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Insights 15: 5 May 2023
The Post: Eric Crampton on why it's time to make the shift to congestion charging
The Common Room: Michael Johnston on how education can help our democracy
Newsroom: Benjamin Macintyre on why there's not enough evidence to justify streaming ban

A point to the pointless?
Roger Partridge | Senior Fellow & Chairman |
This week’s revelation that the Government has spent over $80m in rebates to Tesla owners should cause outrage.

And not simply because subsidising the well-off into new cars fails to pass the sniff test.

The real problem is that the payments have been pointless. Aside, that is, from putting smiles on the faces of new EV owners.

The subsidies were paid as part of the Government’s Clean Car Discount scheme. Introduced in last year’s Budget, the scheme encourages car buyers to purchase EVs to reduce New Zealand’s emissions.

The policy has certainly encouraged the uptake of EVs. So much so that, earlier this week, Transport Minister Michael Wood announced the Government is tweaking the scheme and loaning it an extra $100m to keep it afloat.

There’s just one problem. The policy’s goal is not to subsidise the wealthy into Teslas. It is to help the country meet its net emissions targets.

But, in this, the policy cannot work.

Understanding why requires only a basic grasp of the Emissions Trading Scheme.

Our ETS is one of the world’s most comprehensive. It places a fixed – and reducing – cap on net emissions. Fossil fuels for domestic transport must be offset under the scheme using carbon credits.

As people switch from using petrol/diesel cars to EVs, gross emissions from the transport sector decrease. But this simply frees up carbon credits, facilitating emissions in other sectors of the economy. The EV subsidies simply re-arrange the deck chairs. The ETS cap determines overall net emissions.

All those millions paid to lucky Tesla owners have been spent for nothing.

Worse still, the payments are just a fraction of the $300m already consumed under the Clean Car Discount scheme. Not to mention the cost of the hodgepodge of other initiatives targeting emissions also covered by the ETS. Like requirements that councils consider emissions when approving new housing. Or the millions spent on subsidies for businesses to shift to lower-emitting equipment.

But the wastefulness is symptomatic of an even bigger problem within Government: the failure to apply cost-benefit analysis to spending decisions to discover whether they make sense.

And that is a problem that really matters. A dollar wasted on a pointless policy is a dollar not available to pay teachers’ salaries, fund new pharmaceuticals or rebuild the country’s ailing infrastructure.

If paying $80m to the well-off prompts a call for greater scrutiny of government spending, it may not have been so pointless after all.

When debating tax, don’t forget spending quality
Dr Bryce Wilkinson | Senior Fellow |
An IRD report on effective rates of tax attracted much public attention last week.

It was launched by the Minister of Revenue, David Parker.

In proposing that high income people are not taxed enough, Parker asserted in the report’s foreword that: “New Zealand is not a highly taxed nation”.

This claim is false.
Parker’s case is that we “sit in the middle of the OECD in terms of total taxes as a proportion of the economy.” That is like claiming that an obese person in New Zealand is not obese by American standards. So what?
Member countries of the OECD commonly have big (and problematic) welfare states. This gives them amongst the highest government tax and spending burdens in the world, New Zealand included.
On the Heritage Foundation’s database for 2022, only 31 of 178 countries gathered more in taxes relative to gross domestic product than New Zealand’s 32.3 percent. The ratio for the median country was only 18.5%.
Successful countries can have much lower tax burdens. Singapore’s tax ratio was put at only 13.1% of GDP. Some of its infrastructure we can only envy.
The IRD’s paper illustrates the point that when asset prices are rising fast those who own lots of property gain relative to those who do not.
Everyone has always known this of course. The case for a broader capital gains tax has been debated by government tax taskforces for as long as I can remember.
The Tax Working Group’s 2019 report rehearses the pros and cons. Even tax experts can agree to differ.
The minister argued that it was unfair if the very wealthy did not pay at least as high a proportion of their economic income in tax as everyone else. His example defined economic income to include all unrealised capital gains.
The public is also likely to think it is intolerably unfair to force households to sell the family home, farm or small business to get the cash to pay the tax on a paper capital gain that may be temporary. Most senior politicians know this.

Discussions of tax burdens should not be allowed to distract attention from the elephant in the room – an abundance of ill-justified spending.

Big government is no guarantee of prosperity, literacy, a well-run health system or quality public infrastructure. Sadly, these days New Zealand exhibits this point.

Subsidy games
Dr Eric Crampton | Chief Economist |
In 1983’s classic film War Games, computer-whiz Matthew Broderick hacked into Pentagon supercomputer WOPR - almost starting World War 3.
WOPR had been programmed for war gaming. After playing with Broderick, WOPR decided that it could, and should, win a game of Thermonuclear War against the Soviet Union.
As WOPR was about to launch America’s nukes, Broderick told it to play tic-tac-toe against itself. It learned that some games cannot be won. The only winning move is not to play.
Great movie for lovers of videogames. And a great lesson about a game with far lower stakes: videogame subsidy wars.
The New Zealand Game Developers Association wants the government to subsidise companies making videogames.
The idea seemed ludicrous when it was first pitched last year. And the more you look at it, the crazier the whole thing gets.
You see, the gaming industry didn’t come up with this one all on its own.
MBIE aims for transformational change, targeting ‘weightless service exports.’
Other service exports, like tourism and international education, took a bit of a hit thanks to MBIE’s management of the MIQ system. Service exports need rebuilding, and MBIE always knows best.
So, in some kind of partnership with the game developers, MBIE commissioned work from international consultancy Nordicity on the videogame sector and subsidies.
Nordicity does a lot of work assessing the economic impact of cultural industries like film and videogames. They recently found that a British Covid-recovery film subsidy scheme had a 115:1 benefit-to-cost ratio. It’s amazing that all government spending doesn’t get redirected into film and videogame subsidies on these kinds of returns.
Unsurprisingly, the commissioned study pointed to great successes of videogame subsidies abroad. So New Zealand should have them too. And without any hint of self-interest, the local industry has insisted we need subsidies to keep up with Australian videogame subsidies.
But there’s an obvious problem. Film subsidies and videogame subsidies are an arms race. If you want to keep up with other countries, you have to keep adding to your stockpile, forever.
Governments and countries cannot win this game. Taxpayers internationally obviously lose. The only winners are the subsidised companies.
But there’s a better move than not playing. A move that’s obvious to those of us old enough to remember War Games – and the era’s nuclear arms reduction treaties.
New Zealand should lead disarmament agreements banning these kinds of subsidy games.

On The Record

Initiative Activities:   
All Things Considered
  • Graph of the week: What happened when China started paying companies for new patents? Numbers went up, quality went down
  • Video of the week: Jerry Springer, on the value of free speech
  • Does anyone know where the love of God goes, when the waves turn the minutes to hours?
  • What AI thinks beer ads should look like
  • New Zealand's spud king
  • High crime rates are bad for cities
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