Opinion & Commentary
Is the new National-led government up to the task of remaking New Zealand?
Once the dust from the financial crisis settles, there is a lot of work to be done in New Zealand. But what the country needs and what is electorally popular are two different things. The newly elected government, led by Prime Minister John Key, has promised change -- but will it be a change of direction or just a change of face?
Mr. Key has declared himself to be a pragmatic, rather than ideological, man. Indeed he has used the same strategy as Australia's Kevin Rudd to get himself elected -- a game of "me too." Mr. Key's National Party adopted as its campaign platform many of the policies held by Helen Clark's Labour Party government. It seems the only thing New Zealand wanted was a fresh face.
What should we expect from this government? New Zealand has a unicameral parliament led by Mr. Key's National Party. They are supported by three parties: United Future (a one-man pragmatist band), the free-market Association of Consumers and Taxpayers (ACT), party and the recently formed Maori Party. This National-led government has the numbers to govern without the Maori Party. Yet, Mr. Key has brought the Maori on board.
These arrangements give National a comfortable majority in the house, in return for ministerial seats outside of cabinet for their smaller partners. Having support from both ACT and the Maori party allows Mr. Key to carry out his centrist policies as promised. For issues more traditionally left-wing, National can probably rely on Maori support; for issues more right-wing it can rely on ACT's. It is an ultimately pragmatic arrangement, and one that could work extremely well, but it does reveal a suspicious lack of policy direction.
As part of the arrangement with ACT, Mr. Key has adopted the aspirational policy of raising New Zealanders' incomes to the same level of those in Australia by 2025. This should mean a focus on growth, lower taxes and a significant easing of regulatory burden -- which would all be very positive. However, accomplishing this will require a minimum 3% increase in productivity per year -- a near impossibility with an increasingly regulated economy, bloated public service and high tax-and-transfer regime. To begin, National should turn its attention to reducing the size of government.
Although the key structural and economic reforms of the 1980s and '90s remain largely intact, the past nine years have seen government spending rise as the state has become increasingly intrusive and nanny-like. A number of social engineering laws have been passed on social issues and healthcare, a new state bank has opened, and air and rail have been re-nationalized. For most of the late 1980s and '90s, New Zealanders reaped the benefits of reform with greater freedom, deregulation and lower taxes. But in the last decade they have become more dependent on the state.
In its last days, the Labour government passed legislation for its Emissions Trading Scheme for carbon credits, attempting to make New Zealand a world leader on the issue of climate change. But New Zealand will do nothing of the sort. Mr. Key has supported this climate change policy direction, including emissions trading, despite the tiny amount of emissions the country produces. As part of the deal with ACT, a review will be put in place to reform the carbon credits system. If Mr. Key is interested in Kyoto compliant reform, the best solution would be to use a tax rather than a trading scheme, giving predictability to business, taxpayers and consumers.
New Zealand's almost-universal public healthcare system has doubled its spending in the past decade. Yet a New Zealand Business Roundtable report released last month shows a drop in productivity. Waiting lists still remain long and supply of services remains short.
This has, in part, been the result of an ideological objection to using any private provision in healthcare, even where subcontracting to take advantage of private sector capacity makes sense. National has promised to channel more funding into frontline services, and allow some more private provision. But this is only peripheral reform, at a time when the system requires a fundamental rethink.
The new government campaigned heavily on personal income tax cuts which it will now deliver, but they are neither particularly substantial nor aspirational. Admittedly the world financial situation and rising government debt makes this more difficult, but aiming to reduce New Zealand's top marginal tax rate from 39% to 37% by 2010 is not impressive, especially considering that the tax rate was at a much lower 33% last time National was in office in 1999. Deeper cuts are needed.
Despite a decade of Labour rule where government spending increased by around 35%, the new government has not committed yet to any substantial reform that will begin to limit government pervasiveness. Various compliance costs, red tape and labor market rigidities have increased markedly for business in the last ten years. There are opportunities aplenty for fat trimming aimed especially at some of the Clark Government's pet projects and Vietnam-era socialist policies.
The financial crisis will provide some much-needed focus for the new government. New Zealand faces substantial economic challenges ahead. Cash deficits seem set to rise by approximately 5 billion New Zealand dollars ($2.7 billion) over the next five years.
How will the new government respond to all these things? It is an excellent opportunity to begin considerable reform in spending and policy direction. The opportunity to turn New Zealand around is here, the question is: will the new government seize it?
Luke Malpass is a New Zealand policy analyst at the Centre for Independent Studies.
