Reflections on the Budget: An attempt to buy happiness

Photoshopped image credit: Technomage

By Owen Jennings

The so-called “well being” budget, highly promoted and anticipated, has not gone down well. Those who were promised a lot were left unsatisfied.  Those who expected little were not surprised.  

Only someone steeped in PR and weak on substance could try and sell this budget as “transformational”.  The only thing that may have qualified as new is some additional measuring of social factors.  But the Coalition has already demonstrated their ability to discard targets and goal setting when it embarrasses them.

It is simply a typical tax and spend budget.  Nothing new.  Nothing even remotely likely to transform.  Even Labour sympathisers like Bryce Edwards insulted the offering.

The focus is heavily on spending.  Governments and ‘more spending’ go together like eggs and bacon.  There is an overwhelming desire to ‘do things’ for people.  The feel good factor is seductive and insatiable.  The people have a never-ending list of demands, the coffers are full and the prime minister is determined we will all experience improved well-being and happiness.

You could be forgiven for thinking that spending more money by the state is the pathway to greater real wealth and happiness for all.  Sadly, many believe it to be so.  ‘More’ is confused with ‘better’.  Too many Kiwis think that more money on health means better health outcomes.  More money spent on education means better education for kids.  Quality arguments are shouted down by quantity demands.  The state sees problems as requiring more money rather than better management. Sadly, only one political party in the house disagrees.

The state is generally inefficient in the services it delivers.  It hogs scarce resources at the expense of the private sector so overall performance suffers.

It would be easy to simply write the budget off as a PR stunt.  Call it smoke and mirrors.  Flimflam.  All sauce and no steak. 

However, there are a number of aspects to the direction taken by the Coalition in this budget that are of deep concern and should be deemed alarming

  • There was little focus on those who innovate, take risks, invest in growth and those who work hard and pay over 40% of their earnings in total taxes.  They will have to pay more tax now and even more later as new taxes are conjured up and applied.  They don’t need nor ask for handouts – they need lower taxes, the removal of crippling compliance costs, open and competitive markets, low inflation, low interest rates, efficient infrastructure etc.  They don’t need some benevolent uncle with a sack of money buying electoral support or even winner picking with R and D assistance.

If you ignore the wealth creators as the Coalition is doing you are heading for disaster.

  • The one major factor that would increase the wealth of the country and its people was ignored in the budget.  It is very possible the minister of finance does not understand it, let alone want to focus on it.

It is labour productivity.

Labour productivity is defined simply as output per unit of labour input.  Improving labour productivity contributes to a nation’s long-term, material standard of living.  It tells us how efficient we are, how well we are using resources.  It is the ultimate cornerstone of nation wealth building. 

The Coalition with some help from ‘new thinking’ in Treasury are shying away from measuring labour productivity, and replacing it with measures of wellbeing.  Wellbeing measures are more esoteric, more ephemeral and elastic.  Labour productivity, as a measure, is more exacting and demanding – it shows up years of poor economic management – so politicians do not like it.

Correcting poor labour productivity takes political guts and sometimes unpalatable measures. It requires ‘Roger Douglas’ like clear thinking and courage. Right now the country is stranded and going nowhere with its most vital of indices. No growth in labour productivity – it’s even started to decline as shown below.

Michael Reddell?

Other countries have a better understanding of the value of growing labour productivity. New Zealand’s growth has been dismal compared to many other countries.  No wonder we still “feel poor” when our political masters keep crowing about GDP growth.

GDP per hour worked  
USD, constant prices, 2010 PPPs
1970 1990 2017  
New Zealand 21.4 28.6 37.2  
Netherlands 27.4 47.5 62.3  
Belgium 25.0 46.7 64.6  
France 21.7 43.3 59.5  
Denmark 25.1 44.8 64.1  
Germany 22.3 40.7 60.4  
United States 31.1 42.1 63.3  
Median of six 25.1 44.1 62.8  
NZ as per cent of median 85.4 64.9 59.2  
Source: OECD  

The OECD estimated that New Zealand had the fourth lowest labour productivity growth of OECD countries between 1995 and 2014.

