A Line in the Sand?    (25 July)

Goods and Services Tax (GST)     (25 July)

On Media Gullibility    (24 July)

Jenny Shipley will NOT call an Early Election    (23 July)

Stationery Prices rise 14% as Demand Falls    (15 July)

A Realistic Wish-List for Tau    (15 July)

Let Democracy Prevail    (10 July)

Selling Public Assets such as Auckland's Airport    (7 July)

Do New Zealanders Pay too much Tax?    (2 July)

Do the Rich Pay Twice?    (1 July)

Saving AND Spending Today's Tax Cuts    (1 July)

A Line in the Sand?    (25 July)

The Herald's political editor (25 July, p.A4) followed his peers in failing to even fall for Mrs Shipley's bluff, let alone see it as bluff. Perhaps the Parliamentary Press Gallery are too busy to play poker? Yet they must realise that politicians play something akin to poker as part of their job description.

The following is the key text of the Prime Minister's comments of 23 July:

And 24 July: [*]

The two statements are not at all contradictory. The dumping of Tau Henare as deputy leader of New Zealand First was a political sideshow with some important longrun implications for Maori politics.

In her third statement on the matter, she said yesterday that Thursday's statement was considered and was intended to draw "a line in the sand for New Zealand" (and more particularly for New Zealand First, meaning both Winston Peters and Tau Henare).

This is of course the message that the public, the media, and New Zealand First were meant to get. I have no doubt that New Zealand First did get that message.

Nevertheless, the message is 98% bluff. Now is the time that both factions of NZ First should be pushing hard to get everything they can for their constituencies. They should be crossing that line in the sand, because, at least with respect to policy, it's not really there. (Peters, on the other hand, has his own line in the sand re Tau Henare being seen to be dividing Peters' party, and that line is real.)

Mrs Shipley will not dissolve the coalition, because of the APEC conference due late next year.

Peters and Henare, behind closed doors, have the power to thwart National's economic rationalist policies while pushing through some of their own. I think they know that Shipley's line in the sand, inasmuch as it exists at all, is quite elastic with respect to policy. Indeed, the Prime Minister will be happy for some of their populist achievements (such as the throwing out this week of Max Bradford's attempts to trade off public holidays for cash, and the softening of the community wage proposals re sole parents) to rub off onto her in the runup to an election that will probably be held in the first week of December 1999.

Mrs Shipley was given the job of Prime Minister so that National can gain enough seats to form a government after the next election. Her message to New Zealand First is, 'please, no more sideshows'. Through her recent statements, she is reminding them that the stakes are high for both parties in the coalition.

* The Prime Minister has no power to initiate a general election under the MMP electoral legislation. The power resides with the Governor General, who, rather than call an election, would normally try to seek an alternative government that could gain the confidence of Parliament. [back]

Goods and Services Tax (GST)    (25 July)

The following request from Laura Smyth of the National Union of Students (NUS) in Victoria, Australia, was passed on to me:

Yesterday we had a report released by two Massey University economists. It is called "SHARING THE NATIONAL CAKE IN POST REFORM NEW ZEALAND: INCOME INEQUALITY TRENDS IN TERMS OF INCOME SOURCES" by Srikanta Chatterjee (S.Chatterjee@massey.ac.nz) and Nripesh Podder. It is available on Massey University's web page ( http://econ.massey.ac.nz/ ), readable with the help of "acrobat reader".

This gives the most comprehensive picture yet of the huge increase in inequality that has followed the "reforms" that began in 1985, following the Labour victory in the 1984 election.

GST was introduced in 1986 at 10%, and was introduced alongside a set of cuts to income tax that favoured high income earners. At the time it was introduced there was a sound argument for bringing the top tax rate down from 66% to 48%, and there was a sound argument for introducing a wider range of taxes, with some kind of retail tax or value added tax (VAT) being the only real choices mooted then. (We have since had a third choice, a Financial Transactions Tax, which is the policy of the left-wing Alliance Party.)

