Act's Alternative Budget 2014

A budget for growth, a budget for prosperity, a budget for all New Zealanders ACT’S ALTERNATIVE BUDGET 2014 DR JAMIE WHYTE, ACT LEADER 10 May 2014 Today, I am pleased to present ACT’s alternative alternatives. We are reducing middle class and to the budget Bill English will present on corporate welfare because it is an expensive Thursday next week. It sets out ACT’s aspiration money-go-round of no benefit to New Zealand for a prosperous future for New Zealanders, society but only to bureaucrats and lobbyists. which cannot be achieved with the “tax and spend” policies of all the other parties. It is We demonstrate how New Zealand could now a budget that drives achievement through move to a top rate of income tax of 24% and a freedom, choice and responsibility. company tax rate of 24%. And we can do this without reducing spending for health, education ACT’s alternative budget is about growth, or welfare for low income earners. prosperity and fairness. We are putting workers, business owners, investors and entrepreneurs The budget I am presenting today is first. We are rejecting the tall poppy syndrome comprehensive and fully costed, using official and saying it is wrong to simply impose more Treasury figures. The benefits are understated. and more tax on the most successful New Zealanders. The Government’s budget is predicting 3% growth. Labour’s uncosted tax, spend and borrow In this alternative budget I am taking ACT back to policies will cost growth and jobs. My alternative its original role of providing economically sound budget will lift growth to 5%. No other party has presented a budget that will materially lift growth. 1 5% growth for just 15 years will result in ECONOMIC CONTEXT a doubling of GDP. There is no social or The government will announce its budget in a environmental issue that will be not helped by few days. After years of deficits and government New Zealand being twice as wealthy. No other borrowing, it is likely to show a small surplus. party has presented a budget that will materially The economy is growing at about 3% per annum lift growth. and, over the last two years, 30,0001 people have moved off welfare. ACT’s alternative budget would: • Cut the top personal and corporate rates of These are welcome developments, especially income tax to 24%, setting a path to reduce when contrasted with the massive deficits them to 17.5% by 2020 that Australia’s profligate Rudd-Gillard Labor • Increase the rate at which Working for government has left behind. Only a few years Families abates above an income of $48,000, ago, the Australian government was debt free. setting a path to its total elimination by 2020 Now Australian taxpayers are on the hook for • Eliminate corporate welfare almost a trillion dollars of debt. • Eliminate red tape, including the Resource Management Act and the Employment ACT is pleased to have provided the crucial Contracts Act in their present forms. confidence and supply vote in parliament that • Lift the age of eligibility for National made John Key rather than Phil Goff Prime Superannuation to the age of 67 and index its Minister and has allowed National to pass increases to inflation rather than wages budgets that have returned the government • Reintroduce interest on student loans accounts to surplus. • Sell all state owned commercial enterprises, including Kiwibank, KiwiRail, Landcorp and However, this good news must be put in per- the Super Fund. spective. GDP can be a misleading economic measure. It looks only at the gross output of These measures would: an economy. If a destroyed $500,000 house is • Increase long-run economic growth from less rebuilt, that is counted as a $500,000 contribu- than 3% to around 5% tion to GDP. But you are clearly worse off, since • Restore full employment (i.e. 4% unemploy- you end up with the same house but have put in ment) and slash youth unemployment a lot of extra effort and consumed materials that • Increase wages could have been used elsewhere. The Christ- • Make housing more affordable church rebuild increases New Zealand’s GDP but • Make our pensions system sustainable and leaves us worse off than we would have been if increase the incomes of retirees the earthquake had never happened. • Create a business environment in which companies must win favour with consumers, Moreover, growth is always higher when not with bureaucrats doling out taxpayers’ economies emerge from recession. Indeed, the money 3.5% growth predicted for 2014, which earns • Promote an ethos of self-reliance and us our economic “rock star” status, is relatively enterprise, where people seek to get ahead low for a rebounding economy. Coming out a by their own effort, innovation and risk taking recession, you might expect our growth rate to rather than by the government giving them be above 5%. other people’s money. 