We all know that, and we all seem to agree that it should be a priority.<\/p>\n
But reeling off the obvious solutions \u2013 improved infrastructure, better education, deeper pools of capital and more investment in high-value industries like technology \u2013 has become a highly predictable response to tough questions about how politicians plan to head off New Zealand\u2019s impending fiscal woes.<\/p>\n
It has effectively become the get-out-of-jail card that allows politicians to campaign on policies that little or bear no relation to the dire warnings and advice they are getting from their most senior economic advisers.<\/p>\n
Two very good columns in the past week have highlighted the incredible disconnect between the fiscal policies recommended by government economists and politicians of all stripes.<\/p>\n
Inland Revenue (IRD) published a three-yearly Long-Term Insights Briefing last week, highlighting the need to generate more tax revenue. It suggests broadening the tax base by expanding capital gains taxes (CGT) and lifting the GST rate.<\/p>\n
Wellington Business Editor Jen\u00e9e Tibshraeny<\/a> notes that this builds on the work of the Treasury<\/a>, which has been more or less shouting from the rooftops about the fiscal crunch coming in the next couple of decades if we don\u2019t lift taxes or dramatically cut spending.<\/p>\n With a palpable sense of frustration<\/a>, she describes \u201cpoliticians and the country\u2019s economic stewards … operating in parallel universes when it comes to the sustainability of the Government\u2019s tax-and-spend policies\u201d.<\/p>\n Herald Business columnist Matthew Hooton<\/a> pointed out that<\/a> the IRD \u201chas now joined the Treasury, Taxpayers\u2019 Union, New Zealand Initiative, all major bank economists and even, with different emphases, the Council of Trade Unions and Tax Justice Aotearoa in warning that New Zealand cannot go on much longer without serious spending cuts, big tax rises or both\u201d.<\/p>\n Yet here we are, heading into an election campaign with neither major party prepared to directly confront the fiscal challenge that we are hurtling towards.<\/p>\n Labour supporters might have been able to point to the party\u2019s proposed CGT policy \u2013 had any extra revenue it generates not been immediately spent on the policy to provide free GP visits to everyone (including people like me who can already afford to pay for them).<\/p>\n National, to be fair, would like to deal with the mounting burden of superannuation costs by lifting the retirement age to 67, but it has no chance while it remains dependent on New Zealand First to stay in power.<\/p>\n So how on earth can the disconnect between the top government economists and our politicians be so wide? How do politicians get away with ignoring the stark reality of the Treasury\u2019s maths?<\/p>\n \u201cIf policies are left unchanged, the ageing population and other spending pressures would cause core Crown expenditure to increase from current levels of around 33% of GDP [gross domestic product] to nearly 45% of GDP by 2065,\u201d Treasury chief strategist Struan Little warned in a sobering speech late last year.<\/p>\n \u201cIf tax revenue did not increase in response, net core Crown debt would quadruple to 200% of GDP by 2065.<\/p>\n I wanted to keep the theme going (while we wait for more clarity on the Iran conflict) because the productivity stats are the third piece of the fiscal puzzle.<\/p>\n A government that needs to deal with a structural deficit and burgeoning debt has three options.<\/p>\n It can cut spending, it can increase taxes, or it can unleash amazing policy changes that drive increased productivity, creating more corporate profit and higher wages, generating more tax revenue from the same tax base.<\/p>\n Modern politicians the world over prefer the third option because options one and two aren\u2019t popular with voters.<\/p>\n In theory, there is good logic to the idea that New Zealand could grow its way out of its fiscal hole with constant economic improvement.<\/p>\n But that also requires bold action, which too few politicians in the MMP environment have been willing or able to take.<\/p>\n The productivity challenge<\/p>\n New Zealand famously underperforms on most productivity measures when compared to our OECD peers.<\/p>\n The Stats NZ Productivity Statistics date back to 1975.<\/p>\n Measuring productivity is typically about counting the output per unit of input.<\/p>\n Easy enough if you\u2019re looking at a single factory, but quite complex across an economy.<\/p>\n So Stats NZ focuses on market industries where output can be measured independently from input (the \u201cmeasured sector\u201d \u2013 roughly three-quarters of NZ\u2019s GDP).<\/p>\n That excludes public administration, education, health, and arts and recreation.<\/p>\n