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Growing the economy

07/10/2008

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Scoopit!

Some time ago Adam was sent a copy of the NZ Chambers of Commerce – Election Manifesto. Adam has not commented on this earlier as he was waiting for the various parties to release policy so that he could do a comparison.

In a press release the NZCCI noted:

The major impediment to growth in New Zealand is our poor productivity
performance. With the general election approaching, the New Zealand Chambers of
Commerce (NZCCI) has just released its three-yearly Election Manifesto and we
have decided to focus on the policies needed to correct this poor productivity
performance.

To Adam’s mind our poor productivity growth is a major issue as regards the future of the NZ economy. It is for this reason that Adam is not one of those who sees the last 9 years as some sort of boom period. Out growth was not great, we did not improve our overall economic positioning and the Labour Government did not materially improve the economy. This is exacerbated by the questionable nature as to the quality of much of the spending indulged in by the government, eg Working for Families, Kiwsaver, interest free student loans, amongst other programmes.

The NZCCI believes:-

This document provides a pragmatic stance on business and
economic policy issues for political parties to consider – both before and after the
election – if we are to improve our productivity growth rate.

In general, the business community is not looking for special favours from
government or for interventions from Government in the economy. What’s it wants
are sound, stable policies which provide a platform for economic growth, and an
environment where barriers to business success are removed.

Agreed.

There is too much intervention and regulation in some areas. Adam would suggest that in some areas, for example finance comapnies there may not have been enough.

That said there are things Government can do to create a better business
environment for productivity growth.

The Chambers suggests a policy progamme built around investment in infrastructure;
lower marginal tax rates; reductions in government imposed costs on business;
strong external linkages and a flexible labour market.

Specific policy proposals include:
• leave the existing monetary policy framework alone
• a review of all government spending with a view to eliminating waste
• a reduction in the top personal tax rate be a priority as part of the next round of
tax cuts and the implementation of a flatter tax structure
• increased infrastructure investment including the use of more private sector
investment including public private partnerships (PPPs)
• establishment of a Productivity Commission
• remove restrictions on thermal electricity generation
• a review of the Resource Management Act

In the document itself the Chamber propose a move to a high wage economy brought about through growth and productivity, not through pushing up the minimum wage.

High on the wish list for many businesses are tax cuts. The tax cuts announced in
the recent budget were most welcome, but more are needed if we are to retain our
international competitiveness against countries like Australia.

Rather than a pre-election bidding war on how big each party’s tax cuts would be, we
would like to see parties present carefully considered tax packages that aim to boost
the economy by improving the incentives to work, save and invest. Reductions in tax
rates, rather than a lift in tax thresholds, are most important here because such
incentives are increased with lower marginal tax rates

Over the next 2 or 3 weeks Adam hopes to bring more analysis of the Chamber’s manifesto and comparisons with the policies of the political parties.

The entire document can be accessed here.

A while ago Adam posted on an article by Martin Wolf at the Financial Times, which examined some of the factors influencing sustained and rapid economic growth by a group of countries over a long period. The Wolf article is here.

Ingredients to growth identified as important include:-

  • investment of at least 25 per cent of gross domestic product, predominantly financed by domestic savings, including investment of some 5-7 per cent of GDP in infrastructure;
  • and spending by private and public sectors of another 7-8 per cent of GDP on education, training and health.
  • They also include: inward technology transfer, facilitated by exploitation of opportunities for trade and inward foreign direct investment;
  • acceptance of competition, structural change and urbanisation;
  • competitive labour markets, at least at the margin;
  • the need to bring environmental protection into development from the beginning;
  • and equality of opportunity, particularly for women.

The report Wolf was discussing:-

was written in the context of developing countries and the exemplars considered, based on an analysis of 13 countries that have managed growth of 7 per cent a year over at least 25 years,were:-

Botswana, Brazil, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand with India and Vietnam seen likely to join this group.

Note though the level of growth and then think about growth in New Zealand.

Adam thought it might be useful to look also at things not to do:-

the short list of policies to be avoided. Among them are:

  • subsidising energy (particularly relevant today);
  • using the civil service as employer of last resort;
  • reducing fiscal deficits by cutting spending on infrastructure;
  • providing open-ended protection to specific sectors;
  • using price controls as a way to curb inflation;
  • banning exports, to keep domestic prices low;
  • underinvesting in urban infrastructure;
  • underpaying public servants, such as teachers;
  • and allowing the exchange rate to appreciate too far, too quickly.

Clearly New Zealand was not a developing country in the sense that these were, but a number of these countries have now attained levels of prosperity that rival or surpass New Zealand.

Therefore, it is perhaps appropriate to consider what lessons can be learned from the experience of those countries, especially in the context of our need to grow productivity as well as the economy.

Some of the recommendations from the NZCCI are in accord with the factors discussed in Wolf’s article.

Areas where NZ may be out of line are:-

  • infrastructure spending
  • exchange rate appreciation
  • availability of a pool of domestic savings
  • levels of investment
  • active pursuit of inward investment

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