Sir Roger Douglas - 2013 Budget

Graduate Business School Students

Auckland University Business School

5.30pm 15 May 2013

2013 Budget

No Second Class Citizens

Let me begin by reading you extracts from my speech to the Window and Glass Industry Conference held in Rotorua on 19 June 2009.

I have spent most of my adult life in the Labour Party.
For 21 years I represented one of the poorest electorates in New Zealand.
My brother was a labour member of parliament.
My father was a labour member of parliament.
My grandfather was a labour member of parliament.
The goals I have today are the same as those I had when I was in Labour.
I am just as concerned today as I was then about poverty. I am just as concerned today as I was then about opportunity. I am just as concerned today as I was then about second class citizens.
But where I have changed is what I see as the cause of second class citizenship.
Let’s look at the facts.
For almost 80 years, New Zealanders have experimented with the welfare state. What have the consequences been?
Do all children receive decent education? No.
Do most people retire with enough money to live in comfort? No.
Does everyone receive health treatment when they need it? No.
Have we eradicated poverty? No.
On the very goals that the welfare state has sought to achieve, no one could genuinely argue that it has succeeded. Even the modern day proponents of the welfare state, be they in National, the Greens, or Labour, all know it has failed.
But they think they have the solution. They think the solution is more money. I have never heard a politician from those parties come across a problem that they believe could not be solved with just more money.
That is why, regardless of who has been in power, the budgets for welfare, education, and health have all shown an almost inexorable growth.

Two Classes of Citizenship

New Zealand has two classes of citizens. And we have two classes not because the Government isn’t doing enough for the poor, but because what the Government does for the poor denies them choices, destroys the incentives they have to get ahead, and subjects them to political abuse.

In New Zealand, we have the haves and the have nots.

The haves are the people who do not live from payday to payday, but earn enough to set some aside – to save, or buy healthcare when they need it, or buy education for their kids.

The have nots are those who scrape by, and rely on the state for all their social services.
In New Zealand, we have the privileged and the unprivileged.

The privileged are those who get others to pay for their whims and fancies. The unprivileged are those who face the vicissitudes of the market economy, while being taxed to pay, for example, for the tertiary education of the children of the affluent.
In New Zealand, we have the fortunate and the unfortunate.

The fortunate are those born in a school zone which happens to have a good school. The unfortunate are those born in an area with a poor local school. Zoning locks them in, and if they want to escape, they need to pay twice. They either need to move house, or they need to go private. Only the wealthy can afford to do that.

We have those who receive handouts, and those who pay for the handouts.
And the tragedy is that handouts are often not delivered to those who need them. Working for Families delivers money to many who are comparatively well off.

Government subsidies for business force relatively poorer taxpayers to pay for those lucky enough to get a Government grant.

I hold the same ideals I always have. In fact, every party in Parliament claims to share essentially the same goals when it comes to welfare. National, Labour, and the Greens are all wedded to the current system.

The problem with the status quo is that it is all about power. Politicians control who gets an operation, where kids get educated, and how much superannuation you receive. I can share the goal of equal opportunity for all, and have a different way of achieving it. There are few things we have got as backward as we have with the way we try to help Maori.

There is no doubt that Maori suffer disproportionately from poverty. But if we continue to encourage Maori to look to the past, we will continue to create the system that locks them into poverty. Only if we are willing to look forward and devolve control of the money to individuals, will we deliver solutions to the problems they face.

It is a great irony that the same kind of paternalism that once stripped Maori of individual autonomy and self-determination is today seen as the solution to the problem of poverty.

We have become a nation rife with bureaucracy, recklessly determined to re-use the ideas that have failed to solve poverty for over 80 years.

But if we always do what we’ve always done, then we’ll always get what we’ve always got. What 80 years of political control has achieved is a larger welfare budget, more people on welfare, and barriers for those at the bottom to actually get ahead.

We need to change - Just do it

Until one is committed, there is hesitancy,
the chance to draw back, always ineffectiveness
Concerning all acts of initiative (& creation),
there is one elementary truth – the ignorance
of which kills countless ideas and splendid plans
that the moment one definitely commits
oneself, then Providence moves, too.
All sorts of things occur to help one that
Would never otherwise have occurred.
A whole stream of events issues from the decision,
raising in one’s favour all manner of unforeseen
incidents and meetings and material assistance,
which no man could have dreamed
would have come his way.
Whatever you can do, or dream you can do,
Begin it. Boldness has genius, power and magic in it. Begin it now.
Goethe

Budget proposals 2013
Summary

A budget is a transition plan – a document that details how a country will get from its current state to the desired future state (what position do we want New Zealand to be in, in 50 years). As such when developing a budget you must first set some clear long term goals for the country. Each policy area within the budget must then set out the steps to be taken towards those goals.

