Does Treasury Advice Represent Value for Money?

A fortnight ago the Treasury’s Briefing to the Incoming Government was released.

Treasury is the government’s main economic adviser. Taxpayers fund it to the tune of around $50 million a year. Are they getting value for money for this expenditure?

The Treasury’s job is to assist the government to meet its economic goals. The Labour-led government has repeatedly stated that its “top priority” goal is to raise the per capita incomes of New Zealanders into the top half of the OECD rankings. A National-led government would have a similar goal. Readers might therefore have expected the briefing paper to focus on two central questions: is New Zealand on track to achieve that goal with current policies; and, if not, what policy changes should the government make to achieve it?

On the first question, Treasury pulls its punches. It says that “New Zealand will continue to experience reasonable rates of economic growth, although probably not sufficient to shift the country into the top half of the OECD within the next decade.”

This is a massive understatement. As the briefing explains, moving into the top half of the OECD within 10 years would require growth rates of around 4% per capita per annum. This compares with average per capita growth rates of under 0.5% per annum up to the early 1990s and the much better 2% per annum rate achieved in the last decade as the benefits of the economic reforms materialised. But a further doubling of New Zealand’s per capita growth rate (from 2% to 4% per annum) is simply not in prospect on current policies. Treasury is negligent in not pointing this out.

Indeed it does not offer advice on whether current policies are likely to see any progress at all towards achieving the goal of closing the gap with the OECD average. If New Zealand maintained the small (0.3%) annual growth differential it has achieved over the OECD average in the past decade, it would take over 50 years to close the gap. Recent policy backsliding, however, makes it more likely that the economy’s trend growth rate will deteriorate rather than improve.

On the second question, does the briefing paper give the government advice on the policy adjustments necessary to achieve its growth objective? Regrettably, no.

The first thing it should have pointed out is that economic growth is primarily dependent on good institutions and policies that are consistent with high levels of economic freedom and allow entrepreneurship to thrive. Economic freedom, however, is not mentioned in the paper. No country can be regarded as economically free, and capable of fast growth, when total government spending (central plus local) is around 40% of GDP, as is the case in New Zealand. Cutting the government spending ratio significantly, and releasing resources for productive use in the private sector, is therefore a prerequisite to rapid growth.

It is also a prerequisite to reductions in the overall tax burden. Treasury recommends reductions to the high personal tax rates (33% and 39%) and to the company tax rate, but it doesn’t suggest by how much or tie them to a government spending recommendation.

Treasury does, however, report empirical evidence indicating that high marginal tax rates on personal and company income are damaging to growth. Michael Cullen’s rejection of Treasury’s advice on the grounds that it is “ideological” suggests he is still in denial about the findings of economic research.

The briefing also makes a sound case for a rethink of government policies on climate change, the Resource Management Act, roading, electricity and privatisation in the interests of growth.

However, the Treasury has little to say on the barrage of regulation that is making business operation in New Zealand more difficult. To note that New Zealand compares well with other countries in many areas of regulation is irrelevant to the task of advising on policies that would achieve the government’s growth objective.

It is also surprising that the briefing has nothing to say on monetary policy and the Reserve Bank’s misguided attempts to blame current inflation and economic imbalances on the private sector rather than on monetary and fiscal policy mismanagement.

Nor does the Treasury engage in arguments by the Business Roundtable and other business organisations that ‘constitutional’ constraints such as tax and expenditure limits and a Regulatory Responsibility Act should be considered as part of a credible pro-growth strategy. It is pleasing that there is no trace of the curious material on economic geography that featured in previous Treasury briefing papers.

So while the briefing paper is an improvement, it barely scores a pass mark. Its main weakness is the failure to advise the government that existing policies are not achieving the goal of faster growth and to outline a coherent programme that would. In the interests of achieving the higher living standards that most New Zealanders want, taxpayers deserve better value for money from their Treasury.

Roger Kerr is the executive director of the New Zealand Business Roundtable

ENDS

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