Gareth Morgan, Director of Gareth Morgan Investments
The last week has seen serious cracks emerge in the government’s ability to continue the reform process. Health Minister Upton demonstrated an inability to effect supply process reform in that industry with his piteous “social insurance” concept. The critics correctly pasted it as little more than an extra tax to pay for an ever-avaricious public health system which, like any business requires to be accountable for the resources it is swallowing. Charging customers for services provided is a prerequisite for efficiency maximisation. Given the tax load our legacy of open-ended, State-provided welfare transfers, education and health industries has produced, Upton clearly is exhibiting deficient skills for the reforms required.
Then the National Cabinet, apparently accepting Upton’s suggestion as a true reflection of the scope of reform in Health, without subjecting it to even rudimentary criticism, is now veering towards a general tax increase as a more transparent way of addressing public sector financial difficulties. Clearly, the government recognises that its current policy path is not providing a politically acceptable mix, and that their tenure will be short, however awful Labour looks now. Sir Robert has even formally warned his leader of the Richardson liability. Such cracking in National’s ability to address the economy’s ills and simultaneously hold together political support, is precisely the disintegration addressed in this column over the last two weeks.
If the goal is an improved economic performance rather than merely the rescue of politicians’ skins from intensifying criticism, then National had better urgently produce a coherent economic policy package. It has been obvious since December 19 that the emphasis on fiscal retrenchment and labour market reform as the sum total of their policy contribution, would be deficient both economically and politically. That Richardson and Shipley both favour greater reductions in welfare payments area is commendable in that it must occur if the fiscal imbalance is going to be tamed from the expenditure side, but their policy mix lacks balance.
NZ politicians need to look at the policy recipe that is proving successful in dragging Asian economies towards industrial maturity and economic wealth. Inevitably the fiscal bias in such nations is to use tax revenue to fund education, and industry policy and to minimise, even avoid, funding a welfare state. Direct funding of the latter within the private household sector is the manner favoured by those maturing industrial economies that continue to whip us in the international marketplace. Only in the matured industrial states do we find a profligate welfare state. And a mature industrial state NZ certainly is not. It remains predominantly, in terms of world income earned, a commodity economy.
The political urgency for government to balance the welfare state austerity measures with pro-active industry policy is mounting. Without recognition of this soon, it is becoming more and more likely that policy is going to fall back into the hands of Muldoonists. A credit downgrade at this time could ironically be a good thing for NZ. It may be needed to galvanise policy priorities.