I went along yesterday to a Treasury guest lecture, to hear from one of great figures in the history of New Zealand economic policymaking, Sir Roger Douglas, and his co-author Auckland University economics professor Robert MacCulloch. Their presentation was based on a recent paper proposing a wholesale reshaping of New Zealand’s tax and welfare system. I’ll get back to that.
Roger Douglas is 79 now, and if his voice is weaker than it was once way, his passion for a better New Zealand is as clear as ever. In his brief remarks, there was more evidence of a passionate desire to do stuff that would make for a more prosperous, and fairer, New Zealand than one is likely to hear from our current crop of political leaders in an entire election campaign.
I very much liked the fact that they started their lecture with a chart of real GDP per hour worked (my favourite productivity indicator) for New Zealand and other OECD countries. Things are, very much, not okay economically was the intended message. Music to my ears.
Unfortunately, given that they made quite a bit of the graph, they got the wrong chart.
What they showed was something very like this.
Both speakers made something of it, telling of a large gap that opened up in the Muldoon years, but which then closed substantially again following the reforms of the 1980s and early 1990s, only to resume widening again in the last 15 years or so (when, as they noted, no politician has been willing to do any significant reforms).
But the chart looked a bit odd to me, and I wondered about all the new – mostly poorer – countries that had entered the OECD in the last couple of decades.
Sure enough, when I got home and dug out the data myself, it became clear that what they (or whoever prepared the chart for them – I think they mentioned the Reserve Bank) had done, was simply to average the real GDP per hour worked of whichever countries the OECD happened to have data for in any particular year. That is how I produced the chart above.
Unfortunately, in 1970 when the chart starts. the OECD had this data for only 23 countries. By 2015 it had data for 35. The odd rich country (Austria) was missing in 1970, but so were almost all the emerging markets and former communist eastern European countries now in the OECD (several weren’t even separate countries then). It is only since 1995 that the OECD has had data for all 35.
So here is another way of looking at the chart. The extra line is the average real GDP per hour worked for the 23 countries the OECD did have data for in 1970 – a fixed panel of countries throughout the whole period.
And here is how New Zealand productivity (on this measure) has performed relative to the OECD. I’ve shown both the measure relative to the average of the OECD countries with data for the whole period, and relative to the full sample of countries for the period since 1995 when data are available for all of them. Remember that most of the new-joiners are poorer than us, so the orange line is above the blue line.
There has been the odd good year here and there – and a few phases (including, actually, the Muldoon years, and the last decade) when we’ve gone sideways – but over the entire period since 1970 there has never been a phase when, on this measure, we’ve done consistently better than the group of other OECD countries. The pretty clear trend has been downwards.
I really wish it had been otherwise – not just because it is my country too, and I care about its fortunes, but because I supported a great deal of the reforms that were done (and which I still consider were mostly to the good). But even if the reformers expected, and hoped for, something better – some closing of the gaps – it just hasn’t happened.
I probably wouldn’t make much of it on this occasion, except that (a) Sir Roger is an eminent figure, and (b) the presentation yesterday, and the (no doubt unintentionally) misleading slide, was being presented to quite a large crowd of past and present econocrats.
However, the main focus of the Douglas/MacCulloch presentation was a proposal for a radical reshaping of the tax and welfare system. There is a nice accessible summary here (which includes a link to fuller versions). The gist of the proposal is as follows:
- much lower income tax rates,
- a lower company tax rate (and eliminated “corporate welfare”), and
- higher GST
But, “in exchange”, people have to contribute a set proportion of their income (and there is an employer contribution too) to dedicated private accounts for:
- risk events (unemployment, disability etc)
There are lots of details, but on health everyone would have to buy an insurance policy against catastrophic events (anything more than $20000 per annum) and would have to meet other expenses either from their own health account, or if that was exhausted from direct government funding. Something similar applies to unemployment: your risk account is your first line of support, but if that is exhausted the government remains provider of last resort.
