Introduction
Thank you Andrew for your introduction, and for hosting me here on behalf of Gravity and Waterstone. Thank you to everyone who has come out early at the start of another week to talk about the future of our country and, specifically, what ACT could offer in an alternative budget.
I’d like to acknowledge my fellow ACT MPs. Our Deputy Leader Brooke van Velden is the only MP in Parliament with an economics degree. Also welcome Damien, Simon, and Karen, it’s nice to have some of our team here.
New Zealand’s five decade cycle
I have a theory that New Zealand politics operates on a 40 to 50 year cycle of stagnation and upheaval. The Treaty in 1840 was an enlightened document ahead of its time. King Dick Seddon created the modern state and party political system as we know it in the 1890s. The First Labour Government created the welfare state and the regulated economy in the 1930s. Fifty years later, Sir Roger Douglas reopened New Zealand to the world.
Between times, we have golden ages followed by despair. The post-war period was prosperous, but we were nearly broke by the 80s. The 90s and early 2000s were a confident time for New Zealand, but now more and more Kiwis are losing that confidence, and we hear rumblings of a brain drain entering our national discussion again.
You could speculate why we have this cycle. I suspect it’s because we’re like many picturesque island nations with nice climates, it’s easy to relax. After a while we realise our first world status is at risk, and we have to fix the leaks before we sink back to being a Fiji, a Greece, a Cuba, or any number of island paradises that are nicer to visit than actually live in.
It is now four decades since New Zealand last did any serious work on our policy settings and, for the first time since the Great Financial Crisis, the majority of New Zealanders say our country is headed in the wrong direction.
Some believe we can get back on track simply by changing the faces in the Beehive. Maybe they’re right, but the overall track is one of gradual decline down from first world status. We are approaching a time when we need to change the track as well as the people leading us down it.
Let me give a few reasons why people might be in despair, at least on the the economic front.
We have less capital to work with than most countries. Foreign Direct Investment, money invested in New Zealand-based firms from overseas, is stunningly low. You can blame it on our isolation, but Australians get 80 per cent more FDI per capita. You can point out that Australia’s mining industry attracts investment, but we need a better strategy than waiting for them to run out of minerals before we can close the gap.
Regardless, among small nations, we attract less investment than nearly any small country. Per capita in 2019 we attracted $860 of Foreign Direct Investment. Israel attracted more than twice that at $1,917. Estonia shows what is possible with good policy, attracting nearly three times as much with $2,400.
Investment capital leads to productivity. We’ve long conceived of ourselves as a prosperous first world country. If it’s good enough for the Americans, Australians, and Brits, we’d think, it’s good enough for us. Today we’re not even close. Our GDP per hour worked in 2020 was $61.88, compared with the United Kingdom’s at $89.76.
People in former communist countries that we used to feel sorry for are now richer than us. Lithuania’s GDP per hour worked is at $65.14.
The result is that people can earn more for doing the same thing in a different place. Once that offer’s on the table, some of them leave, and training people for export is incredibly expensive. It’s worse when you consider those who leave and those who stay are self-selecting. If we say we’re a nation of movers and shakers filled with people who had the initiative to move here, then we have to accept the same logic applies when people start to leave.
ACT estimates that 23 per cent of people born in New Zealand live outside the country. In case you’re wondering, that’s based on 3.4 million New Zealand born residents at the last census, and an estimated million Kiwis overseas.
The choice we now face in stark terms is the same as we faced a generation ago in the early 1980s. We keep viewing wealth as a fixed pie to be divided up at each budget, and gradually decline out of first world status. We break the promise of New Zealand and watch a spiral begin as people leave with their skills, reducing the pool of talent for meeting our obligations and providing opportunity. That means higher taxes for those who remain, and so it goes on.
The problem with modern budgets
The discussion over the budget can be nauseating. All we hear is how much people ‘get.’ We never hear what kind of values we want to underpin our country, or who we want to be. If elections are an advance auction in stolen goods, then budgets are time to divide up the loot.
Last week in Parliament, Grant Robertson was asked about tax cuts. He said, and I quote, “That doesn't seem to me like a good use of the Government's resources...” Think about that for just a moment. People joke about giving the Government all our money and them deciding how much we get back. Mentally, at least, Grant Robertson’s already there. Letting you keep more of your own money by not taxing you in the first place is a ‘use of the Government’s resources.’
When politicians get interviewed, they are endlessly asked ‘but how much would someone on salary ‘x’ get?
