Simon Power's big job: getting regulation right

What makes an economy rich? Resources, luck, the population’s mindset and energy, infrastructure (including human capital) and institutional settings. Governments can do little or nothing about the first three. So if John Key is to make good his vaunted “ambition” and enrich us, he must improve infrastructure and hone institutional settings.

Key has promised additions to Labour’s infrastructure and human capital programmes. But on institutional settings he was bland pre-election and post-election he has taken to not ruling things out — even a carbon tax.

Prime Ministers have to rule things out — and in. A good time to start is on the honeymoon, when voters are still smoochy. A bad time to start is in a second term when electoral leeway is tighter.

Institutional settings include taxes, management of government agencies and their dealings with citizens, who delivers social and other services — and regulation.

That is where Key’s agreement with ACT focuses. ACT is not bland. Nor are some of those in line to join the agreed advisory group to track progress.

National is cutting personal tax faster than Labour, plus making a start on eroding Working for Families by way of a new tax credit for non-family workers and KiwiSaver by way of a lower compulsory contribution and smaller tax credits.

Though modest, this fits the theory that economic efficiency (as distinct from social equity) is enhanced by a “broad-based, low-rate, tax system”, as agreed with ACT, with income thresholds for higher rates adjusted to offset fiscal drag. That is where National is pointed in a second and a third term.

On management National focused pre-election on head office “paper shufflers” and “waste”, vowed to redeploy resources to the “frontline”, to deliver more services via the private sector and not-for-profits and draw more on their initiatives. It has since agreed with ACT private-sector-led “task forces”, now being appointed, to drive out waste.

Ministers are likely to find a lot less waste than they trumpeted. Measuring policy analysis and administration is hard and private sector measures don’t readily translate to the public sector. Having too few policy analysts proved counterproductive in the 1990s. Too skimpy administration undermines the front line.

So if in time ministers are, as agreed with ACT and United Future, to get all top tax rates to 30 per cent, they will have to significantly curb services (or just pile up debt).

National promised not to cut services this term but does aim meanwhile to redefine the outcomes it seeks. Logically, that will determine priorities and programmes in a second term.

National promised no selldowns of state-owned enterprises (SOEs). Key explained this trampling on his own once-definite preference as not needed to pay down debt. But debt was only part of the 1980s-90s sales rationale. Equally important was optimal use of assets and better financial oversight.

That logic points to SOE sales and selldowns in a second term. Firing Labour’s political appointees on SOE boards and building on Labour’s permission to buy and sell subsidiaries and do joint ventures will go only so far.

Some “privatisation” is planned. The ACC work account is to be opened to private insurers. But Infrastructure Minister Bill English has yet to make clear whether he will allow private financiers to own roads they build and operate under public-private partnerships.

The most complex institutional design issue is regulation. And there ACT’s Rodney Hide has a special interest, having promoted a Regulatory Responsibility Bill last term and secured appointment as Regulatory Reform Minister.

Commerce Minister Simon Power did draft a regulation policy but the credit crunch excitement swamped it and it was never published. Hide put out a tough, precise policy.

The theory is that if you get the law right the private sector will flourish and the country will get richer.

The easy bit is to make all law, regardless of substance, as simple as possible to comply with. If firms and individuals spend a lot of time and effort on compliance, any hoped-for economic or social benefit of the law might be swamped by its economic, and in some cases social, costs. Power will continue a promising process Labour’s Lianne Dalziel adapted from Australia’s Productivity Commission.

The harder bit is substance. Hide’s bill was deemed unworkable but its core idea, that a law’s benefits must be shown to outweigh costs, is still live. That is intellectually challenging in theory and administratively challenging in practice. Much depends on assessors’ assumptions. Much depends on the quality of public servants and the quality and determination of ministers beset by sectional interests and voters’ vagaries.

Power’s top job is that substance. He must manage his and Hide’s ambitions into high-quality law which will realise Key’s “ambition” but also keep Key, and himself, in power. At 39 this Friday, Power is a most important chap.