Dear Minister: A Roadmap for Recovery

Dr David Law
9 October, 2020

New Zealand faces its worst recession in nearly a century. Unfortunately, the economic response to the challenges of covid-19 leaves much to be desired. Most new policy initiatives proposed in the run-up to the 2020 general election range from trivial at best to economic sabotage at worst. New Zealanders deserve better. So - this week my colleagues and I at the New Zealand Initiative released a new report, Roadmap for Recovery: Briefing to the Incoming Government, to help plug the policy gap. The report includes more than 30 recommendations to promote employment, growth and productivity, and a credible path back to sustainable debt levels.

Here are some highlights.

New Zealand’s labour market settings were performing well prior to Covid-19. Participation rates and job creation were relatively high along with low unemployment. But greater flexibility in hiring is now needed. This is particularly important for vulnerable groups (the young, low-skilled, Maori and Pasifika) whose employment is disproportionately affected in recessions.

We recommend abandoning the proposals to introduce Fair Pay agreements (FPAs) and reform “contractor” law. Recent minimum wage increases, which will hurt employment, should be rolled back and lower youth minimum wage rates reintroduced. Not enough attention has been given to the Ministry of Business Innovation and Employment’s estimates from December last year that increasing the minimum wage to around $20 an hour would cost 19,000 jobs – and that was before Covid-19!

Raising or introducing new taxes would hurt growth relative to cutting ill-justified spending. More tax is not necessary for getting the public debt back under control. Instead, there is ample scope to reduce public spending through greater efficiency and scrutiny and ending wasteful spending on costly programmes which do not deliver on their objectives. Health, education and welfare need not be affected by these changes, despite what many politicians would have you believe, and outcomes may even improve.

Changes to retirement income policy alone could return the public debt to about 30% of GDP by 2034. We recommend abolishing KiwiSaver subsidies – the evidence clearly shows these do not increase saving. Indexation of NZ Superannuation should be tweaked and the age of eligibility increased by two years, with further changes linked to health adjusted life expectancy. NZ Superannuation Fund contributions must also be suspended.

Undertaking a comprehensive expenditure review would identify and reduce low quality expenditure even further. To avoid more green schools offering DNA activation ceremonies, stimulus, such as “shovel-ready” investment projects, must be required to pass standard cost-benefit tests. Longer term, an independent fiscal council would help keep spending decisions under close scrutiny.

Our lacklustre productivity performance - crucial to raising living standards in the long-term - could also be improved with key changes to education, regulatory settings affecting investment, monetary policy and climate change.

The Resource Management Act (RMA) exacerbates resource problems by undermining private property rights and failing to internalise costs. Replacement legislation is desperately needed and should protect private property rights in respect of resource use. Objectors should also be confronted with the cost to the community of the foregone resource use.

The Overseas Investment Act (OIA) is amongst the most restrictive in the OECD. Kiwis must be able to access overseas capital and know-how to enable productivity growth. We recommend that the OIA is repealed. Any replacement legislation should focus on genuine public good problems, such as national security.

When it comes to climate change, putting a price on greenhouse gas emissions is the single best way of reducing New Zealand’s emissions. Measures undertaken outside the Emissions Trading Scheme (ETS), even if carefully designed, risk being less effective and far less cost-effective than working through the ETS. The ETS should be used as the primary regulatory instrument for reducing GHG emissions.

Non-ETS measures should be assessed on the cost-per-tonne of GHG reductions, with that cost reported for each. Rather than distort the ETS to achieve desired distributional outcomes, revenues earned through government auction of ETS credits could be transferred to lower-income households and supplemented with additional payments to targeted households if necessary.

Recent monetary policy developments depress savings are potentially highly inflationary, initially for asset values, and risk the independence of the Reserve Bank of New Zealand (RBNZ). We recommend a suite of changes to monetary policy including amending the RBNZ Act to specify a single policy objective – long-term price stability. The RBNZ’s regulatory role should also be shifted to another institution to improve governance and reduce politicisation risks.

High educational achievement has fallen for two decades due to malign influence of discredited “child-centred learning.” We need a new national curriculum based on disciplinary knowledge, not competencies, and an evidence-based profession, including designing standardised national assessments to highlight effective schools and approaches. We would also reinstate and extend the partnership schools model.

I should really apologise - our report will not leave you feeling warm and fuzzy. New public holidays, green schools offering DNA activation ceremonies, PayWave fees, electric cars, wealth taxes and a guaranteed minimum income do not feature on our list of recommendations.

But, if a prosperous New Zealand floats your boat you’ll probably find Roadmap for Recovery: Briefing to the Incoming Government right up your alley.

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