Govt Spending Surges While Economic Growth Slows

19 December 2005

Government Spending Surges While Economic Growth Slows

"Ill-justified government spending is surging while exporters are being squeezed and economic growth is slowing but the government is in denial about the connection", the chairman of the New Zealand Business Roundtable, Rob McLeod, said today.

He was commenting on the release of the Budget Policy Statement for 2006 and the Half-Year Economic and Fiscal Update 2005.

"On Treasury's forecasts, economic growth will average only 2.8 percent per annum during the five years to 2009-10. This is well down from the 3.7 percent per annum achieved since 1992-93 and the 3.6 percent per annum in real terms achieved between 1999-00 and 2004-05. The average growth rate projected for real GDP per capita is 1.9 percent per annum. This is also well below the 2.5 per cent rate achieved on average since 1992-93 and the 2.4 percent rate since 1990-00.

"On these projections, the gap in living standards between New Zealand and Australia is more likely to widen than close", said Mr McLeod. "This is inconsistent with the government's prime economic objective of raising the trend growth rate, suggesting the need for greater emphasis in government policies on creating wealth rather than redistributing it.

"For faster economic growth, monetary policy needs mates, and fiscal policy needs to be one of them. When governments command resources through taxes and spending, they deprive exporters and others of the ability to use those resources productively.

"Core Crown operating expenses are projected to rise from 30.6 percent of GDP in 2004-05 to 32.4 percent of GDP in 2009-10. With real GDP growing at around 2.8 percent per annum, this implies that operating expenses will grow in constant prices during the same period at around 3.7 percent per annum. Treasury's pre-election briefing advised that in real terms government spending on consumption items was expected to grow by the order of 3 to 5 percent per year, following 6 percent growth in 2004/05, again outstripping GDP growth.

"Such large increases would be less of a concern if government spending was producing value for money in the public interest", said Mr McLeod. "Unfortunately, there is all too much evidence, in health, education, social spending, and elsewhere, that far too much spending has not been rigorously justified, may benefit the relatively well off rather than the poor, and is poorly monitored. The latest policy of interest-free loans for well-paid graduates is a prime example.

"To improve spending disciplines, the Business Roundtable advocates the inclusion in the Public Finance Act of a Taxpayer Bill of Rights or a Tax and Expenditure Limitation provision that would constrain the rate of growth of government spending to the rate of population growth plus inflation, unless governments secured taxpayer approval to higher increases via a referendum. Surplus taxes would be returned to taxpayers.

"Excessive tax burdens and poorly designed tax structures can also harm growth and prosperity. The Business Roundtable considers that tax policy should be guided by the government's 2001 Tax Review, the most recent comprehensive review of the tax system. We support its central recommendation of moving to a lower, flatter income tax structure. That would reduce distortions in the tax system. The abandonment of the proposed carbon tax would also benefit the community.

"The deteriorating growth outlook adds weight to the business community's assessment that government policies have been anti-growth rather than pro-growth, and are making business operation in New Zealand more difficult. An urgent appraisal of policy directions is needed to reduce the risks of an even greater economic slowdown", Mr McLeod concluded.

ENDS

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