the world’s low tax economies like the United States with catastrophic results for low and medium income earners and beneficiaries.

United Future: Reduce taxes on working families by income splitting. Remove income tax on first $3000. Yes, this will no doubt make United Future’s target voter group(s) happier at a cost of some $2.5b/year. But there’s little precious little then left for anyone else. Jim Anderton’s Progressives: Yep, this bastion of enriched socialism will support tax cuts too, dropping company tax to 30%. Business will apparently make us winners through job creation. By some miracle these jobs will be high skilled and highly paid. Lovely if you happen to be one of the lucky few.

Maori Party : Reduce tax on those with incomes under $25000. Yes, that’s understandable because Maori Party voters will tend to be in the low-income groups.

The main parties are each trying to attract their slice of the voting public at the expense of other groups seen to be less likely to vote for them. They see it as a zero-sum game. It’s nasty, but in a democracy, that seems to be how we decide to distribute the nation’s wealth. In the end, few of us will get more unless the economic pie keeps growing. We might be better with a simpler universal tax system that focuses more on making the pie bigger. Some of the smaller parties (ACT, Greens, NZ First, Progressives) pay lip service to this and I’ll return to this after we clear up a little of the 3% of the issue represented by statistics.

Within the OECD, New Zealand is a relatively LOW tax country. Total tax revenue here is around 34% of GDP (Gross Domestic Product). Some north European countries like Finland have tax revenues around 50% of GDP. Many OECD countries have tax revenues above 40% of GDP. The only major western nation with a lower tax base is the United States.

Recently, New Zealand’s nominal GDP before taking account of inflation has been increasing by around 6%/year. Tax revenue has been rising at about the same rate keeping the tax ratio around 34% of GDP. Based on revenue of, say, $50 billion/year, the tax take will increase by roughly $3 billion per year without changing tax rates.

There are three baseline issues to play with.

Spending v Investment: The first is that not all tax revenue is “spent”. That’s where Labour’s fiscal surplus comes in. Some revenue is used for “investment” rather than expenditure. Labour’s “Cullen” Superannuation Fund takes a substantial chunk of the surplus. There has been some repayment of Government Debt (so New Zealand now has one of the lowest Government debt/GDP ratios in the developed world). There have been transfers to Government reserves. Labour has also been able to draw money out of the revenue hat for roads and other infrastructure investment.

Whether there should be a surplus, how large it should be and what it should be used for are all valid issues for economic debate. Orthodox Keynesian economics suggests running a surplus in good times and a deficit in bad times. New Zealand has, in orthodox terms, had some good years and faces problems in the years ahead as the economy slows. So Labour’s economic management has been, as Dr Cullen is wont to say, fiscally “prudent”, possibly a little too prudent.

Of course investment expenditure doesn’t need to be paid out of revenue. Many would argue it shouldn’t be. Looking beyond our fixed ideas, there’s no reason why Government investment shouldn’t be funded interest-free by the Reserve Bank of New Zealand. We don’t usually go the most expensive shop to buy everyday goods when we can get the same things at a much lower price from our local supermarket. We don’t need to tax people to pay for public investment like education, health and infrastructure.

Savings v Borrowing: The second baseline issue is that National probably can’t fund its tax cuts without borrowing. A surplus, whatever it is, is generated year on year but once tax thresholds are adjusted the lost revenue is also lost year on year. If a party were to give back $3 billion/year over three years, ($9 billion in the third year) it would use ALL the naturally increased tax take of $3 billion/year resulting from inflation and growth. This would leave just the current surplus to meet the government’s investment needs as well as inflation and any demand for new expenditure. Moreover there would be nothing left in the kitty in case of an economic downturn. National’s tax cuts account for $4 billion.

So National’s program is neither as cautious as Labour’s, nor Keynesian. A good case can be made for government borrowing as long as there is a corresponding decrease in private borrowing. The government can borrow at lower interest rates than the private sector. It could even borrow from the Reserve Bank of New Zealand at very low interest rates (as it used to do), allowing tax rates to fall further than National is contemplating - and without committing the country to endless debt servicing. If National does not borrow, existing spending will probably have to be capped or curtailed for some years, creating a structural funding deficit of the kind that existed before the present Labour Government came into office.

