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Insights 34: 8 September 2017
The Outside of the Asylum
Public Meetings Future of Recreational Fishing
Dr Oliver Hartwich: Jacinda from Hamilton is eerily familiar to Kevin from Brisbane

When a hole is not a hole
Dr Oliver Hartwich | Executive Director |
“There’s a hole in your budget, dear Labour, dear Labour, there’s a hole in your budget, dear Labour, a hole.”

It is a pity that Finance Minister Steven Joyce did not sing his Monday press conference. It would have been an appropriate start to a week of political theatre.

Joyce’s claim that there was an $11.7 billion hole in Labour’s fiscal plan was a bold and provocative interpretation of Labour’s spending plans. However, as economists left, right and centre confirmed (including the Initiative’s own Sam Warburton and Eric Crampton), Labour’s budget matched its stated spending intentions.

But just because figures add up does not mean they would allow Labour to fund what it or the public really thought it was going to be able to spend.

Labour had presented a fiscal plan which beefed up spending on social welfare, health and education by $12.6 billion over the next four years. For other areas, Labour has left itself $4.1b over the same period. The question now being asked is: is that enough for public sector wage and cost increases? Perhaps not.

With some smoothing of the allowance over time, Labour’s allowance is equal to about 2% inflation per year. As Grant Robertson has said himself, this is tight. Indeed, it might be too optimistic.

Joyce could have asked Labour if they were really planning to run severely constrained budgets for the coming years. Or he could have questioned which programmes in, say, defence or policing they would cut to make room for public sector wage increases.

These would have been legitimate questions given how tight Labour’s fiscal budget actually is.

Instead, the Minister referred to a hole. In the context of an election campaign, this certainly conjures up more vivid public imaginations than a reduction in the operating allowance would do.

In fairness to Joyce, there are questions about whether Labour has enough flexibility in their budget. In fairness to Labour, it is not what Joyce originally claimed.

There is a lesson from this incident. We cannot leave it to the parties to check each other’s spending plans. Especially before elections, fiscal policy needs an impartial umpire.

The only hole we have in fiscal plans is independent scrutiny of Government’s and the parties’ numbers. 

“And with what shall we fix it, dear National, dear Labour, and with what shall we fix it, dear pollies, with what?”

The answer is a fiscal watchdog. The Initiative proposed it in 2014.

Both Labour and the Greens have since adopted the idea.

National should do so too. It would spare us more such theatre in future elections.

Proper process for Labour's Working Group on Tax Policy
Dr Bryce Wilkinson | Senior Fellow |
In 1936 the much-quoted US journalist HL Mencken wrote “government is a broker in pillage, and every election is a sort of advance auction sale of stolen goods”.

So here we are in 2017, preparing to vote in yet another government spending auction of someone else’s money. But whose money is it to be?

Probably all the major parties chant in unison at this point: “Not yours, dear voter; of course not.” Then whose?

Well, Labour seems to have the most novel answer in the field. It looks like: “how about we set up a Tax Working Group, and determine that after you have voted us in?”

This is not a very attractive offer. There is many a shopper who might hesitate to enter a shop where she might find she is the one paying for everyone else’s groceries.

Jacinda Ardern seems to be ‘onto it’. She has been busy narrowing the scope for doubt. There will be no increase in GST or the top personal rate of tax (33%). Any capital gains tax will exclude family homes. Tourists and multinationals are in the gun, but they don’t vote.

So what might be left afoot? Labour’s latest fiscal plan states that:

“We will establish a Tax Working Group in government. It will have a mandate to create a better balanced tax system, including between assets, wealth, income and consumption. Labour is committed to delivering a tax system that is fair, simple, and collected.”

So taxes on land, assets and wealth look to be in the frame. So do taxes on capital gains on businesses, farms, rental properties and other private investments.

None of these look simple. There are unsettling questions about current and base valuations, inflation adjustments, realised and unrealised gains, and the ring-fencing of losses. Fairness may be whatever a majority of shoppers want it to be.

So what more can Labour do from here to alleviate shopper uncertainties?

One option is to assure shoppers that Labour will follow sound, established tax policy development processes. We have one. It is called the Generic Tax Policy Process. It provides for five stages in the development of tax policy, with public scrutiny at each stage.

Parliament would determine the matter, but informed public opinion would be consulted, and heeded.

The Outside of the Asylum
Eric Crampton | Chief Economist |
We just don’t know how lucky we are to live in New Zealand.

In Douglas Adams’s Hitchhiker’s Guide to the Galaxy, John Watson decided that the world had gone mad when he found instructions on the side of a packet of toothpicks. So Watson built a wall around his property, decorated the outside of it for the inmates, and declared his home to be the Outside of the Asylum.

When I first came to New Zealand in 2003, it felt like stepping into the Outside of the Asylum.

It hit home again during the Initiative’s Next Generation debate Grand Final last month. After the Wellington and Auckland teams made their cases for and against the government prioritising paying down debt, Labour’s Grant Robertson and National’s Nicola Willis gave their takes.

And the main difference between New Zealand’s centre-left and centre-right parties was that Labour would take a couple more years than National to get debt down to 20% of GDP. Whatever other silliness this election season brings, the main parties agree on something rather important.

Over the past couple of weeks, The Spinoff has been serialising our take on just how lucky we are to live here.

There are big and important things that New Zealand gets right, that the rest of the world gets wrong, and that Kiwis take utterly for granted. Our airports are sane, our police are generally unarmed, and distilling your own gin in the garage will not get you arrested.

And marvel at the simple functionality of our tax system. Many wage earners do not even need to file a tax return, because the income tax system is simple enough that they do not need to. Our GST is probably the world’s cleanest and best value-added tax. Because it is clean, it is simple. There are no fights like those in Australia about whether some mini-ciabatta counts as untaxed bread or a taxable cracker for GST purposes – everything counts.

But because voters simply expect taxes to work and to be simple, they underestimate the mess that exemptions cause. Calls for exempting healthy food and the like from GST are politically tasty, but would create administrative indigestion for no real benefit.

The Asylum’s wall will not defend itself. We live in the sanest part of the world, but we all need to work to help keep it that way.

Dr Crampton’s Essay, The Outside of the Asylum, is available on the Initiative’s website. It is also available as audio podcast through Soundcloud.
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