In 1986, wage increases and benefit increases largely protected lower income persons. But in 1989, when GST (which is a VAT) was raised, there were no compensations. In the meantime (1988) there was a huge cut in income tax - to a top rate of 33% - which could not have happened had GST not been introduced in 1986.

In assessing the Australian proposal, it will be necessary to (i) consider what taxes the new GST is replacing, (ii) what exemptions there are, and (iii) what may be done in future once a GST is in place.

In NZ, unlike Canada, there are virtually no exceptions. Thus all food is subject to a 12.5% GST.

In NZ, GST was used as a means of cutting income tax, especially as a means to reduce the top rate and to raise the amounts of earnings before the top rate took effect. But in Australia it may be replacing a raft of retail taxes. It may well be that the GST would be better than those retail taxes. GST is a really big problem when it is being used as a vehicle for cutting into income tax rates. Top tax rates in Australia are lower now than they were in New Zealand when GST was introduced.

Theoretically GST is harder to avoid than simple retail taxes; there is less incentive for tradesmen to do the "cash jobs" that make up much of the informal economy. GST is subject to quite a bit of fraud however. This occurs when firms make false claims for GST rebates. Because GST is a value added tax, firms are entitled to GST rebates on their purchases.

In NZ, the 'economic rationalist' Act party believes that tax in NZ should be 20% of GDP, and that the 20% should be almost entirely GST. They want to give up income tax altogether. Indeed there is a media campaign in New Zealand at present to reduce taxes from around 35% of GDP to 20%.

Act is expressing a set of views which are very influential in the big business community. Trans-national corporations in particular would just love New Zealand's tax burden to be borne by New Zealand consumers, and not by producers such as themselves. Inasmuch as the Australian GST proposal may also be part of an anti-income tax agenda, it needs to be opposed vigorously.

(Income tax is really production tax, and ALL income tax - not just corporate tax - represents a cost to producers; ie the income tax that each wage/salary earner pays is a cost incurred by employers. That's exactly as it should be, because employers use many public domain resources for free. Income tax can be understood as a charge on all productive resources that are not subject to capitalist ownership.)

To conclude, the flipside of introducing GST is tax cuts elsewhere. Thus a campaign on GST should look broadly at how all the different taxes will hang together once a GST is in place. It should not focus too narrowly on GST itself. And vigilance should be maintained beyond the introduction of a GST. There is always a danger that income/corporate tax will be subject to ongoing incremental cuts with GST being raised in similarly small increments.

On Media Gullibility    (24 July)

I continue to be amazed at the inability of many of our media commentators to read political statements. This morning, Radio New Zealand's Al Morrison and Kim Hill confessed to total confusion over Mrs Shipley's statements yesterday. This morning the Prime Minister appeared to retract yesterday's statement. Morrison thought that Shipley was quibbling over the words "early election" vs. "snap election". On the contrary, Shipley's key word was "contemplate". Last week, she said yesterday, she contemplated dissolving the coalition, thereby precipitating an early election. The statement was very much in the past tense, meaning that she had ruled out that option. Naturally she could not have ruled the option out without having contemplated it. (No person can reject anything that has not even crossed their mind.)

Shipley's statements are delightfully ambiguous; the hallmark of a very capable political operator. She is indeed giving us the "creativity" that she promised at 7pm on election night 1996. That is why she will be a potent political force for a while yet. Our cynical yet gullible media would do us a great service if they could learn to interpret political statements.

Media gullibility can have unfortunate consequences. For example, the perception in the 1996 election campaign that NZ First would never form a coalition with National represents a media interpretation of Peter's position. This media view of Peters as a negative politician - anti-National rather than pro-something - has in turn led many people to make MMP the scapegoat. The public was truly surprised when NZ First made overtures to National after the 1996 election. The public should not have been surprised.

I watched Peter's carefully during the run up to the election, and I never saw him make a commitment to not form a coalition with National. Most of the time during the election campaign he frustrated interviewers by absolutely refusing to name his preferred coalition partner. Sure, Peters made a number of comments which he knew to be ambiguous. He, like Shipley, is a clever politician.