A budget should contain and deliver:

• Only quality policies – a policy approach based on “what is right, not what can I get away with?”

• Policies and programmes which are capable of delivering on the goals, objectives, and dreams you have set down.

• A practical commonsense delivery programme.

Budget goals, objectives, and dreams

• Real sustainable gains in living standards, growth and opportunities for all New Zealanders.

• Real gains for disadvantaged people (i.e. opportunity, security, and dignity – productive employment and personal choice) which deliver something of value to everyone else.

• An education system where 95% + (not 65%) leave school qualified in all the basics; where parents have more power over their children’s schooling and well qualified teachers are able to establish their own schools.

• A welfare system that aims to end the need for it, not simply run it.

• A health system that aims to put patients first and the services people need are there when required.

• A business environment that fosters small businesses as well as large corporations.

• A business and social climate where many New Zealanders living overseas want to return - while many high skilled, high income/wealthy individuals want to immigrate to New Zealand.

• Government policy capable of fixing New Zealand’s problems, not simply deal with symptoms.

• A simplified tax code system.

• Dramatically lower personal tax leading to higher growth rates and more well paid jobs.

• A business tax system that taxes opportunity, not success.

• The removal of the remaining state-provided privileges in New Zealand.

• A growth rate among the top three in the developed world each year.

Policy

Taxation

Personal Taxation – Policy

Individual taxpayers (no dependants)

- First $700 per week ($36,400 per year) income tax free
- On income above $700 per week ($36,400 per year) a tax rate of 10c

Individual taxpayers (with dependants)

- Two parent family:

One dependant First $1,750 per week of family income ($91,000 per year) Tax free
Two dependants First $2,000 per week of family income ($104,000 per year) Tax free
Three dependants First $2,250 per week of family income ($117,000 per year) Tax free
Four + dependants First $2,500 per week of family income ($130,000 per year) Tax free

- One parent family:

One dependant First $1,250 per week of family income ($65,000 per year) Tax free
Two dependants First $1,500 per week of family income ($78,000 per year) Tax free
Three dependants First $1,750 per week of family income ($91,000 per year) Tax free
Four + dependants First $2,000 per week of family income ($104,000 per year) Tax free

• On income above these respective tax free income levels, a tax rate of 10c.

• Families earning less than the tax free income allowed to them will receive a tax credit of 25c in the dollar of any shortfall.

• Tax free income levels to be inflation-proof.

Objective/Goal of policy

Individual taxpayers and families (with dependants) have sufficient income to look after themselves, before they have to contribute to Government revenue.

Benefits flowing from reduced personal taxes:

• Real sustainable gains in living standards – via rapid increase in incomes and growth
• Improved incentives for low income people (e.g. those on benefits) to join the workforce
• Many New Zealanders living overseas wish to return
• Many Australians are asking how they can earn their income in New Zealand
• Many people from other countries are looking at New Zealand as a place to immigrate to
• Incentives to increase income are now very strong

Business Taxation Policy

Now taxes opportunity not success

• Existing corporate tax system which currently taxes profit and therefore success has been removed and replaced with a tax on assets owned (i.e. opportunity) at a rate of 0.80c.
• A deduction of $1 million for each household (households with less than $1 million of assets (90%+) will pay no tax on any of their assets.

Benefits

• New Zealanders encouraged to use their assets productively.
• Tax burden shifted from those who use their assets wisely to those who do not.
• Yearly tax known in advance in the same way as interest is on borrowing. All income earned above the tax payable is 100% the taxpayer’s to keep.
• The system has incentivised New Zealanders to use the opportunities they have – not punish them for being productive.
• New Zealand - more competitive internationally.
• Investment and growth up dramatically, leading to economic growth and higher living standards.
• Reduction in tax avoidance.
• Rewards investment in productive assets.
• Helps control government expenditure.
• Improves mobility of capital.
• Steady land prices.
• Helps the poorest in society.

Other Taxes – Indirect

• GST would move from 15% to 16 2/3 – to enable personal income above tax free income levels to fall to 10%.
• Road user charges, petroleum fuel excise, alcohol excise, tobacco excise etc – remain the same.