Here is how you should answer that question. With Labour’s tax system, someone on $30,000 a year with no children pays $4,270 in tax. That’s an average tax rate of 14.23%.
By contrast, someone on four times as much ($120,000) with no children would pay $30,519 in tax. That’s an average rate of 25.43%. They are paying 7x as much tax on 4x the income.
With ACT’s changes to the tax system, those two taxpayers would pay $4,184.42 or 13.9% and $25,984.32, or 25 per cent in tax respectively. That means both get a tax cut and, on 4x the income, the second taxpayer would now be paying 6x the tax. That’s a fairer result, but much more mildly so than what we hear in the media.
Instead of the dismal drone of who-gets-what, we need to ask who we want to be as a country. Do we want to be a first world destination for people with skills and capital to come to and remain in, or not?
What a budget needs to do right now
The budget we need is one that delivers real change in key areas:
- First and foremost it needs to kill inflation and the expectation of it dead before we hit a wage-price spiral followed by stagflation. Deficit spending means that the Government is driving inflation and the Reserve Bank needs to do all the work. I don’t agree with Adrian Orr on everything, but he’s right when he says that ‘monetary policy needs friends.’
- Second, it needs to give hope and relief to all those families who are battling away and wondering why they bother. There needs to be light at the end of the tunnel right now, that if you strive and do the right thing for yourself and your family, you are not going to be fodder for New Zealand’s ongoing handout culture.
- Third, it needs to secure the future by making our fiscal settings sustainable and making key long-term investments. We need to know that there is a long-term future in our country that doesn’t involve going broke or being taxed to death to avoid going broke.
- Finally, and by far most importantly, it needs to show how we are going to change our culture so that work, saving and investment are at least as rewarding here as elsewhere. To overcome our inherent disadvantages of size and isolation, we need to make sure that our spending is high quality, our tax system is competitive, and our regulatory environment is welcoming.
Those are the goals of ACT’s Real Change Budget, and now please let me set out how we’d achieve those goals.
How ACT’s Real Change Budget Would Work: Immediate fiscal restraint to tame inflation
ACT’s Real Change Budget gets the Government’s books back in the black immediately. It reduces spending by $6.8 billion. It invests a further $1.3 billion into long term strategic objectives for infrastructure, defence, and education. In total, it reduces spending by a net $5.5 billion. With tax cuts of $3.2 billion, we go from a billion dollar deficit to a $1.5 billion dollar surplus this coming year, reducing the fiscal impulse by $2.54 billion and giving taxpayers back $3 billion to cope with rising costs.
The alternative is continued fiscal impulse that will leave us with higher mortgage rates and ongoing pain that makes emigration more attractive for skilled Kiwis.
From six tax rates down to two, for fairness, simplicity, and competition
Michael Cullen inherited a simple tax system with two personal rates, 19.5 and 33. There was also a Low Income Rebate giving relief only to those who needed it.
Since then, successive Labour and National Governments have made our tax system more complex and less efficient. We now have six tax rates. Five personal income tax rates from 10.5, 17.5, 30, 33, and now 39. Then there’s the company and trust rate at 28 giving us six tax rates in total.
The result is endless opportunity for tax avoidance, and that is not productive activity. But there is something else that happens when you have six tax rates. Psychologically, it tells you that the money is not yours. We tell kids to study hard, work hard, save hard and invest carefully. Then the Government’s tax system ensnares them in a labyrinth of punishment. Talk about mixed messages.
Some people say all that’s fine, so long as we adjust the brackets for inflation. ACT says we need to put the values of aspiration in our tax system, make it fairer, simpler and more competitive.
ACT’s tax policy shows how we can get back to two tax rates. The top rate would be 28 cents. Aligning it with the company rate would massively simplify many people’s taxes.
The bottom rate would be 17.5 cents. That is an increase in the rate for income from $0-14,000. Doing so would raise around three billion. That allows us to do two things.
People on earning between $2,000 and $48,000 get a Low and Middle Income Tax Offset of up to $800 that offsets the additional $980 in income tax. They also receive an additional $287 in Carbon Tax refunds for every household member, leaving them better off overall.
That offset costs $1.75 billion. That leaves $1.25 billion that can be used to reduce higher tax rates.
Altogether, ACT’s tax swap leaves nobody worse off. In fact, everybody is better off. That’s the answer for the ‘who-gets-what-in-the-budget’ brigade.
In addition, we would reverse Labour and National’s assault on landlords by removing National’s bright-line test and reversing Labour’s mortgage interest deductibility changes.
