Budget challenges

• Muriel Newman writes – 

As the new Government puts the finishing touches to this month’s Budget, they will undoubtedly have had their hands full dealing with the economic mess that Labour created.

Not only was Labour a grossly incompetent manager of the economy, but they also set out to sabotage the new administration’s ability to balance the budget and deliver on their election promises.

The Budget Policy Statement released by Treasury outlines the problem:

“The previous Government set a $3.5 billion operating allowance for Budget 2024 but pre-committed around two-thirds of this allowance ahead of time.

“The previous Government also left a number of initiatives with only time-limited, and expiring, funding. The extent of this time-limited funding is a major challenge for the Budget. For example, decisions were made in 2022 to provide additional funding for Pharmac to purchase new medicines and widen access to already funded medicines, but this funding stops on 30 June 2024. Making this and other initiatives time-limited made the future fiscal track look better but left any incoming government with difficult choices. Put together, the cost of pre-commitments and extending time-limited funding exceeds the previous Government’s operating allowance for Budget 2024.”

The report identifies a significant fall in economic growth last year as the cost-of-living crisis bit, but it also attributes some of the cause to an on-going decline in productivity.

While New Zealanders generally work longer hours than most of our competitors, we rank as one of the least productive nations in terms of the value of the goods we produce compared to the cost of labour.

While many factors influence a country’s productivity, the regulatory burden plays a significant role. Instead of clearing away the mountains of mind-numbing regulations and red tape that hold up progress and deter investment, the Ardern-Hipkins Government spent six years creating more.

It started not long after Jacinda Ardern became Prime Minister:

“We have decided to try something no other country has done before and embed Agenda 2030 Sustainable Development Goals into everything we do…”

From mandatory climate reporting to the identity politics objectives of Diversity, Equity, and Inclusion, to He Puapua and empowering the tribal elite, Labour’s social justice agenda has been a significant distraction for both the public and private sectors.

There’s also been a massive expansion of the Wellington bureaucracy, increasing by almost 20,000 from 46,000 when Labour took office to 65,000. With the average public service salary now $97,200, this not only represents a major direct and indirect cost, but with many of those new staff employed to advance Labour’s political agenda, they would have obstructed productivity instead of enhancing it.

With activists already dominating the media and now embedded in virtually every avenue of government, including the judiciary, education, local government, and tertiary institutions, the obstacles the new Government faces as it introduces its Budget reforms, should not be under-estimated.

As a result of the uncertainty that’s been created, many Kiwis have put their good ideas on the back burner and are either leaving the country or waiting to see what difference the new Government will make before deciding whether to go – or stay and invest.

More than anything, the Coalition Government now needs to sweep aside Labour’s influence and signal its commitment to freeing up the country for growth. By removing the roadblocks to progress, and keeping out of the way, the new Government could create the environment for new ideas to flourish, leading to more jobs, higher living standards and better opportunities for everyone.

As the Nobel Prize winning economist Milton Friedman explained,

“A free society releases the energies and abilities of people to pursue their own objectives. Freedom means diversity but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables everyone, from top to bottom, to enjoy a fuller and richer life”.

Looking ahead, it’s important to remember that sometimes all that’s needed to transform a country is one good idea.

Take the case of the drug semaglutide. Developed by the Danish pharmaceutical company Novo Nordisk to help control blood sugar, it is taking the world by storm.

Not only does the drug regulate blood glucose levels, which helps to reduce the symptoms of type-2 diabetes, but it also leads to weight loss, and now, they are discovering, it reduces the risk of heart failure in obese patients.

Sold as Ozempic for diabetes and Wegovy for weight loss, the business has become Europe’s most valuable listed company, with a market capitalisation that is now greater than the Danish economy.

For Denmark, a small country with 5.9  million people, Novo Nordisk has transformed their future, helping the country to avoid a recession, and keeping interest rates low.

So, the big question for the National-led Coalition is whether they have a visionary plan for growth.

History provides some remarkable examples of transformational change.

Following the Second World War both Germany and Britain found themselves mired in economic crisis.

In 1948, West Germany’s Economics Minister Ludwig Erhardt introduced sweeping reforms. Virtually overnight, the bureaucracy was curtailed, taxes were flattened, and the country was transformed into a free market economy.

To encourage hard work, tax on earnings from hours worked over 40 hours a week was abolished, and to incentivise exports, taxes on all profits earned through exports, were eliminated.

Released from the shackles of an overbearing bureaucracy and excessive taxation, innovation flourished, productivity soared, and exports skyrocketed. The country prospered, and Germany became one of the world’s strongest economies.

Meanwhile, after the war, Britain stagnated, until Margaret Thatcher became  Prime Minister in 1979 promising to restore a culture of entrepreneurship:

“I came to office with one deliberate intent: to change Britain from a dependent to a self-reliant society – from a give-it-to-me, to a do-it-yourself nation. A get-up-and-go, instead of a sit-back-and-wait-for-it Britain.”

