www.oocities.org/ubinz/press/1999B25HeraldLyonsSolutions.html

Dialogue, NZ Herald, 25 Nov 1999
 

The knowledge economy, the Irish miracle, the third way, value added, higher taxes, lower taxes, free trade, protectionism fair trade, industry clusters, the Finnish model and on and on.

Our politicians' approach to economic policy-making seems to rely on simplistic solutions and slogans in answer to vaguely defined problems. These solutions are frequently imported and espoused in order to gain a differential over other political parties, with little consideration of the unique New Zealand context.

No party has, during this election campaign, succinctly articulated the fundamental issues relating to the economy. There have been a lot of scaremongering, accusations and figure-tossing which only further disillusion and confuse the electorate.

Three fundamental issues relating to New Zealand's economic performance have not been directly addressed or debated constructively, probably because they do not fit neatly into sound bites.

Those issues are labour productivity, the trade deficit and income inequality.

Labour productivity is important to our economic wellbeing because it deter mines the level of output, income and consumption per head of population. Much has been written about the need for productivity to improve we gain a competitive advantage over our trading partners. But even without international trade, improved productivity would raise the standard of living.

Given that international trade ac counts for about 20 per cent of our gross domestic product, 80 per cent of goods and services produced in New Zealand are consumed by New Zealanders. An increase in productivity must increase the amount of goods and services available to be consumed and the incomes generated in the production and sale of these goods and services.

The main stated objective of the Employment Contracts Act was to improve worker productivity, that is, out put per worker, through the move from collective bargaining to individual contracts. After almost a decade, an improvement is still not evident.

It would appear that the act has been used mainly as a wage-cutting tool by many employers rather than as a means of enhancing productivity. This does not mean that the idea of individual contracts is bad but that the nature of the many contracts negotiated is not particularly productivity enhancing.

The second fundamental issue is the gr6wing trade deficit. At first glance it would be easy to blame this deficit on the reduction in trade barriers resulting in a flood of imports and our continued reliance on exporting a limited range of farm-based products.

Such an explanation is inaccurate. The trade deficit is the product of a huge inflow of funds in the form of foreign investment and New Zealand borrowing abroad. This inflow of funds has allowed us to buy these imports and has also resulted in a huge increase in the payment of interest and dividends by New Zealand to overseas investors and lenders, resulting in an overall trade deficit. The inflow of funds has also contributed to an over valued exchange rate, which has damaged our export competitiveness.

This inflow of funds is not necessarily bad, provided it is used to finance productive investments. Unfortunately, much of this money is in fickle portfolio or speculative investments. A portion of this overseas borrowing has also been used to provide mortgage financing, leading to the bizarre situation of New Zealanders using foreign funds to bid up their own house prices.

The concern is that this source of money could dry up when either we run out of assets to sell to foreigners or New Zealand is no longer regarded as a safe or viable place to invest. A further danger of heavy reliance on overseas funds is implicit restrictions in Government policy options for fear of stimulating a capital flight or international credit downgrades.

The trade deficit is more a symptom of the underlying problem, which is a lack of national savings. This has not been helped by the anomaly in our tax system that

favours speculation in housing. Mind you, any party that spoke about a capital gains tax or estate duties would soon suffer.

Increasing national savings can occur in two ways public-sector saving through Government fiscal surpluses or the encouragement of private-sector savings through the use of tax signals.

The establishment of an independent superannuation authority could be the first step to remedying our poor saving record. It seems ridiculous that the implementation of monetary policy can be rendered virtually politically autonomous through the Reserve Bank Act, yet superannuation remains a political football.

The tax cuts which several parties are advocating will probably only aggravate the trade deficit. We are a nation of conspicuous consumers rather than savers. Reduced income tax rates will increase domestic and import demand, house prices and, ultimately, interest rates.

Reduced company taxes (given that many of our larger companies are foreign- owned) will probably only increase the outflow of dividend payments to overseas shareholders. Historically, overseas investors have a poor record of reinvestment of dividends in New Zealand.

The argument that tax cuts could be used to attract foreign companies is valid. There is, however a risk of getting caught in a no-win bidding war with other countries, either through lower tax rates or other incentives.

Income inequality is the third main issue. The growth in income disparities in Western societies is an international trend. Most economists would argue that income inequalities are a desirable feature of market-oriented economies. There is truth in this rationale because motivation is obviously strongly linked to remuneration. The problem is that our lowest-income earners are not even part of the workforce and, therefore, are unable to improve their incomes through harder or smarter work practices.

There is a need for policies that are worker-friendly for low income earners. These include low-cost childcare facilities, reductions in the high effective marginal tax rates for someone moving from a benefit into employment, and relevant training, guidance and support. Punitive measures such as benefit fraud witch-hunts and slashing benefits only further alienate an already marginalised group.

It would be refreshing for a political party to start articulating the real issues and possible solutions relevant to the unique New Zealand context. Our problems are not terminal; they need to be clearly identified and addressed. Ml of us need to be informed and involved and allowed an opportunity to share in the benefits of economic growth.