Today saw the release of the OECD report about Aotearoa New Zealand. As a part of being part of the rich countries club, we get a regular economic check up from the OECD doctor. So, everyone please pop on this robe, hop up on the table, take a deep breath and give us a cough…
Compared to the rest of the world, we are in pretty good shape – growth is relatively high and we have avoided the debt crises of America and Europe – at least, so far. However, several of the OECD’s warnings suggest we may not be totally immune to the afflictions facing other rich countries.
As a country we have several problems that are too politically contentious for the Government to touch, and their short-term expediency could cause us bigger problems in the longer term. Solving these problems would not hurt our growth as the Government claims – in fact they would almost certainly enhance it in the long term. Much like cutting out the sugary drinks to stave off diabetes, in economics an ounce of prevention is worth a pound of cure.
The problems highlighted by the OECD will be familiar to most regular Morgan Foundation readers; including the housing and land bubble, obesity, transport and planning, the environment and inequality.
Everything in the garden is rosy… or is it?
The Government will have a lot to crow about in this OECD report, and they will no doubt focus on the positive. Growth and employment are relatively high, mainly because the rest of the developed world is doing so poorly. As far as things go, the people of Aotearoa New Zealand are pretty well off; happy, healthy and well educated. Where the OECD has pointed out weaknesses, the Government can point to some action in those areas. But are they doing enough to solve the problem, or are they just doing enough to be seen to be doing something? Let’s looks at the main issues in turn.
Risks from dairy and housing boom
The Auckland housing bubble is merely the latest in Aotearoa New Zealand’s long running obsession with property. It’s most recent cousin is the boom in the price of land that is being used or could be used to farm dairy. Both of these bubbles have created financial risks for the country. This is why the OECD is worried that if our economy is hit by shocks from overseas – for example if dairy prices stay low – these bubbles could pop and we could be in trouble.
Of course, the real cause of these problems is the tax loopholes around housing and land, which encourage people to overinvest in these assets compared with others. Supply may be part of the problem in Auckland, but it is not the whole issue.
In response to this issue the OECD have suggested we look at land and capital gains taxes. Both of these taxes deal with part of the tax loopholes, and in the case of the capital gains tax can be complex to administer and cause some perverse outcomes. Instead we have suggested a Comprehensive Capital Income Tax that would cover all the loopholes that exist and put investing in housing and land on a level playing field with other investments – such as businesses. This would provide much needed investment for our capital starved business sector.
Aotearoa New Zealand is one of the fattest countries in the OECD, and that is expected to eat into our growth rates in coming years. The major issue is Type 2 diabetes – a condition that is often caused by diet. Rates of Type 2 diabetes are predicted to go from 1 in 20 people to 1 in 3. This could not only cripple the people who develop the condition – side effects include blindness, amputations and heart attacks – but also our economy. Having so many people with diabetes will reduce our country’s output at a time when we will sorely need people working to pay for our ageing population. Like smoking this problem will require many solutions, but ultimately a junk food tax will be needed if we want to change people’s behaviour.
Climate Change and Water Quality
The OECD is a pretty conservative outfit, dedicated as they are to the pursuit of economic prosperity. So you know when they speak out on something it is not a left wing conspiracy. They point to the growth in our carbon emissions and deterioration of water quality as key concerns. Their suggestions echo those of the Morgan Foundation, calling for the end of the Government’s 2 for 1 offer in the Emissions Trading Scheme, and for greater national guidance in the implementation of water quality guidelines.
The one issue we don’t fully back the OECD on is bringing agriculture into the Emissions Trading Scheme. Methane is a very different gas, and should be dealt with in a different way.
Transport & Planning
According to the OECD Auckland and Wellington are the 2nd and 3rd most congested cities in Australasia, behind Sydney. This places a huge cost on our economy and society. In response, the OECD has suggested greater guidance on planning so that NIMBYs can’t prevent development in inner city suburbs (note they aren’t recommending reforming the Resource Management Act) and greater use of congestion charging in our largest cities.
The OECD has jumped on our growing income inequality as a sign of problems emerging. Their focus on income inequality has come about because it is the only measure available in Aotearoa New Zealand. The real issue here is equality of opportunity, and here the OECD is right to point out here that our education system struggles to improve the lot of students from poor communities. Poverty is probably a big part of the problem here – people simply don’t have the income to provide the basics they need for kids to flourish. The education system itself may also be part of the problem.
And remember – the greatest driver of inequality is actually the housing market!
But I don’t want to pay more tax!
Of course, many people oppose new taxes on principle, but this position is founded in ignorance. If you are worried about new taxes, simply use the money to reduce other taxes. For example a CCIT would raise $6-8 billion – this money could be used to reduce GST by almost half, or income tax rates by a quarter instead. This would ensure that the package is neutral overall. Given that all the taxes proposed here would boost our long-term growth we would all be better off in the long term.