For retirement income, if I understand the scheme correctly, in many ways it isn’t much different than what we have now: a universal basic state pension, on top of which is private savings (including through Kiwisaver, although as they note Kiwisaver isn’t compulsory and their retirement accounts would be). The difference is that the age of eligibility would be gradually raised from the current 65 to 70.
It would represent a massive rejigging of the system. They argue that, in respect of health, it is largely the Singaporean model, and in Singapore health outcomes are very good and health expenditure (public and private) as a share of GDP is remarkably low. I don’t know enough about the Singaporean system to comment further, including whether it is likely to be replicable elsewhere.
There are all sorts of potential practical and philisophical problems. I wouldn’t rule out the possibility of some real benefits, for some people in time, or even more generally. But Douglas and MacCulloch argue that it is a politically feasible way to get necessary reform going again. And on that – fairly critical – count I’m sceptical.
In a fuller version of their paper they state
Most of the long-term reduction in government spending under the “Savings-not-Taxes” regime comes from the following sources. First, pension spending drops from $28.1b (under the existing system) to $17.4b (under the new regime) due mainly to the rise in the retirement age from 65 to 70 years old between 2015 and 2035. Second, there are the cuts in ‘corporate welfare’ and interest-free loans and grants to students from high-income, high-capital families.
In other words, huge changes to the entire tax and welfare system, to get the NZS age up from 65 to 70, to get rid of what they describe as (and I agree with them) as “corporate welfare” (film subsidies, Callaghan funding and so), and to eliminate interest-free student loans and related support to high income earners.
In the question time, I asked why they regarded the sweeping change as more politically feasible than simply focusing on those three items. I guess I sort of knew how Douglas would reply – it was a variant of a line he has used for many years, about doing lots of changes which can (a) distract people, but (b) provide an opportunity for everyone to benefit in some area. But I wasn’t really persuaded. They argue, for example, that people from high income families currently getting interest-free student loans would benefit from the lower tax rates in the Douglas-MacCulloch plan. Fair enough I suppose.
But the big money is in NZS cutbacks. It isn’t clear how the people who are most uneasy about raising the NZS age – the current middle-aged – are likely to benefit systematically very much from anything in the Douglas-MacCulloch package. Any gains/savings would be probabilistic at best (especially as health expenditures rise with age), and the potential personal losses (five extra years without NZS) certain and specific. I think change can and will be made – governments in the 1990s did raise the NZS age by five years, and got re-elected – but I don’t see how the huge “throw everything in the air” approach really helps. Grey Power, and Winston Peters, will be quite capable of seeing through to the bottom line.
Similarly, corporate welfare is a real scourge. But how does reforming the tax and welfare system on a large scale make it easier to, first, scrap those provisions, and then later resist the endless pressures that will come from various loquacious vested interests to put them back in place? I just don’t see it. It looks like an approach that, rather than making major savings more feasible, would simple multiply the number of enemies the reformers would make.
All that said, and sceptical as I am, it was good to see a serious plan outlined by people who really care. And credit goes to The Treasury for hosting the event.
(In passing I’d also add that one thing I really like about the package is that it would put sickness, disability and accidents all on the same footing).
In many respects, the saddest line of the day was one made almost in passing by Professor MacCulloch. He told us that he administers a fairly generously-funded visiting professorship at the University of Auckland, which aims to bring in distinguished or innovative, leading international thinkers to contribute to policy debate and development in New Zealand. But the last three people who had been invited had declined the invitation to come. There was, so far as they could tell, nothing bold or interesting on the table here, no real prospect of significant reform, or interest in it from our political leaders.
Things were very different, in that regard, 20 or 30 years ago. It is not as if, sadly, we have in the interim solved all our problems, and re-establishing a position as a world-leading economy, or a world-leader in dealing with the various social dysfunctions. We just drift, and allow our elites to tell themselves (and us) tales about how everything is really just fine.