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Insights 17: 20 May 2022
NZ Herald: Roger Partridge says border announcements are muddled and half measures
Podcast: Eric Crampton and Oliver Hartwich on the Emissions Reduction Plan and transport
Literacy Workshop presentations: Experts come together to improve NZ's literacy standards

The Whistling-in-the-Dark Budget
Dr Oliver Hartwich | Executive Director |
Yesterday, even with all the lights on in the debating chamber, the Minister of Finance sounded like he was whistling in the dark.

Grant Robertson’s Budget was what we have come to expect from this government. It was a mixture of self-congratulation, grandiose announcements as well as attacks on past governments and the opposition.

However, the fact that it was a business-as-usual budget for Robertson also showed what was wrong with it. Because times are far from business-as-usual.

For the past two years, Robertson could at least claim that his big-spending approach helped to stimulate the economy during the Covid crisis. He could do so also as the Reserve Bank pursued similarly expansionary policies.

Today, he could not say either any longer. Meanwhile, the labour market shows signs of overheating, there is wage and price inflation, and yet at the same time, the economy is slowing down.

In economics, there is a technical term for all this: It’s called stagflation.

What a prudent Minister of Finance would have done in the circumstances is go back to the drawing board and reassess his approach. What Robertson has done was the opposite. The litany of spending announcements was testament to that.

So what would a good fiscal response to our challenging economic circumstances have looked like?

The Government should have realised that it must work with the Reserve Bank to fight inflation. 

It does not make sense to drive a car with one foot on the accelerator and the other on the brake. Likewise, it does not make sense that the Reserve Bank is withdrawing stimulus while the government is still increasing spending.

As inflation is the biggest threat to the economy right now, the Budget should have been careful with expenditure. However, Robertson’s Budget was not.

So the -flation part of stagflation was not dealt with by Robertson. And the stag- part was ignored as well.

The Budget should have paved the way for economic growth. Instead, it has created additional burdens for businesses.

Through its plans for a social unemployment insurance scheme, the Government is introducing a new income tax of almost 3 percent for most employees. It is even starting to put money aside for such a scheme commencing in two years’ time.

In summary, what the Government delivered was the ‘whistling-in-the-dark budget’. It was a Budget pretending that everything is more-or-less okay and the Minister of Finance can continue where he left off last year.

Reality obviously has not caught up with this Government yet. New Zealand is facing an economic crisis, but the Government is having none of it.

Call it whistling in the dark. Or just call it tone-deaf. 

Blowing the budget
Roger Partridge | Chairman |
Yesterday’s budget was not the only budget in town. It followed hot on the heels of Climate Change Minister James Shaw’s announcement on Monday of the Government’s $2.9 billion Emissions Reduction Plan. The plan sets out the steps the Government will take to meet the first of three national emissions budgets.

Like yesterday’s budget from the Minister of Finance, Shaw’s announcement showed an alarming air of unreality.

The Finance Minister’s error was failing to respond to the change in the country’s economic predicament. Shaw’s error was failing to realise the Government has already implemented a policy to achieve the very objectives proposed for his costly Emissions Reduction Plan – at least for non-agricultural emissions.

New Zealand’s Emissions Trading Scheme uses carbon pricing to lower net emissions. Those responsible for emissions must use tradeable carbon credits to offset them. The Government issues carbon credits using free allocations (to some industries) and auctions. It also issues credits for activities taking carbon out of the atmosphere like forestry.

Over time, the government reduces the number of units supplied by free allocation or auction. This limits or “caps” the quantity of New Zealand’s net emissions. Restricting supply increases the price of carbon credits (currently about $75 a tonne). This makes carbon emissions increasingly uneconomic. The scheme is designed to ensure New Zealand follows a pathway to net zero by 2050.

Aside from agricultural research and development, Shaw’s Emissions Reduction Plan has no chance of altering New Zealand’s net emissions. Subsidising electric vehicles may reduce gross emissions from private cars. But that will just free up carbon credits for use elsewhere in the economy. This will allow emissions which would otherwise have been avoided if credits had not been made available. Economists call this the “waterbed effect.” Push down on one side and the other side goes up.

The beauty of the ETS is it puts a price on carbon. This allows market participants to work out where carbon emissions can be most economically avoided.

The Minister knows private car use is not the most efficient place to save emissions. In an answer to a question in Parliament last week, Shaw said the price of carbon would have to reach nearly $600 a tonne to achieve the same result as the EV subsidies proposed in his Emissions Reduction Plan.

But at nearly ten times the cost of a carbon credit, that means this part of Shaw’s plan is grossly uneconomic. But more than that, the plan is futile. The ETS already has the country on a course to net zero by 2050.

Blowing a $2.9 billion budget on a futile plan is some feat.

A Spinoff tax strategy
Dr Eric Crampton | Chief Economist |
It’s a shame Grant Robertson didn’t sit down with The Spinoff’s Duncan Grieve before Budget Day.

The Spinoff has come up with an ingenious new policy. Instead of the Government paying for the things it wants, it will force companies to deliver them for free. The Government won’t even have to raise taxes anymore. 

Sounds odd? Well, this is how it goes.

The Spinoff argued last year that New Zealand media should adopt something like Australia’s News Media Bargaining Code. On the other side of the pond, the government has the power to force platforms like Google and Facebook to pay media companies simply for linking to them.

In New Zealand, media companies have been requesting voluntary collective bargaining with the technology companies. But when there’s an implied threat of state action, what does “voluntary” mean?

I’ll tell you what it means: we get something for nothing! Tech companies get extorted to pay a bill (so a bit like a tax, really), but it never shows up in league tables of company tax rates. 

The Spinoff’s idea is so brilliant, it can be expanded easily.

This week, Duncan Grieve suggested that streaming video platforms like Disney+ could be ‘asked’ to devote a proportion of their New Zealand revenues to fund New Zealand content production. So no more need for the government to fund NZ On Air – the streaming platforms can provide it instead, no tax required.

But why stop there?

Government could also ‘ask’ Spotify to pay higher royalties to New Zealand artists from its New Zealand revenues – regardless of whether Kiwi subscribers want to listen to local music.

Online booksellers could be nudged into putting a surcharge on foreign books sold here, and the government could ensure that only the most promising local authors received the funding. All of Wellington’s worthies would obviously automatically be eligible.

And best of all, Fox News could be ‘asked’ to help fund sympathetic documentaries about local progressive politicians in exchange for the right to broadcast here. Wave the wand, and no more controversies about NZ On Air and the Film Commission putting $219,999 toward a documentary about Green MP Chlöe Swarbrick. It would all be done totally voluntarily, by companies that feared reprisals if they didn’t contribute.

The Spinoff’s new budget and tax strategy is even better than making Mexico pay for a wall. Shame it was too late to make it into Budget 2022.

But there’s always next year.

On The Record
Initiative Activities:   
  • Submission: Opposing fair pay agreements by Roger Partridge
  • Podcast: Eric Crampton and Oliver Hartwich on the Emissions Reduction Plan and transport
All Things Considered
  • Graph of the week: Geographic Rorschach test: Guess where Oliver is from!
  • At current rates of inflation, the increase in education spending announced in the Budget represents a cut in real terms
  • St Paul, Minnesota, imposed rent controls in 2021. Results so far? “the tenants who gained the most from rent control had higher incomes and were more likely to be white, while the owners who lost the most had lower incomes and were more likely to be minorities.”
  • Good intentions aren’t enough
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