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| Dr Eric Crampton | Chief Economist | eric.crampton@nzinitiative.org.nz | ||||||||||||
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Which makes you wonder what Krugman would think of yesterday’s Budget. Hidden behind headlines of benefit increases, spending initiatives and a new unemployment insurance scheme lies a worrying small detail. Buried in Treasury’s assumptions are expectations of lower future productivity growth. According to the Budget, labour productivity growth will be 1% rather than 1.2%. And even that may be optimistic, judging by our past performance. You may think that such a small difference would not matter much. But that would be mistaken. Such small differences, if maintained over long periods of time, amount to the differences between two completely different futures. To illustrate this, economist Eli Dourado recently presented a good example. Had America had maintained its pre-1973 trend in productivity growth, living standards there today would be about 80 percent (!) higher. Benefit increases have taken much of the headlines. However, setting New Zealand on a path to higher productivity is much more important for longer term wellbeing. Just as Paul Krugman said. In the public sector, that requires a commitment to getting a bigger bang for our spending buck. It requires checking whether spending programmes are delivering value for money. But when I asked whether any of the billions of dollars of shovel-ready spending might be reconsidered, given that the unemployment forecasts that drove that spending commitment last year have changed, the answer was no. Over three hundred million dollars spent strengthening Managed Isolation and Quarantine at the border will help keep Covid out but will not enable any additional travel. Business connections that fuel productivity will continue to wither; skilled workers unable to reunite with families abroad will leave. Increasing capacity at the border would have helped, especially with a slow and uncertain vaccine roll-out. Billions more were allocated to infrastructure spending. Some of it makes sense. Infrastructure to enable more housing development will be crucial in alleviating the housing shortage, which would both substantially reduce hardship and boost productivity. But really unlocking housing affordability requires providing councils with strong incentives to welcome new housing development. And it requires sustainable funding mechanisms for critical infrastructure beyond the current spending surge. Neither made an appearance in the budget. Budget 2021 did provide a few nods in the general direction of productivity. But without sustained productivity growth, future budgets will have a harder time covering the costs of this year’s budget. |
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| Matt Burgess | Senior Economist | matt.burgess@nzinitiative.org.nz | ||||||||||||
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Since April last year, emissions units on the EU’s Emissions Trading Scheme (“ETS”) have nearly quadrupled from €15 to above €56 (NZ$95) this week. The ETS price is the cost of emitting one tonne of greenhouse gases. These record prices follow a decision by European leaders in December to tighten their emissions target. The rapid rise in the carbon price has led to non-compliance and bankruptcies. One of the affected companies is Zander, a paper manufacturer based near Cologne in Germany with 380 staff. It was established in 1829 and closed its doors on April 30. The Federal Environment Agency in Germany must now decide whether to go after the bankrupt company for its unmet ETS obligations. This is how carbon prices are meant to work. Bankruptcies are regrettable – better that firms cut emissions while remaining solvent – but the world’s largest carbon market is showing emissions prices can pack a punch. But higher carbon prices are bringing more than just pain for emitters. They are driving innovation. Europe’s prices are turning carbon capture into a business. In 2019, the US National Academies of Sciences surveyed six so-called “negative emissions” technologies, or NETs. These pull carbon directly from the air. The two most promising NETs are carbon capture in soils, and a modified form of bioenergy. These promise double the emissions benefits of another carbon capture technology, forestry. Together, NETs could remove up to 10 gigatonnes of greenhouse gases per year, nearly a third of global emissions. The technologies are all “safe,” the report says. None will cause “adverse societal, economic, and environmental impacts”. And the NETs can all remove carbon from the air for less than US$100 per tonne, or NZD$139. That is significant because it means NETs could cap what we pay to cut emissions. Nearly all of the government’s emissions policies spend more than $139 per tonne. The Climate Change Commission says carbon costs could rise above NZ$800 under its plan. Right now, the government is spending more than $1,000 in some places. We can cap emissions costs simply by allowing New Zealand’s Emission Trading Scheme to recognise carbon capture. Rising carbon prices do more than just hit the back pocket of emitters. They unlock new ways to meet our emissions targets genuinely, and for less cost and risk. We should be open to the opportunity. |
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| Steen Videbeck | Research Fellow | steen.videbeck@nzinitiative.org.nz | ||||||||||||
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Also, if you are going to rush through last-minute legislation, with no oversight, by slipping it into an omnibus bill, together with tax write-offs for cow diseases, you might as well have some fun. How? Now, I don’t want to be too definitive, but all you need is a crisis and some aspirational new ideas for taxes. The next crisis is obviously the rental crisis. And the answer is obviously a Window Tax. Yes, a Window Tax. Where you tax the number of windows a house has. The more windows, the more tax you pay. Yes, I know; it was tried in England and Wales in 1696. But taxes are like fashion; they always come back into style. But how will a window tax help? To be honest, I have no idea. But Adam Smith, the father of modern economics, said a window tax would lower rents, and that is good enough for me. Plus, it would be fun to see thousands of bureaucrats wandering the suburbs counting windows. I know what you are thinking. Tax avoiders will just get creative, just like they did in the 1700s when they bricked up their windows. Fewer windows meant less tax, as well as a few unintended health problems. Who knew light and ventilation are important? The answer is obviously another tax – a Brick Tax. Alone, window taxes and brick taxes are useless. But something special happens when you bring bricks and windows together. Now, it is important not to repeat the mistakes from the past. So here are some top tips for IRD. Don’t just tax the number of bricks as people will just use big bricks. The key is to create an itemized tax schedule for bricks of all dimensions. Or you can regulate so there is only one size brick in New Zealand. Either way works fine. For those who are sceptical about new taxes solving the problem, we can always try out a new tax and see if it works. New taxes are often temporary and easy to reverse. The window tax in England and Wales was a temporary tax, and it only lasted 150 years. |
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