New Zealand and economic reform

This week’s column tackles the thorny question of economic reform in NZ and Australia. Actually it doesn’t really tackle it – it ducks the main bit of trench warfare according to which one side says that NZ performed badly because of reform and the other says it performed badly despite it.

In researching the piece I gradaully became aware that, for all its fame as an economic ‘laboratory’ NZ has still to make some basic reforms that we did within just a few years of getting serious – like taxing capital gains and means testing pensions.

The column tries to develop some of the economic aspects of my earlier post on NZ. Since tapping out the column the NZ Nationals have announced further fiscal depredations. Don Brash has announced a GST reduction on petrol. About as well crafted a piece of economic shlock as one can imagine. This from an economist! Still, that’s politics where the end justifies the means.

Brash is an interesting study. As Reserve Bank Governor he was so ‘dry’, so enamoured of the idea of pain for gain that he managed to steer NZ into recession in the wake of the Asian crisis whilst our own Reserve did not tighten policy and steered a much superior course. But once he’s at the helm of a political party it seems anything goes – including throwing away NZ’s hard won surplus. Payments to the NZ super fund – set up by Labour – will keep the budget out of technical deficit under Brash’s tax cuts, but they will nevertheless be funded by borrowing.

This and the bizarre behaviour of the Exclusive Brethren sect gives the NZ Nationals a whiff of the US Republican Party. Looks like they’re playing ‘starve the beast’ with the public finances and footsies with the lunar religious right.

Anyway, here’s the column. For some reason the Courier Mail hasn’t posted my column on their website for a few weeks, but I’m reliably informed they’re in the paper version.

New Zealand election

They’re voting in New Zealand this weekend.

Under both Labour and conservative National Parties, New Zealand has been the brave new world of economic reform. Without an upper house or States, New Zealand governments took reform further faster than any other democracy.

The result? Disappointment.

Though the clich© is that modern communications shrink distance, the evidence suggests the opposite. Knowledge grows in ‘clusters’. So in the knowledge economy, scale and proximity to major markets seems to be growing more, not less important. Whether despite or because of reform, from 1984 to 1999 New Zealand had the worst growth record of any rich economy!

New Zealanders rebelled, endorsing a radical new electoral system which requires compromise and coalition building between parties. Even reform enthusiast Roger Kerr, Executive Director of the New Zealand Business Roundtable recently argued that Australia’s slower, steadier pace of reform seems to have worked better.

Since her election however Labour PM Helen Clarke has had a dream ride like John Howard riding on the coat-tails of economic growth arising from the painful reforms of her predecessors and increased borrowing against rising house prices. But where Australian reform has stopped to a crawl, New Zealand is still soldiering on.

Here are two examples.

In Genesis Egypt got ready for its seven years of famine by hoarding some of its surpluses from the previous seven years of feast. Call it budgeting 101. Both countries should embrace the surpluses that their past successes and current (temporary) good luck make possible. They should do so firstly to raise national savings at a time of huge external deficits and also to prepare for the inevitable bad times. Tighter purse-strings now enable looser ones to help us out of the next recession.

Despite our Government’s rhetoric about the fiscal challenges of ageing we’ve done nothing much more economically constructive with the current revenue windfall than funding increasingly brazen cash giveaways around election time.

Being much smaller with much less exposure to mineral exports, New Zealanders have had less luck. But they’ve done much more with it. Their budget surplus this year is not much smaller than ours though their economy is one sixth the size. And they’ve not just shown the political fortitude to maintain such a large surplus. They’ve been building their forbearance into their institutional fabric.

Thus in 2001 the Government effectively raised the fiscal bar by making budget balance the target after a hefty payment into the newly formed New Zealand Superannuation Fund.

It’s true that, having failed to means test pensions and expand compulsory super as Australia did, New Zealand’s budget is more exposed to ageing.

On the other hand our ‘Future Fund’ has been a reactive comedy of improvisation. Like Treasurer Keating, Treasurer Costello initially ridiculed the idea until he realised he needed somewhere to stash the proceeds of the Telstra sale. Retaining Fund earnings outside the budget does raise the fiscal bar but by about quarter of a percent of GDP compared with almost two percent in the New Zealand Fund.

But additional contributions to the Fund from the Budget remain vague. And one minute we were told that the Fund would hold a diversified portfolio of assets at arms length from Government. Then we heard that the Government’s thirty billion dollars worth of Telstra shares might be parked in the Fund as its sole asset.

And some readers might remember that this July I suggested increasing super payments ‘by default’. If your super contributions were no higher than the nine percent compulsory rate, your employer would be required to increase the proportion of your wages paid into super. You could opt-out any time, but recent research shows that many people would go along with the plan to their own and the budget’s great advantage decades later.

I wondered how long it would take before an idea with so little compulsion, such obvious benefits and so few downsides would take hold.

Well guess what? Six weeks earlier New Zealand had already announced it. Under ‘KiwiSaver’ employers must pay four percent of their employees’ pay into super accounts unless the employees choose to opt out. Government will contribute $1,000 on establishment with subsequent help to raise a housing deposit.

The international attention the scheme has attracted reminds me of our own innovations many years ago like HECS and having child support administered through the tax system rather than the scandalously ramshackle court system. Those were the days!

I don’t know enough to endorse one side or the other in the New Zealand election. But politics is taking its usual toll on good policy. The National Party Opposition has promised tax cuts big enough to require additional borrowing (after payments to the ‘NZ Super Fund’ are made). And they’ll abolish KiwiSaver.

But default savings schemes are too good an idea not to catch on. Whether it’s stillborn or not, before too long we’ll copy KiwiSaver just like the kiwis copied HECS.