The more important answer is that we are making the tax system simpler, fairer, and more competitive for the whole country and its future. Now I’ve put it that way, let me turn it around. Can we really afford not to have a simpler, fairer, and more competitive tax system, or is New Zealand too rich already?
Extending the mixed ownership model, for less debt and higher productivity
The Mixed Ownership Model has been an enormous success. It is a politically durable and economically robust compromise between state ownership and privatisation. It drives productivity by applying market discipline to firms and provides cash for government debt repayment, while reassuring those skeptical of privatisation that the majority stake remains in public hands. It has the additional benefit of deepening New Zealand’s anaemic capital markets with new listings on the NZX. Based on book value, the sales would raise $8 billion to reduce government debt.
Best of all, it is a policy that Labour invented for Air New Zealand, so there should be a broad political consensus around it.
The question should be, can we afford not to apply it to more SOEs that are engaged in commercial activity? Assure Quality, New Zealand Post, Kiwibank, Transpower, Kordia, they are all good businesses, or have the potential to be. So why shouldn’t Kiwis be able to buy in to them?
The alternative is to keep $8 billion dollars of debt on the government’s books as interest rates rise, and give up on the opportunity to make key companies more efficient. When you put it that way, a better question to ask might be: Can we afford not to do this, or is New Zealand too rich already?
Facing reality to make superannuation sustainable
New Zealand is becoming a global outlier when it comes to our superannuation age. Australia, the U.K, the U.S, Germany, Ireland, Italy, the Netherlands, Norway, Spain among many other countries have, or are raising their retirement ages to 67 or 68.
The demographic dividend of the baby boom is now counting against us. When a baby was born in the 50s, they could expect to live to 69. Now, thanks to healthier lifestyles and the miracles of modern medicine, life expectancy is 81. People who might have looked forward to four years of superannuation after turning 65 stand to collect 16 years’ worth.
At the same time, the number of taxpayers to support them is dwindling. The baby boom peaked with 27 births per 1,000 of population in 1961. Today that figure is 12. By any measure, the commitment of successive Prime Ministers to keep the retirement age at 65 is blind and irresponsible. It is contemptuous of younger taxpayers.
Perhaps it has been a political hot topic because some people, perhaps intentionally, present raising the pension age as a sudden shock. ACT’s approach is to start early and raise gradually. That is a better option than waiting until some future crisis imposes exactly the sudden shock they are so fearful of.
ACT’s Real Change Budget would begin raising the pension age from 65 immediately, but very gradually. It would raise the age by two months every year until it reaches 67 in 2035. After that, the age would be indexed to life expectancy.
The effect on those already retired would be nothing. Nothing changes for them.
Someone who is currently 59 would be eligible at 66 instead of 65, in seven years instead of six. Someone who is currently 53 or younger would be eligible at 67, in 14 years instead of 12.
We hear people say it’s not possible for people with physical jobs. I have some sympathy for that view, but I think it’s overstated. Do you really want to be getting up on the roof one more time at 67? The truth is that people change careers and get out of physical work before 65. If you can still work at 65, chances are you can still do the same work at 67. That’s how people have dealt with it in all those other countries.
We would also decouple KiwiSaver from the superannuation age. You would still be able to access KiwiSaver at 65 like now.
This change would save $16 billion over the 12 year adjustment. That is $16 billion less debt for working taxpayers. Once again, the question has to be, can New Zealand afford $16 billion of extra debt to pay superannuation to people who on average will live another 16 years, or is New Zealand too rich already?
Stopping wasteful expenditure to show taxpayers some respect
Of course, you can’t cut taxes, reduce debt, and increase some expenditure in some areas without reducing it in others.
We make no apology for reducing wasteful spending across the board. Altogether, we reduce expenditure by $6.8 billion in the first year. I won’t give a full list, it is in the document on our website, but here are some of the reductions we believe are necessary if we’re going to kill inflation and show hardworking taxpayers some respect in the way we use their money.
We should not have a Government that borrows money to save. That is illogical, but it is what we’re doing when the Government spends a billion dollars a year on KiwiSaver subsidies.
We should not have a Government that gives cash to businesses in an overheated economy. Nor should we assume politicians or officials are better investors than the people who earned it. But that’s what one-and-a-quarter billion dollars of corporate welfare amounts to.
We should not be spending half a billion dollars on a winter energy payment that goes to millionaires and beneficiaries alike. ACT saves $200 million by repurposing it as a winter hardship payment that goes only to beneficiaries and those over-65s with a community services card.
