Brash Don: Budget Debate 
Brash Don: Budget Debate 
[Volume:608;Page:5937] 
Dr DON BRASH (NZ National) 
: 
 Last week the Minister of Finance presented his fourth Budget. I am bound to say that it was a profoundly disappointing document. The Budget was not surprising but it was disappointing. I will not attack the Budget for being boring and predictable as being predictable is in fact desirable—indeed it is mandated by the Fiscal Responsibility Act of 1994 introduced by one of the Minister’s most illustrious predecessors a former National finance Minister. Nor will I attack the Budget for proposing to run surpluses as running surpluses is entirely appropriate at this stage of the demographic cycle and indeed with a buoyant economy. However I will argue in a moment that the surpluses proposed are far too large. Rather I want to attack this no-growth Budget for doing almost nothing to get to grips with the big issue facing New Zealand. 
The big issue facing New Zealand is the gap in living standards between New Zealand on the one hand and Australia on the other. Last week—in fact just a few hours before the Budget—Mr Jim Anderton gave a speech. I do not often agree with Mr Anderton but in his speech he said that if we had grown at the Australian growth rates over the last 30 years it would have meant extra income for the average worker of $175 a week and it would have meant for health another $3.7 billion a year and for education another $4.2 billion. He also said if our gross domestic product had grown at the same rate as Australia’s we could have invested twice as much per capita on our transport infrastructure over the last 30 years. I agree with Mr Anderton on that point. 
None of us can do anything about the past; what we can change is the future. The Australian Budget assumes growth of 3 to 3.5 percent a year over the next few years. Ours will average less than 3 percent over the next few years; it is projected to average just 2.5 percent a year over the next decade. So the gap between our living standards and those in Australia will not only fail to become smaller but will continue to widen. In terms of our achieving a goal that the Government used to have—namely getting New Zealand back into the top half of the OECD within a decade—there is not a dog’s chance of that happening. 
The gap that exists between our living standards and those in Australia—the gap that will widen over the next decade—has serious implications for New Zealand society as a whole and it should have been the main focus of the Budget. Instead we have had a little fairy dust sprinkled around: a little more money for industry training some small incentives to commercialise public sector research and development and a modest attempt to ease the compliance costs arising from the taxation system for small business. There was not even any pretence of changing the taxation system to make it more growth supportive. 
This Government spent millions of dollars on commissioning a major review of the taxation system in 2001 led by some of the best taxation experts in New Zealand and one or two from Australia. But the Government has totally ignored the recommendations of that committee. As a consequence we still have a company tax rate that is one of the highest in the Asia-Pacific region. We have a situation where people earning over $38000 a year—and most full-time workers in New Zealand now earn more than that—pay more than 40 percent of their income above that level in income tax and GST. Most full-time workers now enter that taxation bracket and of course those who earn above $60000 pay almost half their income above that level in income tax and GST. 
The reality is that this Budget proposes to continue overtaxing hard-working New Zealand families and New Zealand businesses. The Minister of Finance sometimes dismisses the idea that growth has anything to do with taxation and points out that the tax cuts in 1996 and 1998 were followed by a recession. The reality is of course that those tax cuts were followed by a serious international downturn and two successive serious droughts. No serious economist doubts that the amount of taxation raised the marginal taxation rates affecting those inclined to invest and to work harder and the nature of Government spending are all relevant to future growth. This Budget failed to make any growth-enhancing changes to the taxation system. For a mere 10 percent of the projected surplus the Minister could have reduced the company tax rate to equal the Australian rate. For less than half the surplus he could have given significant tax reductions to all full-time workers in New Zealand. 
Nor did the Budget make any attempt at all to rectify the problems experienced with the roading system in Auckland Tauranga and various other parts of the country. Granted that it makes sense to run a Budget surplus at present why does it make sense to invest those surpluses in foreign shares and bonds? Why invest them in foreign shares and bonds? I do not propose that the surpluses be squandered on low-yielding projects of marginal value but the Prime Minister herself has said that traffic congestion in Auckland costs this country $1 billion a year. Transfund has a 4:1 benefit-cost ratio hurdle before it will fund roading projects. There is an abundance of high-yielding infrastructure investment projects available in New Zealand that that surplus could have been invested in. Instead the Minister is proposing to squander it in low-yielding international shares and bonds at considerable risk to the taxpayer. It is worth mentioning that the Budget itself provides a 6 percent reduction in Government spending on transport and communications between this year and next—a 6 percent reduction in that spending. 
Nor did the Budget make any real attempt to deal with the serious problem of underachievement in our schools. Yes there was quite a bit of money to pay teachers of pre-school children on a par with primary and secondary teachers and more money to further subsidise the education of tertiary students but there was only a trivial amount to deal with the serious problem of illiteracy. There was $15 million spread over 4 years to reduce illiteracy in years 1 to 8 in our primary schools. That is a totally inappropriate allocation for such a serious problem. 
The Budget did nothing about reducing welfare dependency either a serious issue that has been hidden by the fact that the Budget has simply dropped out of sight the traditional forecast of the number of people on benefits. We know that the number of people on benefits is projected to keep on rising over the next 4 or 5 years but we are denied that information by the Budget. 
What has been the reaction to all that? The National Bank states: “The Government’s plans have little growth-enhancing initiative. Effectively they have just reallocated the pie and have done little to make it grow any bigger.” The Employers and Manufacturers Association says: “The Budget abandons economic transformation and the growth of the economy as the primary goals for New Zealand. It demonstrates the Government has given up on getting New Zealand back into the top half of the OECD.” Even Chris Trotter who can often be relied on to find something positive to say about the Government concluded: “The Budget was delivered on a theme of smart growth. Frankly I am sceptical. According to economists the key to long-term economic success is a sustained improvement in labour productivity. But Michael Cullen’s Budget contained nothing that suggested such an improvement was imminent.” 
The Minister had a great opportunity to contribute to a faster rate of economic growth. Tragically for New Zealand he muffed it.