How much can New Zealand achieve by 1993 if we really try hard?
(published 1989)
The uncertainties and anxieties of the voting public in New Zealand come to a focus around one question: Where is the country going?
Where are we going to end up?
I cannot tell you the answer. As a backbench MP, I can make only minor contributions to the decisions about where this country is going. Instead let me change the question into something which I can answer, with knowledge and authority, based on 4 years as Finance Minister.
Where can we end up by 1993? How much can we accomplish, in 4 years if we seriously want to build on what Labour has already achieved?
Forget about "policy" for a moment. Let's start with vision, realistic dreams that we have the power to make come true, by 1993, if we try. Vision is what Labour was about in 1935 and 1984. The future is built on the goals we set ourselves.
"Policy" is a tool. It comes later. We select among policy options by asking ourselves: "Which combination can do most to achieve our goal?" I am publishing these goals because I want them wide open to scrutiny and testing against both public opinion and the knowledge of experts.
If New Zealanders can once again reach a consensus about desirable and realistic goals, we will have mastered the secret of achieving them.
In my view, we can realistically achieve the following economic goals over the next 4 years, by the end of 1993:
Sustainable economic growth rates in the 3-5% range per year, up from an average 0.9% in 1973-83 and an average 1.8% since then.
Stable prices, with inflation in the 0-2% range, compared with our average of 13.3% in 1974-84 and our 11.1% average since 1984. (The Reserve Bank says we should be able to achieve this target by the end of 1992.)
Unemployment halved from its current 7.4% of the labour force, into the range now occupied by the best 25% of the OECD nations.
Interest rates down into the 7-10% range, making a positive contribution to improved investment in our future potential.
Public debt halved from its current level, with resultant ongoing reductions in the level of Government debt servicing payments.
The tax burden on the community down by 5% of GDP, via improved growth, lower debt servicing costs and fiscal reform.
Real wage growth around 2% a year, more than 20% a decade, once current unemployment is absorbed and debt substantially reduced.
These are not separate, ad hoc objectives. They are locked together so that each one supports the economic achievement of all the others.
My economic goals, achieved by 1993, would very significantly improve the living standard and quality of life for all New Zealanders.
They would give most people a chance to own their home, give their children more help, and set aside a nest egg for their retirement. Quality of life would improve. It would be easier to upgrade the family car, have more meals out, and the occasional overseas holiday.
Economic achievement also opens new opportunities for the jobless and disadvantaged to play a more productive role in community life. That works directly to reduce the alienation that is driving rising crime, racial conflict and social tension in our society today.
Poor skills, low income, bad parenting and crime are a vicious circle. Opportunity, incentive and skill can turn that into a virtuous circle.
Sound social policies will support and advance that process by targeting those who most need incentives, encouragement and help. We want a virtuous circle where every economic gain improves social outcomes and each social policy reform adds to economic performance.
The task of Government is to harness equity and efficiency together, make them serve each other and increase total social wellbeing. On the other hand, we will never succeed if all we offer is soft options. There has to be an element of "tough love" in the mixture.
So let me spell out some social goals we can also achieve by 1993. Again, each goal is designed to support and reinforce all the others:
Value for money
More delivery of better quality social services, via increased efficiency to those in most need, without any extra cost to taxpayers.
We know we can do that. SOE reform cut costs by 25% in Electricorp and nearly 100% in Coalcorp, without loss of quality or output.
Retirement Incomes
We can develop a credible environment for retirement income planning. Improved after-tax incomes will help people to save. Stable prices will ensure that savings are not eroded.
Incentives
We can give disadvantaged people more incentive to improve their own position, if we lower their present excessive marginal tax rates.
Low-income people can now lose up to $8.80 if they earn an extra $10 for themselves. The system locks them into poverty and dependence.
We could let them earn more, keep more, and at the same time, cut the bill we all face paying for a system that promotes dependency.
Housing
Low inflation and low interest rates will give disadvantaged people better access to housing.
We can improve that further if we remove poverty traps from housing assistance by integrating it into the income maintenance system.