All successful politicians have to master the art of ambiguity; they have to placate a variety of different people or interest groups, each wanting to hear something different. It is the job of the media to place political statements in their context; to empathise with each of the different interest groups to whom these statements are directed and not to behave as if they are one of those interest groups.

Jenny Shipley will NOT call an Early Election    (23 July)

Jenny Shipley 'let slip' that she considered calling a snap election last week. She's clever. This 'side-show' is no accident.

Comment that I've heard so far suggests that it was a mistake on her part. On the contrary, she wants the public in general and New Zealand First in particular to believe that any problem faced by National in getting its programme through will, potentially, precipitate an election.

Of course, an election is the last thing she wants. This Government wants to be there, on the international stage, when the APEC meeting is held at the end of 1999. I am sure that Shipley's biggest nightmare is an image of Helen Clark on the podium of APEC, sharing the limelight with William Jefferson Clinton and Boris Yeltsin.

I don't believe for a moment that she considered calling an election. But she has every reason for wanting us to believe that she will call an election if the people whose votes she depends on 'misbehave'.

Most of us think twice about rocking the boat when the stakes have been raised. She knows that.

PS Later comments on this story are here and here.

Stationery Prices rise 14% as Demand Falls    (15 July)

From Statistics New Zealand, Consumers Price Index (CPI) Press Release 15/7/98:

Supply and demand theory is predicated on the view that prices for a commodity rise when there is an increase in demand for that commodity. The textbook would say that school stationery should be more, not less, expensive in the March quarter.

It appears that the simple theory is correct only when the demand rise is unanticipated. Even when unanticipated, a price rise is only likely if new supplies cannot be ordered quickly.

Pricing is, more often than not, a matter of second-guessing the responses of other suppliers to likely changes in demand. Over-ordering by each individual supplier, in anticipation of increased demand but failing to anticipate over-ordering by competitors, generally will lead to low prices. Under-ordering may lead to high prices, but more often will lead to repeat orders. High prices, as per the simple theory, occur when repeat supplies are either delayed or expensive.

In reality, prices tend to fall when demand rises and is anticipated to rise. As well as being due to collective over-ordering (which often but not always happens), this is due to economies of scale (in retailing, wholesaling and manufacturing), and to the reduced times that stock is on the shelves.

These comments can be seen as a part of a case that suggests the Reserve Bank's view of inflation is simplistic. For example, an easy monetary policy (which facilitates higher demand, and is anticipated to do so by suppliers) may actually lead to lower inflation than a tight money policy (which is expected to lead to reduced sales, diseconomies of scale, and high interest costs of maintaining inventories).

Fortunately, the Reserve Bank is now in "easy" mode, and there are no signs of any grounds for them to move back into "tight" mode.

A Realistic Wish-List for Tau    (15 July)

With the huge rift that has emerged between the Winston Peters faction and the Tau Henare faction of the New Zealand First Party, the Maori "tight five" now have the balance of power in Parliament. There is a real opportunity now for a "lurch FROM the right".

Their potential influence is heightened by two reasons why Jenny Shipley cannot call an election. The first reason is the state of the National Party in the polls. The second reason is the APEC conference due to be held in Auckland late in 1999.

My realistic 3-point wish list for Tau Henare:

1. To moderate the Community Wage legislation to make it conform with what is known in the academic literature as "Participation Income". There is much opportunity here for Maori (and non-Maori) cultural activities, when unpaid or underpaid, to be recognised as contributions to society. [See transcript of the June 28 Backch@t interview about acting as a socially useful occupation that requires appropriate recognition by WIA.] The Work and Income Agency criterion for loss of benefit (given that such a criterion will exist) should be that people should lose their benefit only where the Agency can establish that they are participating in activities that constitute social harm. Even then, the emphasis will need to be in guiding such people into alternative socially beneficial activities, with loss of benefit very much a last resort.
2. To delay the implementation of the Electricity Reforms, while an academic study is commissioned that shows the likely impact of those reforms on the present owners of New Zealand's electricity generation and distribution assets, and that shows how the reforms are likely to benefit domestic consumers vis-à-vis corporate consumers.
3. To vigorously oppose any moves to cut the corporate tax rate.

