Let's be Honest about Tax Rises

The Times in the UK has run an article today headed "Let’s be honest about tax rises, Rishi Sunak tells Tories". Rishi Sunak is the British Chancellor of the Exchequer (equivalent to our Minister of Finance). However, it's unlikely that we will be seeing much honest discussion about the prospect of tax increases in the Kiwi election campaign.

Why? Since the government is in the process of adding $100 billion to public debt (over 30% of GDP) yet has not announced a single significant spending cut. Nor will they. Consequently, taxes are certain to rise sharply in NZ, given current policy settings. Expectations of taxes rising is collapsing investment and job creation right now, notwithstanding the rhetoric of government politicians, which is being ignored by investors who know that it lacks credibility.

The only way to have the best of both worlds - low taxes and job creation - is to end spending on "privilege". In other words, end government transfers to wealthy people, as well as corporate welfare. That way, the spending cuts won't hurt the poor. The best article which explains how this works is by Alberto Alesina, the former Chair of the Department of Economics at Harvard University. He writes:

"Western governments can save money and avoid inflicting injury by improving the way welfare programs are targeted; scaling back programs that use taxes raised, in part, from the middle class to give public services right back to the middle class; and by gradually raising the retirement age". See:

https://voxeu.org/article/cut-deficits-cutting-spending

NZ's Productivity Debacle

Conversations about weaknesses in the NZ economy frequently return to one word: productivity. Economists measure productivity by the value of output per hour worked. One of the best figures I have seen tracking this measure over time is reproduced below. NZ's performance is woeful, to say the least. Lets break the figures down a bit.

The government of Helen Clark was in power for nine full years, from 2000 to 2008. From the start to the end of the Clark years, productivity rose by 9.9 percentage points. During the last two terms of the Clark government, when the effects of its policies would've had time to work their way through, productivity rose by 5.3 percentage points.

The Key-English government also lasted nine full years, from 2009 to 2017. From the start to the end of the Key-English years, productivity rose by 2.8 percentage points. During the last two terms of the Key-English government, when the effects of its policies would've had time to work their way through, productivity FELL by 1.8 percentage points.