Education
We need to train more students, achieve higher levels of excellence, and hold students and staff more accountable for education outcomes.
Teachers will gain in status if we hold them more accountable for seeing that pupils achieve international standards in core subjects.
We can have a tertiary education system with open access for every qualified student to courses of their personal choice by 1993.
Employment
Unskilled people will have better access to both jobs and training if we remedy the present deficiencies in our labour market system.
Where their productivity does not enable them to earn a living wage first, we can top up their pay packet, instead of keeping them on the dole.
They would learn work-skills faster, add something to the nation's output, and the costs would also be lower for everyone else.
Maori Progress
We can apply exactly the same principles to disadvantaged Maori, to open up practical ways for them to transform their own future.
Treaty claims cannot solve the problem of Maori underachievement. Maori and Pakeha both need the right skills for the 21st century. We can achieve racial harmony only if we give disadvantaged people identical rights based on need, regardless of race or creed.
Law and Order
We can improve law and order if better childcare, higher educational achievement and better skills accompany good enforcement.
Parents with good opportunities and incentives make a better job of child rearing, and can take more responsibility for doing it well.
Health
The opportunity is there to halve hospital waiting lists by 1993, reduce cot deaths and expand our preventative care programmes.
Hospitals, like SOEs, given the right structure, can achieve 30-50% gains in efficiency, without loss of output or care quality.
Income Security
We can safeguard the health of low-income people and families by guaranteeing that no one will pay more than, say, 4% of annual income for primary health care, and include dental care too.
We should be quick to extend a helping hand to those who fall over, but not to remove individual responsibility for the avoidable consequences of personal actions.
I do not pretend that this is an exhaustive list of the social goals that we can achieve in New Zealand in the 4 years to the end of 1993.
But it would be a pretty good start, in combination with those economic targets, towards making New Zealand a better place to live.
In my second article I will look at those principles in more detail, how they put more drive into any society, and why we should bother to do so.
A third and final article will then look at the policy tools we would need to adopt, to achieve these economic and social goals by 1993.
Why it makes sense for New Zealand to target faster growth
New Zealand has a choice to make in the coming year; We can coast on the changes made since 1984 and those already in the pipeline, or we can raise our sights and push the reform process a stage further.
The first option would continue to leave some privileged people in a protected position, while others carry more than their fair share of burdens. That limits our ability to improve our living standards.
The second option would continue the process of removing the inequities which are limiting our economic performance, provide improved incentives, and substantially raise our achievement level.
The real question is: what do New Zealanders want? An easier task in the short-term, with limited rewards down the track? Or do they want to put more effort into the period ahead, for much bigger gains?
I personally favour going for the optimum gain in opportunity and living standards for everyone. We have got the reform process rolling. If we let the momentum stop, it may not be easy to get moving again.
Let me make the case today for getting on with the job.
In the 1973-83 period, our economy grew at an average rate of 0.9% a year, then rose to 1.9% in 1983-88, lifted by the unsustainable boom stimulated by Rob Muldoon's last-ditch effort to win the '84 election.
To visualise what such figures really mean, consider the fate of a child that is 60cm (2ft) tall and grows 0.9% a year. After 18 years of growth at that rate, the child will end up 71cm tall (2ft 4in).
Those figures left New Zealand trailing along in 19th place among 20 comparable OECD countries. Throughout that period, our living standard here slid steadily backwards, in relation to the OECD average.
Because our economy was not moving fast enough, we failed to create enough productive employment for a growing labour force. Ultimately there was no way left to conceal the real level of our unemployment.
As the changes since 1984 bed down, in combination with any further changes implied by current Government policy, that historical growth rate will more than double to reach a sustainable 2% to 2½% a year.
David Caygill, since my dismissal as Finance Minister, has shown real personal determination to reduce inflation further and do what he can to prevent Government spending from undermining economic growth.
The same child growing 2½% a year for 18 years ends up 94cm tall, a gain of 34cm this time, instead of 11cm. The increase over that period is three times larger than before. That is a genuine achievement.
