Niue of the OECD, Part III

Who Will Rescue Us?

In New Zealand we have a gung-ho Prime Minister who thinks that he is going to make a difference to our parlous economic performance. He is either deliberately deceiving the people; or he is deluded. The structural problems are simply too big for any politician who wishes to cuddle up to the political centre. The best that can be hoped for is to provide palliative care, while the patient sinks.

Not that there aren't solutions. It is just that the necessary solutions are politically impossible in our "cradle to the grave" welfare paradise, and probably always will be.

We have argued that if New Zealand cannot compete in the global marketplace, its living standards will decline, initially on a relative basis, then eventually on absolute measures. The relative decline phase has been going on now for over twenty-five years. Two ingredients are essential to enable New Zealand Inc to pay its own way: a large highly skilled labour force, and lashings of inexpensive capital.

What, then, are the necessary solutions which no government will take? The biggest impediment by far is the government itself. New Zealand is over-governed. Government is a dead-weight on the economy. It sucks out productivity and wages like an insatiable leech. It rules and regulates and controls just about every aspect of life. But the vast majority of the populace like it that way. Those that don't, tend to leave. That's why it is politically impossible to ring the changes.

The political centre in New Zealand is socialist in everything but name. But if New Zealand were to make its way in the world it would have to starve the bloated beast that sits on top of us, crushing the economy under its dead weight, like some colossal Jabba. The most effective way to starve the beast is to cut taxes: corporate, personal, and indirect taxes, while restraining (probably through entrenched legislation) the ability of government to borrow, or print money.

This would have three immediate salutary effects. Firstly, it would leave more capital with businesses, to fund expansion and resources. Secondly, it would immediately increase the income of every worker in the country. This would amount to a real increase in wages overnight—which as we have argued, is critical if New Zealand is to retain and increase its skilled labour force in the face of global competition for their labour. Thirdly, it would force all government (local and central) to decide what was core and what was not. Non-core government services and functions, of which there are layers upon layers upon layers in New Zealand, would then have to be dismantled, dismembered, and terminated.

How much should taxes be cut? All indirect sales taxes (petrol, alcohol, cigarettes) need to be completely removed. They exist now primarily for social engineering purposes. Vain attempts at social engineering are strictly non-core, and have to go. Now, at this point, the pseudo economists will throw their hands up in horror and tell us that the public health system will be crushed under the weight of illnesses and sicknesses that would result from alcohol and tobacco abuse. Yes—people do stupid things to themselves. Letting people face the consequences of their actions is part of what it means to treat them as adults. It is unconscionable and indefensible that for nearly one hundred years successive governments in this country have treated its citizens as if they were children, and its citizens have loved it.

But sorry, guys. The economic arguments just do not wash. People who die untimely deaths through lung cancer and alcohol abuse are less of a drain on public finances than the average person who lives to 75.

So indirect taxes are out. Then corporate tax rate needs to be set significantly lower than our major trading partners. New Zealand is starved of capital. We need to compete successfully for global capital—and the capital of our major trading partners is a good place to start. When offshore investors know that the tax rates in New Zealand are lower than in their own countries, they would be far more likely to look favourably at investing in New Zealand. They would be prepared to take more risks herre, would demand lower-than-otherwise returns here, and be more likely to leave their earnings and profits in the country for the long term.

Low corporate tax rates would make New Zealand far more competitive in raising capital.

The personal tax rate also needs to be lower than our major trading partners; and it also needs to be flat. Progressive taxation is regressive. It penalises those who succeed and prosper. It is an envy tax. It provides an incentive to skilled workers to leave the country. Remember—skilled labour is fungible. When someone finally gets to the point of earning a higher salary, the government currently insists on a proportionately greater share. As long as we continue to do this, global competition for our skilled labour will inexorably draw it away—at precisely the time when the employee would make his or her biggest contribution to our productivity and well-being.

Will New Zealand take these measures? Not a hope. Meanwhile the mistral of relentless global competition for labour and capital blows without remorse. So, a Niuean future beckons.

Around about now, some bright spark will retort: “what about the dairy industry? It is the one industry in which we have a sustainable competitive advantage.” Wrong. The dairy industry, like all others in this country, is starved for capital. Fonterra cannot get sufficient capital to enable it to compete successfully and sustainably in the world. New Zealand farmers cannot provide it. And they are so scared of “losing control” of their industry that they stymie any attempts to bring in outside capital. So their message to Fonterra is: we won't provide any more capital for you and don't you get it from anywhere else—unless people want to give it to you out of the goodness of their heart with no strings attached. Sound like a recipe for success? Sounds like a cargo cult to us.

But, then, dairy farmers are not immune to the national malaise. They all too often believe that the world owes them something. Actually, the way things are going, the world is going to tell New Zealand dairy farmers that they owe the rest of the world. The government is merrily going to tax their industry to stop the atmosphere warming up. That's right—the one industry that has a potential sustainable competitive advantage, and the government is planning on taxing it more.

So, since our economic future is bleak and (for political and social reasons) irremediable, our advice would be to petition Australia for full union immediately. One thing is sure. We are in a stronger negotiating position today (weak as it is) than we will be in twenty years time. We need to take the deal now. We will never get a better offer.