Economic growth: a dialogue of the deaf

There is a problem with the growth argument. Different people mean different things. The result is a dialogue of the deaf.

ACT, the National party, the Business Roundtable and Business New Zealand want company and personal tax cuts, deregulation and privatisation and less state spending.

National’s Don Brash fixates on the Treasury’s technical projections in last year’s Budget of 2 per cent growth at the end of this decade. That would take us back down the OECD ladder.

ACT says slashing tax, particularly company tax, would unleash a surge of business activity which could get us into the top half of the OECD in 10 years.

Even the government’s helpmeet, United Future, wants company tax cuts and less regulation.

Such talk sets the government’s teeth on edge. This is for two reasons.

One is ideological. Labour and the Progressive Coalition philosophically oppose National’s tax cuts and selling state companies and are philosophically committed to more support for employees and the less well off.

The second reason is practical politics. The 1999 election reflected widespread discontent with the social upheaval and income disparities which accompanied the 1980s and 1990s policies. Revival of such policies risks a backlash at the 2005 election, especially against a left-of-centre government.

The government’s peace of mind is not eased by general agreement among economists that its policy settings are unlikely to lift productivity growth enough to get us growing significantly faster than the OECD average and so climb up the ladder.

In fact, the government has now fudged its target. Once it said it wanted back into the OECD top half by early next decade. Then it said it would take 20 years even if productivity growth doubled — a very tall order. Now it is not putting a date on arrival and has toned down the rhetoric. As it has fudged, so it has become short-tempered with critics.

It has focused on affirmative interventions: infrastructure, education and skills, research, commercialisation of research, promotion of joint ventures and big investments, especially by foreign companies (some tax moves are under development) and connecting up with high-flying New Zealanders overseas. There is a long and busy list, though it is still relatively modestly funded.

Its tax priority is designed to improve the position of low-to-middle-income families. Compared with similar countries New Zealand taxes these families highly and people without children relatively less. In effect, because adults with dependent families tend to be younger than those without, there is a generational transfer — especially so since Michael Cullen is raising more tax overall than he needs to in order to fund his super fund.

The government is also determined to try to meet health care demand out of state coffers. This is for both ideological reasons — a strong belief that health need should be met by the state — and the practical reason that health is a perennial bother at election times. It is also committed to improving social assistance.

Amid all that is a bothersome fact of life: business must not be discouraged. Without the goose in fine fettle, there is no egg, golden or otherwise and it needs that egg to satisfy its social ambitions.

It all adds up to a short fuse.

In fact, most thinking people in business recognise they have got Labour for another three or six years and are not going to convert it to tax cuts, deregulation and privatisation.

Advocacy of such measures is now mostly aimed at tempering some of the re-regulation (for instance, in the new Holidays Bill and the redundancy law to come) and at prodding National back to the faith — much as the unions kept up their rhetoric in the 1990s, knowing they could not covert National, to bring Labour back into the fold.

To have practical effect, many thinking people in business now focus more on getting the government to inject more urgency — and so more resources — into its affirmative measures, particularly in research, education and skills development and the pitch for foreign investment.

You might think the government would be at ease with that. But urgency requires hard choices — diversion of resources from health and social assistance. Instead of incremental steps across the board, social and economic, it means more on the economy and less on social measures.

That, too, infuriates the government. And it doesn’t help that often when it hears “urgency” it translates it as “tax cuts”.

Fury leaves little room for reasoned discussion. So instead of a debate on growth, we have an argument. That’s politics.