But frankly, I would have to say that Labour had better things in mind when we set these reforms rolling 1984, and when we campaigned in 1987 for a mandate to finish a job still only half done.
The best available opinion says 2½% growth a year will not be enough to let the government make a sizeable dent in present unemployment levels, even over quite an extended period of years.
Our reforms since 1984 and what Labour has in its current policy pipeline were never intended to be the end of the story. They were designed as a launch platform for further reform and further growth.
That is why, in yesterday's Herald, I proposed a new package of social and economic targets, achievable by 1993, which would lift our growth rate a quantum leap further, to a sustainable level of 3-5% a year.
The upper end of that range would place us, for the first time in many decades, above the OECD average. New Zealand would not only hold its place in the world. We would start to claw back our past losses.
At 4% a year, the New Zealand "child" does a great deal better over 13 years. It grows from 60cm to 1.22 metres (4ft); the gain becomes 62cm instead of just 11cm or 34cm. That kind of difference really matters.
We are not talking about children. I am using them to illustrate how our incomes and opportunities in New Zealand can change over time, and contrast that with growth in income and opportunity elsewhere.
Immediately to our north, the Asian Development Bank forecasts that Asian Pacific Rim countries will grow at an average 6% a year from now through to 2000AD. Suppose we visualise that in the same human terms.
The Asian "baby" is not going to grow by only 11cm or even 34cm in 18 years. It will add 1.11 metres to its height to reach 1.71 metres or 5ft 7in - 6% a year is roughly the normal human growth rate.
We live in an age when technology and the information revolution are driving change faster than ever before, on a world scale. The winners are the nations flexible enough to seize new opportunities quickly.
Those who cling to out-of-date methods or institutions fall further and further behind. In extreme cases, like Russia and China today they end up faced with almost impossibly painful adjustment problems.
Since 1984, New Zealand has been trying to get the fundamentals right as a starting point. In many ways, we have done that better than our apparently more prosperous Australian neighbours.
In 1986-87 for example, Australian inflation was 9.3%; we were a long way behind on 14.6%. They have since improved to 6.6% but New Zealand has already bridged the gap and moved ahead. We have achieved 4.4%.
Their current account deficit in 1986-87 was 5.1% of GDP; it is still 5%. Ours has improved from 4.9% of GDP to 1.9%. So our trade figures are now closer to balance than Australia's, a sign of a better future.
As I see it, about three-quarters of the programme is in place. But that is a bit like having 3 wheels back on your car, or lumbering down the runway on 3 engines in a 747 and hoping for a good takeoff.
We can change that by strengthening the drive towards better productivity and continuing to improve the balance of our policy mix. If we do that, we can get a surge of extra growth to benefit everyone.
Farmers and a lot of our exporters are seeing the gains, which that approach, can achieve for them with part of the job done. Extending the process to ports, shipping and so on will add to those gains.
But it will take a change of attitude, an improved understanding of how better outcomes are achieved for society, to produce a real renewal of our determination to make full use of our opportunities.
At the moment, New Zealanders are obsessed with unemployment, crime, inadequate education, low skills, poor parenting, high interest rates and so on. We are focussed on our problems, not our opportunities.
Those problems are just outcomes of a destructive social process that feeds on itself. Low growth creates lack of opportunity which destroys incentives to acquire skill, a situation that does no one any good.
There is only one way to solve that, reverse the process. Growth will open new opportunities. That creates the incentive to acquire skill and an environment where people can advance through personal effort.
As people become more productive, their attitudes change. Their income rises. Their children do better at school. We break the vicious circle. Our society becomes more dynamic, successful and harmonious.
People can end up with their own home debt free in a working lifetime. They can save enough to feel comfortable, have a retirement nest egg, and give their children more help to achieve something in the future.
We are not going to manage that unless we harness all of our policies to drive forward together in the same direction. We need efficiency that gives us better equity, and equity that improves our achievement.
If we want to achieve the targets I set in the first article for 1993, then our policies should be guided by a consistent, principled approach where the Government aims, with a considerable amount of energy to:
Increase the incentives that encourage people to make constructive use of new opportunities to advance themselves by their own effort.