Expenditure

• To balance the budget and reduce debt the budget tackles wasteful or inefficient expenditure.
• Measuring success by the amount of money you throw at a system has seen outcomes in health, education, housing, and welfare decline (these areas have been tackled).
• Steps in the budget tackle these issues and areas of New Zealand economy (currently 70% government expenditure).

Examples of Expenditure reductions

• $5000 million in health and welfare as a result of individuals contributing to their own cover, (in the main high income people and single people).
• $2000 million (approx) tax that will no longer apply to benefits (benefits in net terms will stay the same).
• $800 million in corporate welfare.
• $700 million of working for families to high income families will no longer apply as tax reductions come into effect.
• $1500 million other savings in areas such as tertiary education, education, superannuation.
• Other departments amounting to $1000 million have been identified but have been used as a buffer rather than all of this amount being taken into account.

I believe this tax expenditure package would be an economic game-changer, a powerful boost to our lagging economy. This package would make New Zealand internationally competitive and be a driver of business investment in New Zealand. As the economy grows, so do the living standards of all New Zealanders.

Changes as a result of Budget proposals for 2013

Education

Background

“When all the determinants of wages are broken down, the level of education is by far the most significant” (The NZ Treasury)

• Many New Zealanders fail to make even the bottom rung of the economic ladder – 300,000 to 400,000 New Zealanders of working age at any one time are on one form of benefit or another.
• Fact – The education system failed 80 – 90% of this group.
• Had these New Zealanders succeeded at school (i.e. been able to read, write and do maths to an appropriate level) most of them would be employed today at a decent wage.

Why? We need to ask ourselves is it that the current education system fails between 30-40% of school leavers each year?

Answer

• The teachers unions – they behave no better than the watersiders did in the 1960s and 70s. They are the modern day version.
• Monopolies (promoted by Education Department) like the New Zealand education system are almost invariably bad – whether they be public or private. Why?
- They create dreary, mediocre uniformity
- They deny opportunity
- They cost too much
• We have chucked more and more money at public education only for the problem to get worse not better

Why don’t we collectively get angry?

• Because we believe we can’t do anything else.
• We can’t change it.
• The state has almost entirely monopolised education.
• They dictate what will be taught, how it will be taught, where it will be taught and when it will be taught.
• And none of these decisions are taken with the interests of the children being paramount.

The agenda is set for the convenience of the teachers unions and education bureaucrats in Wellington. That’s what monopolies are all about.

And yet it would be so easy to fix – there are a number of schools in poor areas that are obtaining outstanding results despite the system.

Why is this when most (especially in poor areas) are failing?

In a nutshell, they have outstanding principals.

Education

Policy

Government role in schools – pre-school/primary/secondary

• Ensuring every family has the means to send their children to any registered school of their choice.
• A standard scholarship, based on age of pupil, is paid to the school of the parents’ choice by Government.
• An additional 1% to 10% is available to families on low incomes (i.e. those whose family income is less than the tax free threshold).
• An education surcharge of 20c in the dollar to be paid by any family with income above the tax free income limit.

Governance – Education Board

• A Government appointed education board replaces the Education Department which is abolished. Other Government sponsored education bodies/groups also abolished unless the new Education Board believe they have an important role and decide they should continue.

• Role of Education Board
- Appoints CEO
- Appoints other staff whose appointment is not delegated to the CEO.
- Appoints a separate board to manage school assets (in line with goals, objectives and principles laid down by the Government Education Board) e.g.

• Foster competition (including teacher owned schools)

• Ensure Government owned school buildings are available to any registered school as required that show they have parental support i.e. applications for enrolment from parents to go to their school.

• Establish rent levels (recommendations to come from education Asset management Board).

• Foster performance contracts between schools and parents.

• Foster teacher training (including in-house as well as private institutions). Close old style teacher training institutions when/if demand falls for their services.

• Work with immigration department to ensure top educators from overseas with relevant qualifications come to New Zealand to open new schools or run existing schools (recognises that great principals = great schools).

School Registration and Monitoring

• Initial period of registration is six years. The board to report to Government by end of year four on whether registration and monitoring is necessary and if so how this should be done.
• All schools (new and old) to be registered by Education Board.
• Registration can be removed by the board on six months’ notice or a shorter period if urgent.
• Board to undertake independent monitoring of all schools for three years with the results of this monitoring available to parents and to the public.
• If, as expected, quality private sector monitoring develops within this period the Education Board role would be reduced to an audit style monitoring approach.

