Simon Collins: Hands-off Govt the main theme of Brash report

Don Brash. Photo / Herald on Sunday

The central theme of the Brash report on catching up with Australia is that the Government should get out of the way and release the power of the market.

The 147-page report says the Government has a crucial role in setting "the rules of the game" - the laws, institutions and policies within which business can thrive.

But it says the New Zealand Government spends too much, owns too much of the economic cake and interferes too much with private decisions to invest capital, hire workers and start businesses.

The argument is not easy, because the report acknowledges that "New Zealand's current level of Government spending appears not to be too different from that of the average OECD country", and that New Zealand actually rates better than Australia on the world "economic freedom" index.

But it argues that we have slipped so far down the income ranks that we don't have the luxury that a rich country like Sweden has to spend much of its income on public services, or that Australia has to adopt regulatory practices that are "well short of world's best practice".

"Other than Argentina and Uruguay, probably no advanced country has tumbled further down the international league tables in the past 100 years," it says.

"Evidence suggests that countries that increase the size of government as they decline economically will struggle to reverse the economic decline.

"Successful fast economic transformations - themselves relatively few in number - have multiple dimensions, but typically one part of the story is either a low or substantially shrinking size of the state."

It cites Singapore and Hong Kong as success stories that had low state spending throughout their transition, and Ireland and Slovakia as cases where state spending was cut.

In New Zealand, the report says core state spending rose from 29 per cent of national income in 2004 to 36 per cent this year, mainly because of the former Labour Government's policies such as higher family support payments, childcare subsidies, cheaper doctors' fees, KiwiSaver and the scrapping of interest on student loans.

It says spending should be cut back to 29 per cent of national income in the next three years, for four reasons:

First, because taxes discourage people from working and investing.

Second, because state spending is often inefficient because it is "not subject to the same rigorous scrutiny that people and firms give to spending their own money".

Third, because some state spending on welfare, health, education and pensions discourages people from saving to provide for themselves.

Fourth, because higher state spending, funded by reduced budget surpluses, has kept interest rates, and therefore the exchange rate, higher than they would have been otherwise.

"As we've become relatively poorer, we developed a welfare system that has allowed a much larger proportion of the working age population to opt out of the labour market, fully supported by the state," the report says.

"We've hugely increased subsidies to tertiary education, even though the private returns to a good education have never been better.

"And we've provided a very generous universal pension - still among the most generous in the advanced world - that leaves many people, behaving quite rationally, with little incentive to save or to think of providing for themselves."

The proposed solutions follow from this rationale: raising the pension age and cutting the pension rate in relation to the average wage; scrapping KiwiSaver subsidies; ending subsidies on doctors' visits and prescription charges except for "the very poor and the chronically ill"; abolishing childcare subsidies, again except for the poor; restoring interest rates on student loans; and letting private schools compete with public ones with equal public funding.

The report is more cautious on family support payments, offering four options ranging from abolishing Working for Families completely to restoring a universal child benefit to eliminate the disincentives involved in the current system of reducing family support as a family's income increases.

Although it suggests "serious consideration" to limiting the domestic purposes benefit to a maximum of five years, its recommendations call more vaguely for "ambitious welfare reform".

If the Government follows its recommendations, the report says the top tax rate could be cut to 20 per cent and the NZ Superannuation Fund could be wound up because, with its proposed changes to the pension, "there is simply no obvious reason to allow the share of GDP devoted to superannuation spending to increase very materially over time".