We should not be spending three quarters of a billion dollars on a Fees Free scheme that mainly benefits kids from middle and upper middle class homes. If it had increased participation in education by kids with few choices, that might be a good idea, but the Fees Free scheme has done no such thing. It should go.
We should not be spending a quarter of a billion dollars on subsidies and ad campaigns telling people to save energy and paying them to plant trees. We already have a cost of living crisis and every incentive to save energy under the Emissions Trading Scheme. But lame and expensive subsidies is what the current Government does, and ACT says it needs to stop.
Leaving aside COVID and climate spending, the Government is giving itself an additional operating allowance of $4.3 billion this year. That’s up from the $3 billion they budgeted for this year in 2021. We’d keep 20 per cent of that difference to cover the costs of inflation, still leaving with an operating allowance which is $1 billion lower than labour’s.
I could go on. It is not difficult to find examples of spending that just needs to stop if we’re going to have change that is real, and treat taxpayers with a little respect.
Investing in defence, education, and infrastructure to secure the future
There are some areas where we actually need to spend more. Altogether ACT would increase expenditure by $1.25 billion in the first year, in three areas.
The most important thing that will happen today, so far as our future is concerned, is the quality of learning in classrooms up and down New Zealand. For all the fads and change coming out of Wellington, nothing matters more than the quality of teachers.
ACT says they are underpaid, and we have reserved $250 million, around $5,000 per teacher, to pay teachers more. We would not, however, feed it into the current union dominated system.
We would establish a Teaching Excellence Reward Fund, managed by principals. Each principal would have $5,000 per teacher, but they could choose how to distribute it according to schools’ priorities. They could prioritise Science, Technology, Engineering and Maths teachers, who are harder to attract. They might prioritise those who contribute to extra-curricular activities, or mentor other staff. In short, it would bring a long-overdue reward for teachers, but do so in a way that improves the quality of teaching overall.
The world has changed beyond our border. We need to reinvest in the ANZAC alliance, and that starts with matching our neighbours at two per cent of GDP defence expenditure. It would put us in a position to invest towards being part of an inter-operable ANZAC defence force in the South Pacific. The alternative is that our allies give up on us in an increasingly dangerous world.
Finally, we would invest in local infrastructure by sharing half of the GST collected on construction activity with the council that issued the consent. This would simultaneously give councils the incentive and the means to allow development. Initially this would be offset by repurposing the Housing Acceleration Fund, in the long term it would share approximately $1.4 billion per year for local infrastructure.
Together these initiatives help secure a better educated, safer, and more affordable future for New Zealanders.
Immediate non-financial reforms for investment, jobs and growth
Most of the budget is about fiscal decisions, bit there are also immediate changes we need to make if our economy is going to attract investment, jobs, and growth to our shores.
It’s too hard to send investment to New Zealand. According to the OECD, it’s easier to invest in Myanmar, China and Saudi Arabia than New Zealand. ACT would remove Overseas Investment Act restrictions for investment originating in friendly democratic, OECD member countries. We need to show the world we trust them and are open for business.
We would reverse the oil and gas exploration ban that has done so much damage to our reputation as a trustworthy jurisdiction to invest in.
We would repeal the woefully bureaucratic Zero Carbon Act that simply replicates the efforts of a capped Emissions Trading Scheme.
We would abandon the mysterious ‘immigration reset,’ and focus intensively on getting Immigration New Zealand to actually help people immigrate in a timely manner.
We would reintroduce 90-day trials and put a moratorium on minimum wage increases so it is easier to hire people, especially those that employers might hesitate to take a chance on, also known as those who need those chances most.
Conclusion
Our country is in real danger of slipping away from first world status. We cannot afford another business as usual carve up budget. Real change means a budget that stops asking who gets what this year, and asks who we want to be for years to come?
The simple question is, do we want to carry on in comfortable decline, or do we want to seize the initiative and make our country the preferred destination for talent and investment to stay in and come to?
Altogether ACT’s Real Change Budget would deliver the following:
- Debt under ACT will be $15 billion lower in 2025/26 than under Labour. That’s roughly $3,000 less per Kiwi and saves us over $200 million a year in interest.
- ACT will be back in surplus this year. Labour says it will be back in surplus by 2025.
- The tax burden per New Zealander will be $1,236 a year lower in 2025/26 under ACT than under Labour.
- Selling the SOEs will raise around $8 billion. The Government will lose about $100 million in annual profits.
- Raising the Super age saves $500 million a year by 2025/26. Over 12 years, it saves $16 billion.
The real question is, can we afford not to do this?