Government Up Shit Creek Without A Paddle

Bill English is not a stupid man and his lack of performance as a Finance Minister is not because he lacks ability but due to his ideology and that of his Government. National's economic philosophy is to reduce taxes and regulation and take a back seat as regards driving the economy and allow market forces to rule. The National Government has had seven years to prove that their philosophy will deliver prosperity to all New Zealanders and at least four of them have been on the other side of Great Financial Crisis. It seems that the ideology has failed and the OECD has noted that our country has lost 15.5 percentage points of growth through inequality, the highest in the OECD.

One of the first things the Government did was reduce taxes to upper income earners and rather than being fiscally neutral it cost them over a billion a year in lost income. Although the rich in New Zealand have enjoyed increases in their wealth of around 10-20% a year since 2011, English has steadfastly refused to look at a capital gains tax or seriously manage the billions lost in tax fraud every year (around $7 billion estimated in 2011). To maintain government services National has had to borrow to make up the difference and the $10 billion of Government debt that existed when they first took office in 2008 has leapt to over $60 billion.

Despite a period of booming commodity prices and New Zealand being referred to as a 'rock star' economy the Government coffers have benefitted little. In five years under a Labour Government (2003 to 2008) revenue from direct taxation increased from $26.8 billion to $41.3 billion, an increase of $14.5 billion in income. Under National, income from direct taxation plummeted to $33.9 in the 2010-11 financial year and only last year did we almost return to the 2008 level, with $41.2 billion collected. Even accounting for the Great Financial Crisis and the Christchurch Earthquake, National's determination to tax the rich less than Australia's top rate has lost them at least $12 billion of potential revenue. Despite dragging in extra income through GST and SOE dividends etc, direct taxation still provides over half of Government revenue, no wonder English has struggled to balance the books and reduce Government borrowing.

National's attempts at reducing expenditure in the state sector has had unintended consequences. By sacking over 3,000 state servants it has removed institutional and local knowledge and, rather than becoming more efficient, it has caused costly mistakes. The most obvious failure was when it cut the Ministry of Education's budget by $25 million and employed someone to lead the Ministry from overseas with a background in Charter Schools. The result was the Novopay debacle that has cost taxpayers over $110 million and several million more has been needed to prop up failing Charter Schools. Similar scenarios have occurred across the state sector where funding cuts and lack of Ministerial oversight has seen expensive failures that have negated any intended savings. The cost of redundancies and rehiring people as consultants has also cost hundreds of millions.

In an effort to balance the books and maintain the budgets for core services like health and education, without further increasing borrowing, the Government tried to sell off state assets. After spending $120 million on promoting the sales $4.7 billion was eventually raised and few 'mum & dad investors' were represented in the share purchases. The long term effects of the sales is reduced dividends from the SOEs and many overseas shareholders reaping the benefits instead. Attempts to increase dividends from the SOEs also resulted in disaster when the Government's encouragement for Solid Energy to borrow money and invest in new projects saw it collapse owing over $600 million. The Government has been spending millions to prop it up ever since.

The Government's laissez faire approach to property speculation has seen money shift from productive and taxable activities to investment involving untaxed capital gain. Allowing unrestricted foreign speculation and investment has also seen domestic houses and farmland being priced well beyond most New Zealanders as more and more overseas buyers take an interest in our property. The drop in commodity prices for dairy will see many farmers go to the wall and be forced to sell up and it is likely that many farms will be sold to foreign interests. Already Chinese corporates have bought farmland and built dairy factories, with the profits generated from our resources largely being sent off shore. Over the past five years over 640,000 hectares of New Zealand property was sold to foreign investors, much of it in forestry. Given the downturn in dairy it is is very likely that a similar amount of productive farmland will be sold over the next five years and, when one realizes that the total area currently devoted to dairying in New Zealand is 1.7 million hectares, it won't take long for overseas owners to control a large percentage of our farms.

Despite promising that there will be no more state asset sales, given the huge public opposition recorded in the referendum, Bill English is embarking on more. His attempts at selling off state houses has proved problematic as there is little interest in taking on social housing in New Zealand and it appears he is now having secret talks with potential buyers who are likely to be foreign. English is also desperately asking Ministries and SOEs to hock off any unused assets (including Landcorp farms) to generate some quick cash.

Much of our debt is also managed by Australian banks that are reaping huge profits every year. It is clear that some of their profits ($4.1 billion in 2014) are bordering on fraudulent as the IRD had to take legal action to reclaim $1.5 billion of avoided tax and a class action is being taken to challenge unnecessary charges.

To try and generate more income the National Government has thrown itself into negotiating free trade agreements, but it looks like these are also failing. The $11.5 million spent to bribe a Saudi businessman to help pave the way to an agreement with his Government was not successful and the hopes that we could get our dairy exports into new markets with the TPPA appears to be doomed as well.

At the same time that our rock star economy is losing its edge the lack of capital expenditure and maintenance of our transport networks, state houses, schools and general infrastructure has been highlighted and $110 billion will be needed to address them over the next ten years.

The National Government is paying large sums to a mass of spin doctors to ensure the reality of its economic mismanagement is not widely understood. The drop in dairy prices is being downplayed and English and Key are very good at presenting relaxed faces to what must be causing them sleepless nights. If only they had spent more on R & D, less on spin and listened to advice outside of their cabinet clubs, the country may be in a stronger position. There is only so long that heavily redacted documents and the flag debate can cover the facts and provide distractions.

The Government has found itself up a creek full of cow shit of their own making and, thanks to their rigid ideology, no effective paddle to lever themselves out.