• Robert MacCulloch

Our Regulatory Deep State

I wrote an Opinion Piece for the National Business Review this past week. It is available at this link,, or you can read it below:

Don’t wait for the Budget: it’s not the problem

Back in 2014 when the National Party was in power, an informal group of academic advisers was created by the Minister of Finance to give a non-political view on policies, which I was invited to join. One issue ended up leaving a strong impression. Namely that, unlike many other nations, budgetary issues were not, at least at present, NZ’s number one problem. Instead the extraordinary rise of our regulatory state, comprised of red-tape and rules which can send the wrong signals and create woeful inefficiencies, has become public enemy number one.

Between 2008 and 2016, Sir Bill English did do a great job keeping the books in shape. He balanced revenues and expenditures, at least after the fall-out from the Global Financial Crisis had subsided. Government debt rose from less than 20% of GDP in 2006 up to between 30% and 40% of GDP in 2012, but Sir Bill got it down again. Government debt has again risen to post GFC levels and is forecast to go higher. Grant Robertson will try to manage it down. Both parties have delivered spending outcomes way better than the likes of the US and UK where the public debt to GDP ratio now lies over 100% of GDP.

Just as Sir Bill wished to be respected as a conservative custodian of the public purse, carefully employing actuaries to pour over spending plans to see whether they comprised a good “social investment”, Grant Robertson is also keen to win credibility regards keeping public finances in order. So what has changed? On the spending front, little apart from replacing the label “social investment” with the label “social well-being”. The single biggest item of government spending arising from the impact of the virus, namely the wage subsidy scheme, was endorsed by both of our major political parties.

So what’s there to talk about? A lot. During the time of the Key administration, the Productivity Commission reported that “NZ’s stock of legislation is large, growing rapidly and complex”. It noted how “The Government does not use many of the approaches to system-wide evaluation of regulatory regimes that are used in other countries”. Meanwhile the Treasury estimates that NZ “might have perhaps 200 core regulatory regimes”. An inquiry into dairy food safety regulation found that the “tertiary layer includes numerous instruments of different types and runs to about 12,000 pages”. The Ministry for Primary Industries estimates that they administer over 9,000 regulatory provisions applicable to the seafood sector alone, many dating back to former regulatory environments and some with a lost lineage.

And so it continues. This week the Labour government is presenting a neat, transparent itemized budgetary account detailing all of its various revenues and expenditures. The marketing and public relations behind the event has become impeccable, right down to the glossy brochures. Everything looks like it has been revealed. It most certainly has not. There are no measures of the number of rules that are presently being passed by central, let alone local, government. There has been no accounting of their net benefit to the country. Our regulatory superstructure becomes vastly more opaque, year upon year, as each successive government tries to control more and more of our behaviors. Although the catch-cry “fiscal responsibility” is one that now strikes a chord with Finance Ministers, both left and right, the catch-cry “regulatory responsibility” does not.

The latest set of new rules relate to “fair pay agreements”. A huge number of ‘command and control’ regulations relating to the environment, which have been prioritized ahead of market-based solutions like carbon taxes or the emissions trading scheme, are coming. Proposals to rejig our impenetrable tangle of resource management regulations into a new impenetrable tangle are in the works. Rule changes relating to our health system are currently underway.

Across most of these categories, the question of whether the costs outweigh the benefits remains largely unknown. Neither National nor Labour have made a commitment to subjecting rules to formal cost-benefit-analyses. Let alone abiding by the results. A presumption exists that the more regulations, the better. Missing in action is what economists call ‘mechanism design’ which tells us which set of rules deliver the best outcomes. These rules can end up being very simple and promote market-based institutions.

A current example is our health-care system. Its administrative complexity is immense. The recently announced changes mean that decisions will be moved further away from the patient and their doctor to an even higher level than before. There are alternative sets of rules available. In Singapore, for example, each person has a mandatory health savings account which is used to fund their universal care system. A low cost public insurance scheme to which everyone contributes an affordable premium pays for large health-care bills. People pay for smaller bills directly out of their own account, in consultation with their doctor, and can choose between providers, both public and private. The aim of the system is to empower patients with information for making decisions regarding high-quality, low-cost care and to encourage competition between institutions. The resulting cost is less than one half of ours. The quality is higher.

Where does this leave us? The theatre surrounding the annual budget whereby scores of journalists and celebrity commentators cast judgment on how well the government is managing the nation’s finances, how much money is going to health, how much to transport, has become a smoke-screen. The real action lies beneath, in how well NZ governments are designing the rules which incentivize behaviour and encourage lower costs and higher quality within our public and private sectors. This is where our biggest challenge lies.