Thursday, November 17, 2005

The Whimpering Treasury….And Other Eerie Tales of the New Right

One cannot but help feel sorry for Treasury. After the glory days of the 1980s and early 1990s, they have been cast once more into the gloom and twilight of the New Zealand economic scene, only emerging now and again to cast dubious reports about the shape and the direction of the New Zealand economy and to scare small children.

It appears that there is an assumption from the popular media, and I am going to be generous to Mark Sainsbury and Co and say that it is only an assumption, that Treasury provides high quality, non-bias advice to the Government. Last night on ‘Close Up,’ Sainsbury was asking why the Government was not going to take the advice from Treasury in relation to its suggestions to cut the top rate of personal tax and reduce government spending. Obviously, Sainsbury noted, since Treasury was saying this, shouldn’t the Government be acting upon it?

This approach adopted by the ‘Fourth Estate’ appeared again this morning on ‘Breakfast’ with an interview between Paul Henry and (sigh) Gareth Morgan. I understand that Maia on Capitalism Bad, Tree Pretty has made postings about her dislike of Gareth Morgan. However, he does more than ‘suck.’ He is very useful to the New Right in that he offers a respectable, but yet extreme point of economic view, which can be trotted out to simply justify economic rationalism to the masses, who largely don’t understand or appreciate economics. This morning was no different, with Morgan starting his analysis by stating that no economist would disagree with the Treasury report.

John Maynard Keynes once observed that if you put 12 economists in a room, they would not agree with each other. Economics, he noted, is not a science; it is a social science with a range of different views and perspectives which tend to determine the economic direction that you take. Some economists start from the perspective of Neo-liberalism, others from neo-Keynesian and still others from Marxist or other radical traditions. What Morgan meant of course was that no economist who agreed with his line of economic thought would disagree with the Treasury Report. And, that is how the Treasury report needs to be approached.

So, are some New Zealanders highly taxed? Yes, some New Zealanders are, but the wrong ones. As a result of tax changes in the mid 1980s, New Zealanders now face a barrage of direct and indirect taxation. Personal tax rates dramatically increased for those on lower incomes. Prior to 1984, beneficiaries did not pay personal tax, after the tax changes in 1986, they did. Tax is deducted from their benefit prior to them receiving it, this is in addition to paying indirect taxes such as GST, they and other low income workers actually faced a tax increase in this period going from virtually nothing to 19 cents in the dollar.

But the real issue is not tax, as New Zealand is not a highly taxed country in OECD terms, the real issue is that New Zealand workers get paid low wages and have bad conditions in comparison with most other Western workers and it has been the economic philosophy pursued by agencies such as the Treasury over the past two decades that is responsible for this state of affairs.

Michael Cullen is very correct when he refers to the Treasury report as an ‘ideological burp,’ it is and it follows in a direct line from previous ‘ideological burps’ from Treasury, such as ‘Economic Management’ in 1984 and ‘Government Management’ in 1987 as well as briefings to incoming Governments in the 1990s, all of which suggested curtailing state spending, benefit cuts etc.

I want to add, that I feel that there is nothing wrong with promoting a distinct ideological agenda, after all the Government should receive contested advice from which to base its policy approach.

The problem with the New Zealand Government is that the advice it receives from Treasury is not only shoddy, but also non-contested. The last time that there was a major state agency that was capable of providing an alternative economic analysis to Treasury was in the 1980s, when the Ministry of Works Planning Department was in existence. It was the old MoW that provided a detailed alternative (Keynesian) report to Treasury’s 1984 Report ‘Economic Management’, which basically said that Treasury’s briefing was seriously flawed. It was the same Planning Department that was first up for the ‘chopping block’ in the Treasury inspired ‘cull’ of state agencies and departments. Treasury for all its posturing about competition really hates it when it comes to contested advice.

The fact is that Governments can choose to take or ignore Treasury’s advice. Governments are, as Muldoon famously observed, elected to govern. In the end, they do not govern on behalf of Treasury, but on behalf of the people who put them there – that’s why parties have policies and programmes. Treasury has an opinion based on its economic and philosophical perspectives which influences its intrepretation of data, unfortunately, others have opinions based on theirs. Treasury needs to get used to being ignored more…


At Wednesday, November 16, 2005, Anonymous Anonymous said...

New Zealand is turning into a highly taxed country. Labour promised in 1999 that only 5% of taxpayers would be hit by the 39% tax threshold. Nowadays it is your average bloke who has a wife and three kids that is paying the higher rate.

Labour is continuing its theme of giving people a handout (working for families benefit) when they should be giving people a hand up.

I do not believe that the advice that treasury has given is "shoddy". it is well researched advice. You fail to justify why it is "shoddy" and fail to provide references.

At Thursday, November 17, 2005, Blogger Comrade_Tweek said...

You mean the average bloke with three kids who twenty years ago would have had better conditions, higher rates of pay and lower tax if they earnt the average wage? Or, do you mean the average bloke who is now working well in excess of 40 hours a week as is his wife/partner, in order to make ends meet?

The facts are that New Zealand is not a highly taxed country in terms of other OECD countries, a point that was made very clear several months ago with the release of an IRD Report that stated the same.

The other inescapable fact is that New Zealand has low rates of pay and lower working conditions than other developed nations in the OECD, this is the real issue and one that will not be resolved by pitful taxcuts.

I can provide plently of examples of Treasury's shoddy advice. A case in point is its advice to Government prior to 1984 when it suggested that deregulating the exchange market and lifting controls on wages and prices would not have a detrimental effect on inflation, interest rates or the value of the dollar. Of course, the opposite was true, the dollar plummetted, inflation reached a high of 23-4 percent as did interest rates, which remained high by OECD International standards for remainder of the 1980s and 1990s. Another piece of Treasury rationale was the effects of the 1991 Benefits Cuts on the Domestic economy. Treasury estimated that the cuts would again not have a significant detrimental effect on demand in the economy...wrong again, Approximately, $1 billion was wiped out of the domestic economy, as a result of the drastic reduction of domestic demand and a return to recession.

If you want to find out more I would recommend the following:
Boston and Holland - The Fourth Labour Govt (2nd Edition)
Easton, Brian; The Commercialisation of New Zealand
Jesson, Bruce; Only Their Purpose is Mad and also Behind the Mirror Glass.

Also, if you do find the time as well, have a look at Government and Economic Management by Treasury - if nothing else they are good for a giggle.

(Hope this helps - Tweek).


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