A Framework for an Economic Strategy

<>A note prepared for discussion in September 2012.


Keywords: Business & Finance;  Distributional Economics; Globalisation & Trade; Growth & Innovation; Macroeconomics & Money;


What is the Purpose of the Economy?

* The purpose of the New Zealand economy is to maintain and increase the wellbeing of all  New Zealanders. It is neither the maximising of material output (GDP) nor the maximisation of profit, although under some circumstances these can contribute to the purpose.


How Do We Seek to Improve the Wellbeing of New Zealanders?

* By the social control of the means of production, distribution and exchange. That control may be exercised by the government and other collective institutions, or it may be left to a properly regulated market.


What Is The Role of the Market?

* A fundamental principle of democracy is of ‘subsidiarity’, that decisions should be taken at the lowest effective level, as close to those who are affected as possible. The market is a means to do this. However  markets do not always do this effectively.


How Do We Make the Market Work Effectively?

* Markets typically need a framework of laws and enforcement to work effectively. This includes

– laws which affect consumer information, safety, protection and transactions;

– where competition does not work well ,workable competition (which can include public ownership);

– in employment relations;

– health and safety (including worker health and safety);

– where transactions are complex and take time for the full outcome to become evident as for financial transactions and construction;

– where the actions produce economic ‘bads’ such as in the environment or from misuse of drugs (including legal drugs such as alcohol and tobacco).

– for goods and services which have a collective or a merit element.


What Is the Economic Role of Government?

* To regulate markets.

* To provide the goods and services in alternative ways where markets work particularly ineffectively. Examples include

– educational services;

– health care;

– public interest broadcasting;

– the underpinning of cultural and recreational activities;

– environmental services.

* To maintain full employment by providing an adequate level of effective aggregate demand through fiscal, monetary and exchange rate policies – without stimulating inflation.

* To offset market failure in the mechanisms which promote economic growth. (Especially important is the stimulation of technology and innovation).

* To provide protection and support for the weakest in society.


Who Are the Weakest in Society?

* The first priority of the government is to protect the young, the sick and disabled, and the elderly.

* Particular needs at the moment arise from

– the widespread poverty among children;

– those caring for the sick and disabled with inadequate public support;

– beneficiaries who have not had an increase in the level of their benefit above inflation since 1991.

* While education and health are always priorities of a caring government, New Zealand also faces a particular crisis in its housing stock from inadequate maintenance, poor supervision of building quality, the need to rebuild from the Canterbury earthquakes and the need to strengthen to meet future earthquakes. (The latter applies to many public buildings.)


How Should the Government Fund its Activities?

* The main source of revenue for government is taxation. Compared to the current taxation regime  the government will need to raise taxation to meet its wider social objectives. Among the options that need to be explored are

– a higher top tax rate, so the rich make a fairer contribution to the nation’s overall welfare;

– a real capital gains tax;

– extending GST to cover offshore electronic transactions and personal imports;

– a financial transactions tax to be imposed with like-minded jurisdictions.

* Use of public resource (such as carbon credits) should be charged for instead of given away.

* Borrowing should generally be limited as the government should be contributing to the nation’s savings.


Why Are Savings Important?

* Without adequate savings the economy is unable to fund its physical investment, public investment (including infrastructure) and the necessary refurbishment and extension of the housing stock.

* Depending on foreign borrowing raises the exchange rate undermining the ability of the export sector to thrive.

* The inevitable consequence of foreign borrowing is that an increasing proportion of New Zealand land, resources and businesses will be owned offshore.

* To increase the nation’s saving the government should

– as far as practicable run a surplus on the current government account;

– make Kiwi saver compulsory and raise the contribution rates;

– discourage wasteful investment as occurred recently under the light-handed regulation of the finance company sector.


How Should New Zealand Connect with the Rest of the World

* New Zealand is a trading nation, specializing in some exports where it has a high productivity comparative and competitive advantage and importing goods and services which it has not.

* It should pursue free trade opportunities, but never where the concessions would compromise the long run wellbeing of New Zealanders (especially PHARMAC and intellectual property rights).

* It should be reasonably open to direct foreign investment, where the investors are bringing expertise not readily available in New Zealand, but foreign investment should not be an alternative to the failure of the New Zealand economy to save sufficiently.

* It should not get significantly involved in the high turnover finance markets which are destabilising, but seek like-minded international partners to insulate their economies from them; a multi-nation Financial Transactions Tax may be a means of doing this.