Listener 24 August, 2002
Keywords History of Ideas, Methodology & Philosophy; Political Economy & History; Regulation & Taxation
The economic debate was noticeably missing from the election campaign, as the public turned its attention to other concerns. This suggests an economic consensus (almost) arising from the economic prosperity over the last three years, plus an increasingly widespread agreement that economic policy is going in the right direction.
The economy has been doing well, growing slightly faster than the OECD average with modest inflation (below 3% p.a.), lower unemployment (the rate is down to 5.3%), and a strong fiscal position, while the external deficit has fallen from alarming levels (as high as 7% of GDP) into the usual working range (near 3%). Nothing is perfect, and real wages (nominal wages adjusted for inflation) barely rose in the last three years, so workers had to be satisfied with an extra 135,000 jobs and a better social wage from government spending and legislation. They will not be satisfied with such wage growth over the next electoral term.
Because the economy has been doing well, there has been less agitation over the economic policy. The consensus may be deeper. The post-war trend in economic policy has been the opening up the New Zealand economy to the world and the making of greater use of the market mechanism. The economy needs strong export performance to grow, while the public increasingly spends their growing incomes on overseas products, which have to be paid out of export earnings (unless we go down the slippery slope of overseas borrowing). The export diversification meant the economy no longer worked properly with the detailed intervention that characterised the war economy. In any case the public has become diverse too: no central planner can provide the variety of women’s fashion shops that crowd even our smallest town centres.
The policy trend was interrupted by Rob Muldoon’s government which resisted the economic liberalisation, judging – rightly I think – the public preferred the old ways (even if they were becoming increasingly impractical). The 1984 Treasury Post-Election Briefing Economic Management was a moderate call back to the long run trend to economic liberalisation and the open economy. Unfortunately the incoming government overshot into the extremism of Rogernomics and, later, Ruthanasia. The last four years have seen much of that extremism wound back – although some of its ‘reforms’ may be almost irreversible. Meanwhile the public seems to be much more accepting of the open economy and the market mechanism, although the support is tentative and individuals react strongly where the new regime disadvantages them personally.
The bits I did not like about Economic Management were its monetarist macroeconomic policy, and its vague growth strategy. We are still debating the former, currently in regard to the Reserve Bank targets. Meanwhile Treasury has been addressing the lacuna in its growth strategy, although it still has a long way to go. Both issues were hardly touched on in the election campaign.
A consensus does not mean total agreement. But none of Act, the Alliance, or the Greens – who in quite different ways dissent from parts of the consensus described in the last few paragraphs – chose to take their differences to the electors. There were the usual extravagant promises of increases in government spending and tax cuts by parties who had no expectation of implementing them. National’s promised tax cuts were within the fiscal parameters set out in the last budget, although concentrating them on the very top income earners may not have made electoral sense. Act did promise all workers a tax cut, but failed to explain how they would have funded it. That such issues were not pressed was indicative of the lack of electoral interest.
There will be further calls for tax cuts. The most concerted claim comes from those who advocated the policies which stagnated the economy for a decade. They have been unable to provide convincing evidence that lower taxes and lower government spending affect the growth rate by much. There is some research which supports their position and some contradicts it. One of the advocates’ themes is the only OECD economies with government spending below 40 percent of GDP grew faster than 4 percent p.a. (the government’s current target). Unfortunately that 40 percent figure is problematic. New Zealand’s public spending appears high because it includes direct tax on social security benefits and indirect tax on government expenditure. Other countries do not follow these conventions, which lowers their apparent public spending relative to New Zealand’s.
In any case the successes on this criterion are only two countries, while in opposition to the theory there are four low government spending economies with growth rates below the 4 percent p.a. The unbiased observer is likely to conclude that any effects of government spending on economic growth are tiny, and may be in either direction since some spending – infrastructure, research and development and acquisition of worker skills – may enhance it.
The tax debate will not go away, as long as there are people who will benefit from tax cuts. But macro-policy and growth strategy are more important things to debate. Unlike the election campaign, this column will try to keep you informed.