Reduce the welfare and poverty traps that lock people into dependency, by making them worse off if they improve their earnings.
Remove privileges which protect favoured groups, but obstruct others who are trying to advance on a basis of their own fair efforts.
Improve job market opportunities for people at every level and open up, in particular, fairer chances for the jobless or disadvantaged.
Ensure that those who genuinely need government assistance get top priority, ahead of those who have no real need of government help.
Where disadvantaged people have the capacity, design that assistance to get them successfully back on their feet with minimum delay.
Improve public sector efficiency to get maximum value per dollar for consumers of government services, the taxpayer and the economy.
By all those means, hold government expenditure to levels that allow us to achieve significant and sustainable increases in economic growth.
Create wider opportunities for meaningful personal choice, and I include the disadvantaged in that - life has no dignity without it.
In the final article of the series, I will review the policies we could use as tools to achieve my targets by 1993, and describe the pathway which could lead us to that improved achievement.
What must we do to avoid a second-best future for New Zealand?
New Zealanders who do not want a second-best future need to know that we can boost economic growth to a sustainable 4% a year by 1993. The economy would then grow by half every decade; a measure of the extra resources we can create to meet needs and improve lifestyles.
My 4% target substantially increases the achievement we could expect from the current policy approach, expected to deliver 28% in a decade.
A firm Government commitment to that target, backed by a credible programme for achieving it, would liberate a surge of confidence. With the right incentives to win co-operation throughout the community and involve people at every level, that would transform our future.
To get better growth rates and therefore higher living standards, a country has to make improved use of its resources and opportunities. That has been a major priority for 5 years. My programme takes our achievement since 1984 for granted, and builds on them.
It is no criticism of a good government to say it can become a better one in the future. Ongoing improvement is what growth is all about.
I have incorporated David Caygill's 0-2% inflation target, the Reserve Bank says that is achievable by 1992. It betters the likely rates in most countries we sell to and will give us a new competitive edge.
My programme is designed to accelerate growth to 2% by 1991, on past the likely ceiling of current policy, to 3% in 1992 and 4% in 1993.
The increased rewards, which that achievement offers to all New Zealanders, are, in themselves, a major incentive to motivate people. The gains in that initial 4-year period should, in my view, be ploughed back to reduce both unemployment and public debt. The extra employment would give us major gains in equity and capacity. Debt reduction is vital to economic security and future investment.
My projected 1990-93-growth track creates jobs considerably faster than the rise in the labour force. It halves unemployment by 1993. So by 1993, dole payments are halved too, saving half a billion dollars a year by then. We can do something better with the money. In the same way, my programme aims to halve public debt by 1993. Debt servicing costs the Government about $4.5 billion a year at present. By 1993, that cost on the taxpayer would be about $2 billion lower. The saving is a resource made available for more constructive uses.
An expanded asset sales programme would be used to achieve a substantial fiscal surplus, dedicated to debt reduction. The new owners of those assets will make it a priority to use them more efficiently. That has flow-on effects. Coalcorp has halved the real price of coal to Electricorp and New Zealand Steel, for example.
Such savings feed through to industry and help us win markets. Efficiency and innovation also reduce real prices to consumers. Pay packets go further. That stimulates new demand and further output.
Towards the end of the 1990-93 period, the asset sales programme would be largely complete. Debt reduction then becomes more dependent on a substantial financial-balance surplus. So I have planned that in.
Obviously, one could achieve that surplus by raising taxation. In other words, letting the government take the lion's share on the annual increase in GDP. That would be totally counterproductive.
If we want growth and jobs, we must have increased investment in new production, improved products and better marketing. We need to increase the private sector's resources for doing a better job faster.
More than that, productivity depends on whether wage and salary earners want to help the nation achieve faster change and better methods. Incentives matter as much to them as to investors.
If people lift their sights, they need to know that the Government is firmly on their side, and that it will not seek to rob them of the reward. So I propose to cut tax by 5% of GDP in the 1990-93 period.