School Boards – Governance

• Any schools owned and operated by the Government would have government appointed boards. Schools owned and operated by private owners/teachers would appoint their own boards.
• Boards would be responsible for appointment of CEO (Principal).
• CEO/Principal would be responsible for appointment of all teaching and office staff and for setting of working conditions, pay rates etc.
• CEO/Principal also responsible for appointment of school maintenance staff if this role is delegated to them by School Asset Management Board.
• Schools would be subject to the same laws as any other business in New Zealand.
• Teacher Unions would be subject to competition for teacher membership (teachers do not have to join a union).
• Superannuation would be protected by Government as far as possible, (i.e. up to the point the new system comes into existence). Thereafter by negotiation with new employer or if self-employed by own decisions.
• Curriculum agreed between Education Board and a school as part of the application process to become a registered school. Education Board agrees or amends.

Tertiary Education

Governance

Government appoints an establishment board for each University. The role of the board is to:

• Set down the objectives and principles of the University.
• Determine what the University will teach and what degrees they will offer.
• Appoint CEO of University.
• CEO and board to appoint members of panel that will interview and appoint professional staff.
• University funding:
- By Government – via students
- By parents – via students
- By students – via loans etc.

Welfare

New philosophy – get rid of existing policy approach which is “to run what is” and replace with a new policy objective the aim of which is to “end it” by concentrating all our efforts on moving New Zealanders off benefits and into employment (via a change of incentives).

Policy

ACC/Sickness and Unemployment Cover
• A minimum level of cover introduced equal to the unemployment benefit.
• Extra cover (separate) can be taken out by any individual at their own expense.

Payment of cover up to unemployment benefit levels as follows:

• Beneficiaries – by government - unless their income is coming from private sector cover.

Employed
• ACC cover – by employer (same as it is today) and individual (same as it is today)
• Sickness cover – employer pays ½ premium of employed staff and individual pays ½ premium
• Unemployment cover – premium contributions paid by employer, individual and Government with the percentage paid by each, dependent upon income levels and size of family.

• Non Workers ACC – Government covers premium or it comes out of family income in full or in part depending on the income level of family where applicable.

Health

Health cover – All New Zealanders to take out catastrophic health cover i.e. Health expenditure over and beyond 5% of income in any one year.

Payment of healthcare costs

• Healthcare expenditure up to 5% income –individual responsibility
• Catastrophic cover (above 5% income).

Who Pays?

• Retired – in the workforce individual retired taxpayers’ responsibility
• Individual taxpayers (no dependants) – individual taxpayers’ responsibility
• Individual taxpayers (with dependants) – with income above tax free threshold, individual taxpayers’ responsibility.
• With income below tax free threshold a percentage from taxpayer and balance from Government dependent upon taxpayers’ income.
• Beneficiaries (sickness, unemployment) – government pays. ACC – individual pays a percentage with balance paid by Government dependent on income. DPB – Government pays.

Superannuation

Policy

• Existing superannuitants – no change

Future Retirement

• Retirement age to move to 70 over next 15 years
• Compulsory superannuation introduced (5% contribution from individual and 5% from employer) up to $100,000 of income. ($100,000 indexed.)

Retirement Income

• Government benefit – existing benefit level for current over 60s, for those aged 59, 99% of existing benefit phased out to zero for current 20 year olds.
• Pension from own savings.
• Government top up – provided for those individuals whose capital accumulation and government benefit (next 45 years) is insufficient to provide retirees with an income equal to the current retirement benefit.

Local Government

The problem - local government/councils are monopolies.

The solution – a new structure for local government:
• The overriding principle - People most affected by council decisions must be in a position to voice their opinion.
• Two distinct levels of local government:
- Level 1, The greater regional council which would look after the broader issues (e.g. roading, storm water)
- Level 2, Community council representing the local community, carrying out those activities that primarily affect the community.

See No Second Class Citizens for a full outline.

Assets

Overview

The World Bank estimates the ongoing cost of Government ownership of companies like TVNZ amounts to $1,000 a year for every adult.

The cost is caused through the overuse of resources in the production of goods and services by government owned companies (this does not include local government). Total cost $2,000?

The real cost in publically owned enterprises is the lack of efficiency.

Conclusion

We cannot continue to enlarge the unproductive elements of the public sector while squeezing the productive private sector.

ends

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