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Insights 32: 1 September 2023
NZ Herald: Roger Partridge on Three Problems and Four Wins for the next government
Podcast: Michael Johnston and Melissa Darby on Exploring Literacy in NZ
The Australian: Oliver Harwich on Why NZ dollar faces a toxic cocktail

Beyond tax tweaks: the real path to New Zealand’s prosperity
Dr Bryce Wilkinson | Senior Fellow |
This week, the National Party revealed its tax plans for the election. These are aimed at people with average incomes.

Overall, the changes are minor. Yes, many people would be able to earn more before moving into a higher tax bracket. And yes, there are some further tax cuts for low- and middle-income earners.

These tax cuts will cost $14.6 billion over five years.

But still, this is only a small reduction in the government’s expected tax revenue. It makes you wonder, why National would not go for bigger changes? Perhaps it will when Treasury’s pre-election forecasts are published.

But the signal for now is that National broadly plans to maintain Labour’s current spending levels. These spending levels are high. And big spending means little room for tax cuts.

This is disappointing because New Zealand’s government is too big. And it is getting bigger.

Figure this: Budget 2023 projected that Government spending during the next five years would be 33% higher on average than in 2019. And it is not as if we would get better government services from all that spending.

The state of New Zealand’s finances is concerning.

By the way, it is not just that the state is too big. It is also that a lot of spending happens without proper scrutiny.

There is another problem because we are also running big fiscal and external deficits. Not even the high taxes we pay are enough for the government to pay for all the things it does. And, as a country, we are spending more than we earn.

But deficit-spending is risky, especially when our earnings from exports like dairy and tourism are declining.

Of course, politicians want to get elected. And so they like promising things like tax cuts. I get that.

But the country actually needs something else.

As a nation, we can only move forward if we become more productive. That means becoming better and more efficient at in everything we make, do, build, design or produce.

If we look at this bigger picture, the real question is not about minor tax adjustments. It is about the policies to help New Zealand prosper in the long run.

For instance, improving education and skill development. Supporting businesses to innovate and grow. Does hard work get rewarded?

While tax tweaks grab headlines, these issues need voters' attention.

Instead of finding different ways of slicing a meagre pie, how about baking bigger and better pies?

Peace dividends and carbon dividends
Dr Eric Crampton | Senior Economist |
At the end of the Cold War, western governments substantially reduced military expenditure. US President Bush and UK Prime Minister Thatcher called it the “peace dividend.”
It was not a “dividend” in any normal sense of the term. It only meant that instead of spending money on bombs and planes, governments could reduce taxes or fund other expenditures. No one received a dividend cheque.
This week, in a similar vein, National proposed a ‘carbon dividend’.
Currently, ETS revenues fund industrial subsidies that can actively discourage companies from investing in decarbonisation. Rising carbon prices should provide all the incentive needed for those investments. But delaying investment in the hope of drawing subsidies can be all too tempting.
Rather than wasting ETS revenues on industrial subsidies, a National-led government would use those revenues to help fund tax credits and tax reductions.
The economic case for raising revenue through carbon charges rather than taxes on income is straightforward. Most taxes cause economic distortions. Carbon taxes, or ETS charges, reduce them.
While National’s proposal is better than the status-quo, it remains a missed opportunity.
The Initiative has proposed carbon dividends that mirror Canada’s system. The Canadian government returns almost all carbon tax revenue directly to households, with carbon dividend payments scaling with household size.
Canada’s carbon tax and dividend scheme is progressive. High income households pay the most in carbon charges, but revenues are divided more equally.
If rising prices hit household budgets, Canada’s Environment Minister can remind everyone that over 80% of households receive more in carbon dividends than they pay in carbon taxes.
That helps maintain support for rising carbon prices.
A government running National’s scheme would have a much harder time. If carbon prices rose quickly and hit household budgets, the proposed tax package would not flex. A proper carbon dividend would.
The ACT Party’s carbon dividend policy is much closer to the Initiative’s longstanding proposal.
Unfortunately, carbon revenues run dry when the government stops auctioning ETS credits. A real carbon dividend can only help households transition to a higher carbon cost world, before ending.
National’s proposal, then, poses a problem for future governments. When ETS revenues run out, other adjustments to tax or spending will be needed.
Not having to spend money on bombs, or on industrial subsidies, is excellent.
But National missed a chance to align more closely with its potential coalition partner’s better policy.

Children’s crusade 2.0
Dr Oliver Hartwich | Executive Director |
In a courageous move, the New Zealand Government introduced a bill that would allow 16-year-olds to vote in local elections.

Yes, you read that right: 16. Because if Jesus had had a say in New Zealand politics, he would proclaim, “Let the little children come to the ballot box, for theirs is the kingdom of representative democracy.”

Only fools would criticise our government for being childish. Because, as history shows us, children are capable of remarkable things.

We need only remember Joan of Arc. By the tender age of 17, she was leading armies and changing the course of French history. Had she been a New Zealander today, under the current voting age, her talents would have been squandered on TikTok.

Or consider the Children’s Crusade of 1212. Led by ambitious youngsters, this crusade may not have been a success but it proved that youth should not be shackled by ageist legislation. If a 12-year-old could attempt to retake Jerusalem, why can’t a 16-year-old vote on rubbish collection in Auckland?

And, of course, there is Mozart. Composing music at five, imagine what he could have achieved as a city councillor at 16. He would probably have composed a symphony solely to combat urban noise pollution.

All that said let us not get carried away with these intoxicating examples of youthful achievement. There are some downsides too, because this bill could have unforeseen consequences.

After all, 16-year-olds may be mature enough to decide the future of their local community, but are they mature enough to deal with the local council’s perpetual ineptitude? And how could they face the existential dread of a poorly maintained local park or the horror of delayed roadworks?

The truth is our children will grow up soon enough.

The joys of youth, like being largely irresponsible and not having to support themselves, are fleeting. These joys will never come back unless they later become a backbench MP.

So, why thrust upon children the adult burdens of civic responsibilities? Let them be children for a bit longer before they inherit the tiresome task of dealing with, say, the government.

The move to lower the voting age to 16 is an ambitious endeavour, steeped in wisdom and with many historic precedents of children doing remarkable things.

But perhaps, just perhaps, we should leave children to enjoy their youth.

Because rest assured, the mundanity of adult responsibilities, such as fighting with your local council, will catch up to them soon enough.

On The Record

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