That is roughly equivalent to a 13-14% reduction in average tax rates across the board, including GST, with flow-on gains in growth.
There is no point in beating about the bush. Achieving those targets does imply quite substantial discretionary reductions in Government spending. They are an important part of the pathway to these targets.
Are further substantial cuts realistic? If a consensus sees such large rewards as worth the effort of further structural change in traditional public sector activities, the answer is definitely "yes".
To achieve the required savings, the Government would need to continue its present effort to extract full value in output and care for every dollar it spends across a wide range of public sector activity.
It would be important to set the right structures and incentives in place to encourage and reward public sector staff to want to extract that kind of value from their own effort and the resources they use.
Government would have to focus its assistance on those who genuinely need public sector help to achieve dignity and security. Those people must not be hurt by the changes. They are a top priority.
The help given would need to be redesigned. It is not enough just to maintain those people in dependency. They need positive incentives to find a more rewarding place in the workforce of a growing economy.
Those who do not need public help would have to pay themselves for some services which they presently fund via their taxes.
Their reward would be more choice, lower taxation, a faster rate of real income growth and rapidly expanding new opportunities.
Real safeguards would be built in to ensure income security for example, a ceiling of 4% of income per year for all primary health care including dentistry. Beyond that, the State would pay everything.
Low-income people with significant health problems would end up spending less in many cases than they are forced to spend at present.
The evidence is unanimous that we can have more care and better quality care than we get now, at lower costs, if we give the people in the system the right structures and incentives to achieve that outcome.
I am absolutely not arguing for an abandonment of public care. New Zealand has always had a mixed system of public, private and voluntary care. A change in the balance of that mix can now benefit everyone.
The last crucial area where our present structures are obstructing New Zealand's efforts to improve growth in output, jobs and living standards is the way we presently arrange for our labour market affairs.
The present system includes significant discrimination that limits the employment opportunities and the job skills of women, part-time workers, young people, people in the regions and many Maori.
They deserve fair opportunities to compete on merit; potential skill and willingness to make an effort, for work, rewards and promotion, a point well made by Air New Zealand stewardesses in their recent case.
Future living standards are limited too by entrenched practices which create obstacles to the improved productivity we need for sustainable improvements in the real wages of working people.
Present arrangements also tend to restrict the benefits of growth and productivity largely to those already in jobs. The jobless are treated as outsiders and the system works in ways which tends to keep them out.
If a firm is in trouble, its staff cannot easily do a local deal with their own employer to work together as a team, hold on to their jobs, and try to pull the firm through for everyone's sake.
Our present system too often sees the firm shut down. Output is lost and staff put out of work because people on the spot have limited ability to bargain with each other for their own mutual benefit.
That reduces the incentive for workers and management at local level to operate as a team seeking the fastest possible growth for their firm, with the objective of sharing in a better reward.
In the short-term, the system may benefit some privileged workers who can exploit conditions which resemble a monopoly. On our wharves and shipping services, the excess cost has been $600-800m a year.
But giving watersiders 43 hours' pay a week for an average 29 hours' work has increased export costs, reduced potential sales and export job growth and boosted the price of imports for all New Zealanders.
We need to turn people around, so that instead of clinging to old methods and arrangements, they willingly develop and embrace new ideas which produce better products faster and market them harder.
Twenty years back, nobody could have imagined Kiwi farmers growing nuts, nashi pears and flowers for export. After flowers, we need people to invest in perfume, and pioneer a new world market for us.
If Asia is growing 6% a year, we need people motivated to explore the market Asia could offer for new products we can made to delight their consumers, and win New Zealand a growing share of their growth.
Growth is about giving everyone new reasons to act with fresh initiative, participate more fully, achieve more, co-operate better. Government can and should set the framework to motivate all that.
When most New Zealanders talk about incentives for producers, they still mean SMPs or exchange rate intervention. Certainly producers need incentives; my package is about incentives that really do work.
Within my proposed policy mix, thousands of variables create wide scope for negotiation and public choice. If the Government adopts this approach wholeheartedly, we will deliver on time and target in 1993.