Her reforms, which embraced the virtues of freedom, lower taxes, and less regulation, reinvigorated the British economy.

Singapore was a different story. A tiny third-world island nation, its only natural resource was its people. With visionary leadership, Lee Kuan Yew embarked on a transformational journey in the fifties that focussed on education – to provide every citizen with a pathway to employment and to ensure that ‘no-one was left behind’, exports to build a strong economic base, and a contributory savings scheme to provide security in retirement along with healthcare, and housing. With low taxes, a limited government, and a relentless focus on excellence, Singapore has prospered into a world economic leader.

One of the most remarkable aspects of Singapore’s success was their far-sighted approach to the looming problems associated with an aging population. Through their contributory savings scheme, every retiree can look forward to prosperity in old age. This is in sharp contrast to the situation faced in many countries, including New Zealand.

Our numbers tell the story. As the baby boomer generation reaches retirement age, the number of people aged 65 and older is growing rapidly. It doubled between 1990 and 2020, to reach almost 800,000. The number is projected to double again by 2056, growing to over 2 million by 2073. At that stage, there will be just two workers for every retiree, compared to around four today.

In its long-term forecasts, Treasury predicts that if we stay on the current path we are on, we are heading towards bankruptcy.

In this week’s NZCPR Guest Commentary, the former Labour Finance Minister and ACT Party Founder, Sir Roger Douglas, outlines the problem:

“This article calls on all New Zealanders to be clear-eyed about the state of social services, particularly health, education, welfare, and superannuation, and to acknowledge that without major changes the system will inevitably collapse under its own weight. No government has had the courage to face up to the fundamental structural flaws of our present system. This lack of courage is an abdication of duty. Putting off the necessary measures to avert that collapse is far from compassionate. It is mortgaging our children’s future beyond their ability to repay it. (Our existing unfunded social liabilities for super and health exceed one trillion dollars).

“My objective in writing the article is three-fold: Firstly, to warn the public about the coming tsunami of deficits, or tax increases and benefit cuts, as our super and healthcare obligations for the growing number of retirees come due. Secondly, to look at the solutions suggested by Treasury and our political parties to these problems and to explain why they are insufficient or dangerous. And finally, to provide a workable plan for reform, that will restore New Zealand’s solvency and ensure security for New Zealanders.”

Sir Roger explains that for over 50 years he has been questioning the approach to superannuation taken in this country, which sees many New Zealanders retiring after 40 years of working hard and paying taxes with little to show for it except dependency on the government for a small pension in their old age.

In 1972 he developed a Private Members Bill to turn this situation around, by providing New Zealanders with a contributory super savings scheme that would have enabled workers to accumulate a million dollars plus in their retirement funds.

In 1974, the Kirk Labour Government introduced the New Zealand Superannuation Scheme, based on Sir Roger’s concept. If it had been allowed to continue, instead of being axed by the newly elected Prime Minister Robert Muldoon in 1975, like Singapore’s contributory scheme, it would have transformed our economic future.

In a Herald article in 2007, Investment Analyst Brian Gaynor estimated the scheme would have turned New Zealand into an ‘Antipodean Tiger’ – the envy of the rest of the world:

“We would have a current account surplus, one of the lowest interest-rate structures in the world and would probably rank as one of the top five OECD economies. Most New Zealanders would face a comfortable retirement and be the envy of their Australian peers. The Government would have a substantial Budget surplus and we would have one of the best educational and healthcare systems in the world.”

In 2014 Infometrics estimated that had the scheme been retained, it would have been worth almost $300 billion, which at that time was equivalent to more than the combined value of the New Zealand Super Fund, Kiwisaver, and the New Zealand Stock Exchange!

And in 2021, an article in Stuff claimed,

“Few economists would disagree that Robert Muldoon’s decision to cancel the fledgling New Zealand Superannuation Scheme was probably the worst financial decision ever made. Why? Because had it continued, New Zealand would now be one of the richest countries in the world… we would have at least $500 billion saved in our own individual retirement accounts.”

Instead of looking forward to a bright future, Sir Roger warns that if we stay on the current path, relying on pay-as-you-go super, New Zealand will face financial ruin:

“According to Treasury, those policies are leading New Zealand towards a fiscal deficit of 13.3% of GDP in 2061, which, if it was allowed to get to that, would send the country into bankruptcy. Many New Zealand politicians have known, this outcome was inevitable given the policies they were following, yet they have continued to follow the same course they were on.”

There is no escaping the reality that as a country we are now failing while others are succeeding. Labour has accelerated our failure.

This is the challenge facing the Coalition. They not only have to clean up an economic mess, but they need to turn around the culture created by Labour that denigrates success instead of applauding it.

Most importantly, they must harness the entrepreneurialism, energy, and expertise of Kiwis wanting to build a better future for themselves and their families – because that is the key to our success.

The Budget will also provide us with a hint as to whether the Coalition intends being “revolutionary” enough to reverse our decades of decline.

——————————

This article by Dr Muriel Newman was first published by the New Zealand Centre for Political Research.