So, what to do to rectify this deteriorating situation?

Strangely, Prime Minister Ardern was told by a speech writer what to do, in part, to promote an improvement in labour productivity.  Whoever contributed this part of her speech to the throne was trying to get some valuable advice across. 

A shift is required to create a more productive economy. This does not mean increasing productivity through more people working more hours to increase outputs, while eroding our natural and social assets. This means working smarter, with new technologies, reducing the export of raw commodities and adding more value in New Zealand”.

It is clear that they failed to convince her as she did almost nothing in the budget to achieve such a desirable outcome.  It is likely the PM does not understand the nature of the problem, its severity or how to deal with it.  Given her socialist proclivities, even if she did know what to do she would find the medicine unpalatable.

Among the more obvious policy areas needing urgent attention are corporate tax rates which are now out of line with our trading partners. NZ First have a reduction in their policy mix but they had other priorities in the budget.  Compliance costs, especially around building and construction, are savaging the business sector.  National failed to adequately address them and there is no stomach for reform in the Coalition. It’s set to get much worse with more unnecessary environmental regulation and damaging, increased energy costs.

Trying to boost rail while studiously avoiding road construction is simply head- in- the- sand, climate warrior pandering.  It weakens our ability to provide the income and wealth to handle genuine environmental problems.  The halting of the East/West Link in Auckland, and cancelling the Tauranga/Katikati upgrade and other urgent road work, means we are stifling our businesses, slowing growth in meaningful jobs and derailing improving labour productivity.  Deflecting taxes into cycle-ways used by 0.0001% of the community simply makes us poorer.

While explicit macro policy issues are absolutely critical, labour productivity improvements are achieved also in subtle areas.  Confidence and certainty are huge factors in business, the private sector, where the real useful gains can be made.  Captain’s calls are patently stupid.  Announcing out of the blue that gas and oil exploration is halted sends shivers through boardrooms, has investors holding back and CEOs reluctant to take any sort of risk.  Opportunities are lost.

Dishing out large dollops of hard earned tax money in the regions is actually a hindrance to systematic business development.  Finding your competitor has received some “free” money unsettles and confuses.  Subsidising R and D can have a similar effect.  It’s Band-Aids. Investment risks get postponed.  More uncertainty.  Added value opportunities disappear.

Clearly, the big drivers in labour productivity are the quality of the human capital and the uptake of new technology.  Our workforce is generally poorly educated and inadequately trained.  Our education system is stuck in mediocrity.  Teachers are undervalued because they refuse to allow performance pay.  Policy making educators insist on methods and subjects that contribute little to grasping the basics that equip a labour force.  Schools are turning out entitled, little cupcakes better instructed in diversity than duty and diligence.  Universities are run by doctrinaire socialists busy destroying free speech, excellence and open-mindedness.  A “bums-on-seats” payment approach produces useless courses and inadequately educated students.

The apprentice systems and vocational training efforts of recent years have been in tatters.  We have not yet developed a training and re-training culture that has companies focused on staff improvement.

Some of our biggest businesses that we rely on for exports, added value and job growth are controlled by their producers who, justifiably, focus on their own immediate well-being. Dairy, meat and forestry are examples of sectors where the boardrooms are in the hands of individuals looking strategically in the wrong direction.  Underperformance continues, allowing the Chinese and others from offshore to snap up bargains in the processing sector.  The added value opportunities and labour productivity gains follow the commodities offshore.

A budget that has the real wellbeing of its people at its core would have a totally different focus.  Dragging down and handicapping the achievers to help the less fortunate only makes everyone worse off.  It’s a rising tide that lifts all ships.  It is gains in labour productivity that makes a nation and its people wealthy.  Nobody in Wellington is listening.