Using the Reserve Bank would introduce a whole new ballgame to the tax debate. It creates a whole raft of opportunity that hasn’t been considered; some of the 97% for which statistics don’t exist. For parties wanting to make savings on government expenditure there is a golden opportunity to save the $2.6 billion budgeted for borrowing expenses in the 2005/06 budget before even taking account of new investment.

Efficiency v Targeting: The third issue is spending ‘efficiency”. In the 2005/06 budget Non-Departmental Transactions for votes Health, Education and Social Development together with income support administered through vote Revenue and Veteran’s affairs amount to more than $30 billion of total appropriations of $46 billion (excluding borrowing costs and capital expenditure). Health, Education and social transfers make up two thirds of government operating costs.

While rationing them is a legitimate area of debate, the debate is really about deciding who gets what, when; about targeting rather than efficiency. Parties like National and ACT are ideologically prepared to reduce or at least limit universality (tighter targeting guidelines) because that is where they perceive their voting base to be. Others like Labour and the Greens choose to increase or at least maintain universality (relaxing targeting guidelines). There is really relatively little scope for improving spending efficiency without looking outside the square, beyond the statistics.

For instance, replacing GST, Company and Income Tax with a single fiscally neutral automatically collected Financial Transactions Tax would save most of the $0.5 billion departmental vote Revenue. Replacing social transfers with a universal, Guaranteed Basic Income would save most of the $0.7 Social Development budget. Each of these would save billions of dollars a year in compliance and administration costs.

A Better Way: Looking at the various Parties’ tax and economic policy leads me to some quite startling insights.

1. Instead of driving the country towards ever lower wages and higher overseas debt let’s accept higher wages and become more economically self-sufficient. If, like me, you try to buy NZ Made goods and you’ve been in the supermarket recently you’ll know what I mean. NZ made goods are being priced off the shelves despite very low wage increases over the past decades. Dredging the bottom of the price barrel in world markets has hidden costs (another part of the 97%), like lost jobs, foreign debt servicing built into prices, loss of skills and entrepeneurship just to mention a few. All it would take is a surcharge on the transfer offshore of New Zealand dollars, automatically collected through the banking system and just high enough to bring the current account into balance over time. We could call it a Foreign Transactions Surcharge. It would stop currency speculation and slow the bleeding of the nation’s wealth offshore (that now exceeds 5% of GDP). And it fits within the rules of the international financial institutions. As long as the revenue from the surcharge is used to reduce domestic taxation there is little or no net fiscal cost.

We could use the Reserve Bank of New Zealand to reduce the price of money. Interest costs could then be gradually removed from the price structure. We will be able to buy more for less. There need be no inflation other than “imported” inflation; and that can be minimised by becoming more self sufficient in the production of everyday goods and services.

And why don’t we lead the world again by bringing our tax system into the 21st century?. Let’s replace the hodge-podge of taxes built up over centuries with a simple automatically collected Transactions Tax, starting perhaps with GST and then moving on to eliminate company and income tax. No tax returns, no bookkeeping other than what is needed for company records and statistical purposes. No Revenue Department except for a residual bank monitoring unit and a unit to process export rebates. Everyone keeps what they earn. They pay tax when they spend. The tax base is doubled reducing the amount of tax ordinary people pay. Taxation is perfectly progressive. The tax transformation would be tax neutral (after taking account of savings on government interest and operating costs). There will be some net redistribution of income because high-income earners and companies cannot avoid paying tax on each transaction they make. On the other hand, high-income earners and companies will get substantial savings in compliance and administration costs.

While we’re about it, let’s do away with Social Development and the astonishing array of benefits and tax-credits. Let’s give everyone (superannuitants, men and women of working age, students and children) a basic income sufficient to live on but with built in incentives to encourage fit and able people to make a productive contribution to their community. Working people might pay more in Transactions Tax, but would keep everything they earn plus their basic income.

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