Our economy is stagnant under National. Or worse.
Like an opossum in headlights, the Government continues to chart the same economic course. It is not clear whether this inertia is due to a lack of courage, or a lack of imagination. Either way, the Government has proven unwilling to tackle the structural problems that underlie our economy – preferring instead to stare down the oncoming train. We continue to import more than we earn in exports, and no credible plan to change our course is currently being entertained.
In New Zealand, the average value of our individual earnings has dropped during National’s first three and a half years in office. Real GDP per capita is lower than it was in 2008.
It doesn’t have to be this way.
The Government members continue to blame everyone but themselves. Their excuses don’t stack up.
Growth in Canterbury is outstripping other parts of the economy, so National’s attempts to blame Christchurch don’t make sense. Nor do attempts to lay all of the blame at the foot of the Global Financial Crisis. Our biggest trading partners have enjoyed growth stronger than most over recent years.
The basis of a more plausible explanation for National’s failure is found in Nobel Prize-winning economist Joseph Stiglitz’s latest article in Vanity Fair. It’s titled ‘The One Percent’.
National has made bad choices. It has failed to develop and implement pro-growth policies.
For starters, National passed over a huge opportunity to stimulate the economy. The latest Treasury figures estimate the cost of income tax cuts made by the National Government in 2010 at around $11 or $12 Billion.
If 44% of the value of the cuts went to the top 10% of earners, around $5 Billion of the 2010 tax cuts went to those who needed them least. The Prime Minister received about $1000 more in the hand per week. Others received more. These tax cuts for the wealthiest New Zealanders came at the cost of income tax cuts for the other 90%: middle and lower income earners. This was not good for our economy. An example Stiglitz uses illustrates this point:
“Consider someone like Mitt Romney, whose income in 2010 was $21.7 million. Even if Romney chose to live a much more indulgent lifestyle, he would spend only a fraction of that sum in a typical year to support himself and his wife in their several homes. But take the same amount of money and divide it among 500 people—say, in the form of jobs paying $43,400 apiece—and you’ll find that almost all of the money gets spent.”
Sir Michael Cullen’s 2008 tax package was more strongly directed towards lower and middle income earners. But the new Government unpicked the changes and wound the spend into a new package which underestimated the need for stimulus. In doing so, National failed to support growth in the New Zealand economy.
The 2010 tax package worked negatively in another way. It grew inequalities. Greater inequality undermines trust. Those not in the very highest income brackets feel less motivated to work in a system that favours those who are already well-off. I’ve covered that ground before – commenting on an earlier Stiglitz piece in Vanity Fair. That article explained in simple terms why growing inequality is bad for all of us.
But all is not lost. Opportunities for pro-growth tax reform are still available. A capital gains tax would push money away from the speculative sector and towards the productive economy. Unfortunately, National has so far refused to entertain pro-growth proposals that would support our hard-working export sector.
And there are other pro-growth policies that could be adopted. They’ll be the subject of further blogs. Labour will take a suite of them to the next election.
The contrast between the records of the two major parties couldn’t be starker. Labour grew real incomes (after inflation is stripped away) by 25% over its most recent nine years in Government. Since then real GDP per capita has fallen back. Population growth, in the absence of economic policy, has driven our economy over the past four years. This needs to change.