1 Paul Bennett, 15,000 fewer people dependent on benefits 17 April 2014 2 But the problem is not this year’s growth rate. TABLE 1: General government expenditures as The problem is New Zealand’s low long run a percentage of GDP3 growth compared with countries to which our capital and people can easily shift. Between 1996 2001 2009 2011 and 2013, labour productivity in New Zealand Australia 35.2 37.7 36.3 grew by only 1.6% annum, compared with 2.1% New Zealand 37.1 42.9 49.5 in Australia. Australia’s average annual output growth was also higher, at 3.5% compared with Of course, National has had a global recession New Zealand’s 2.6%.2 and major earthquake to contend with. However, that does not change the fact that they have To close the income gap with Australia, New accepted the costly structural changes made by Zealand will need to grow about two percent Clark’s Labour government. faster than Australia each year for at least the next 15 years. A few years of high dairy prices We still have Working for Families, interest free and low minerals prices won’t cut it. student loans, corporate welfare through the Ministry of Business, Innovation and Enterprise GOVERNMENT SPENDING and unreformed health and educational sectors Excessive optimism and unwarranted boasting which lack serious incentives to improve are perhaps unavoidable vices in a governing efficiency. party. More concerning is National’s election year spend-up of more than $1 billion. Once To get the New Zealand economy moving, established, government spending is politically government spending must be significantly and difficult to cut back. We cannot afford to have structurally reduced. Before explaining how that it pushed up by $1 billion every three years by can be done, it is important to remember what is governments seeking re-election. wrong with government spending. Even without this vote-buying splurge, ACT is The simple answer is that it must be funded from disappointed by National’s spending policies. taxation. Taxation transfers money from private During Helen Clark’s nine years as Prime individuals to the government. That transfer Minister, government spending increased in itself costs society nothing. The taxpayer dramatically. Labour spent $3 billion to $4 billion loses a dollar; the government gains a dollar. extra every year for their last five years in office. Nevertheless, taxation imposes massive costs on society, because it makes many productive National has done almost nothing to reverse this. activities unprofitable (by adding costs to them) In fact, things have got worse under National. and many unproductive activities profitable, such According to the OECD, government spending in as employing a tax lawyer to rearrange your New Zealand had reached 49.5% of GDP by the company’s affairs for the purpose of reducing end of 2011, and is still above 40%. your tax bills. 3 Source: OECD (2013), Government at a Glance 2013, OECD Publishing. http://dx.doi.org/10.1787/gov_glance- 2 Statistics NZ, Productivity Statistics: 1978–2013 2013-en 3 This deadweight cost of taxation is difficult to TABLE 2: Wasteful government spending estimate but, for a country with a tax code like New Zealand’s, it is probably in the range of $m 25% to 50%. For every dollar transferred from taxpayers to government, economic output is Working for Families 30% abatement 60 reduced by between 25 and 50 cents. A less taxed starting at family income of $48,000 population would be a richer population, before KiwiSaver kick-start 165 tax as well as after tax. KiwiSaver tax credit 575 Super contribution tax exemption 120 The second problem with government spending Paid parental leave payments 176 is that it often replaces private spending. When Parental tax credit 15 you spend your own money on yourself, you are Initial write-down of student loans 537 likely to buy only what you value and only when Corporate welfare (see Appendix 1 1,386 you think it is worth the price. When a govern- for details) ment buys goods and services for you, however, Climate change obligations 217 these outcomes are unlikely. In other words, Other (see Appendix 2 for details) 763 government spending is almost sure to be wasteful – its “beneficiaries” would usually pre- Total 4,012 fer the money to what it is used to buy for them. How can government spending be reduced? The items listed in Table 2 are poor quality government spending. They pass no credible The large areas of government spending are cost-benefit test. Nor do they provide so-called health, education and welfare. To cut spending in public goods, which would be under-supplied these areas, the suppliers of these services must without tax-funded subsidy.

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