By David Seymour, ACT Party Leader
Would you live in a country in which the average age at death is 45, few children attend secondary school, and most people don’t have access to a telephone or electricity?
Sounds awful, right? That was New Zealand in 1913. The difference between then and now is productivity.
Paul Krugman – a Nobel Prize-winning, left-wing economist – once wrote that “Productivity isn't everything, but, in the long run, it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
Most serious economists would agree.
In layman’s terms, this means if we want to be wealthier we need to produce more valuable stuff each hour, day and week. To do this, we must combine innovative ideas, more investment in productive assets, and increasingly skilful workers.
But New Zealand isn’t becoming more productive. The numbers are alarming.
Over the last five or six years, productivity growth has averaged 0.3 per cent per annum. We have gone from one of the best to one of the worst performers in the developed world.
Low productivity is now being reflected in low GDP growth. GDP per capita grew by 0.1 per cent last December and actually fell by 0.1 per cent three months earlier Do Jacinda Ardern and Grant Robertson have any idea of how to turn this around?
One of the Government’s big ideas for boosting productivity is its R&D tax credit. But economists at Treasury have rubbished the idea. In 2008, when the existing R&D tax credit was scrapped, it wrote: “There are also concerns about the effectiveness of the credit. The aim of the credit was to generate additional R&D, thereby increasing productivity in the economy. However, given international experience, and anecdotal evidence, the government is concerned that little additional expenditure will be generated as a result of the credit.”
The Government’s other policies will do nothing to improve our situation and may even make matters worse.
Industry-wide collective bargaining – so-called “Fair Pay Agreements” – will tie firms up in red tape and make them less competitive. Fees-Free is paying tuition for kids who would have gone to university anyway. The Provincial Growth Fund will take $3 billion from productive individuals and businesses and give it to marginal projects. Loosening restrictions on welfare (coming soon) will mean fewer people decide to work. A capital gains tax will reduce saving and investment in productive assets.
The only conclusion we can draw is that the Labour Government is not serious about making New Zealand a more productive, wealthier country.
What, then, is the Government’s plan for improving our economic fortunes?
The Prime Minister says she subscribes to “an economics of kindness”. That’s just spin.
If the phrase means anything, it means she believes the Government should tax wealthy and successful New Zealanders harder and provide more stuff.
The looming capital gains tax and welfare reforms seem to confirm this interpretation.
Jacinda Ardern also wants to eradicate child poverty. That’s a laudable goal.
But if she were serious about being kind and truly committed to eliminating child poverty, she would consider the evidence that productivity and incomes are higher, and poor children fewer, in countries that have free-market policies. Yet she rejects that evidence. She says capitalism has failed. But this is a failure of logic on her part. Children are not in poverty because of capitalism, but despite it.
Proponents of progressive tax systems and big welfare states argue they are necessary to build a “fairer” society.
In New Zealand, five per cent of people pay 33 per cent of all income tax and 50 per cent pay only eight per cent.
We spend $30 billion each year on welfare and social security.
What has it achieved? Inequality has been stagnant since the early 1990s. 10 per cent of adult New Zealanders are on a main benefit. (This doesn’t include Working for Families, accommodation supplements, and superannuation.)
Tax and spend policies haven’t delivered higher productivity and incomes or more kindness.
The Prime Minister’s rejection of the evidence and embrace of failed policies show her guiding philosophy to be an economics of blindness.
What is the alternative? How would ACT help turn around our poor economic performance?
First, low, flat taxes to ensure people have the incentive to work, save and invest. This would be achieved by reducing wasteful government spending: Fees-Free, the Provincial Growth Fund, corporate welfare. We’d give parents and students educational choice that extends beyond their local state school.
ACT would also cut red tape and fix infrastructure funding
This will ensure more houses are built and transport links get workers where they need to be. We would tighten welfare requirements so that dependency is reduced, and beneficiaries are encouraged back into work.
That is a plan for a more productive, wealthier country. Unlike Labour’s plan, it is grounded in the historical evidence that if the Government set simple rules of the game, and then allows people to get on with their lives, they will flourish. That would be a true economics of kindness.
David Seymour is leader of the ACT party.