I look forward to 17 months of real influence by Maori in the political process.

Let Democracy Prevail    (10 July)

The fact that Parliamentary and Select Committee Procedures are being abused by this Government (for example, the constant use of "urgency", and the impossibly limited time given for submissions to be heard) is further proof that MMP is effective in constraining the power of privilege in New Zealand. It is because of the more representative composition of Parliament that the rightwing executive is having to reveal political tricks that it would rather keep in reserve.

The abuse of procedure came to a head on 8 July, with the Wellington hearings on the Social Security (Work Test) Amendment Bill. This is the bill that introduces the Community Wage to replace, initially, the Unemployment and Sickness Benefits.

In politics, policy is determined by power, not soundness of argument. The exception is when those in power buy sound argument.

There are three main sources of power: the power of numbers (ie "people power" or democracy), the power of money (plutocracy) and the power of arms (military/police power). Inasmuch as money can buy arms, the latter two can be conflated into one; the power of established privilege.

In any society, the effective political spectrum ranges from the views of the median voter (100% democracy) to the views of the patrician (100% plutocracy). Achieving political change is about both: (i) creating an electoral system which pitches power closer to one's own end of the median voter to patrician spectrum, and (ii) influencing the views of the people who occupy the socio-economic range from the median voter to the "blue-stocking" patrician.

The Left, who represent views that support the interests the politically powerless, require democracy as a necessary (but not sufficient) precondition to political success.

In a 100% democracy, the key to effective politics is persuading median voters that the policy you believe in is also the one that they should believe in. While we still do not have political system of 100% democracy, the switch to MMP was a huge step in that direction. That means, more than ever before, political success lies in selling policies to moderate voters.

So far the Right have been more effective at both strategies; more effective at selling their policies to median voters (although the latest polls suggest a rightwing stumble) and also effective at creating a sense of cynicism towards a proportional representation in Parliament. The Right want an electoral system in which it is only necessary for them to appeal to the richest one-third of voters, and in which left-wing parties can be easily bought off on the few occasions that they do become the Government. (They want FPP or SM, the two most rejected systems in the 1992 referendum.)

The Left remain tactically inept. From what I saw of TV news coverage of the Select Committee hearings on the Work Test Bill, there was no sense that the Left were presenting any arguments that would appeal to the median voter.

At present, opinion in the political centre strongly favours some sort of "contribution for the dole" scheme. There is no chance that that opinion will change this year; opponents of the Bill are not even trying to change opinion in the centre. Therefore, in part due to the tactical poverty of the Left, we will get a "contribution for the dole" scheme this year.

The most practical contribution that the Left can make in 1998 is to ensure that the form of the legislation more reflects the views of the ordinary New Zealanders who occupy the centre ground than it reflects the views of the patricians and their political vehicle, Act. "Contribution for the dole" schemes can vary widely, but you get no sense of that variation from the way the Left opposes them all.

The Left, realising that a "contribution for the dole" scheme will be implemented, should be seeking to moderate the legislation, while also seeking to ensure that the legislation can be modified in one or more steps once median opinion in New Zealand supports such modifications.

If the Left lets proportional representation go - something I fear they will do as a part of some form of short-sighted power play - then, in the future when popular opinion does support the Left's present views on workfare and other matters, then it is likely that political power will no longer reside with the median voter.

Today, and every day, it is much much more important to support democracy than it is to oppose any particular piece of legislation. Unfortunately, in New Zealand, the Left is as ill at ease with democracy as is the Right.

We know that democracy is taking effect when the opponents of democracy indulge in anti-democratic power plays such as the attempts to subvert Select Committee procedures. Democracy forces anti-democrats to reveal their hands.

The majority of New Zealand's people want a "contribution for the dole" scheme. Let's all of us act to make it a good "contribution for the dole" scheme rather than sit back and allow a bad scheme to be implemented.

Selling Public Assets such as Auckland's Airport    (7 July)

There are two kinds of public assets: those that can be sold and those that cannot. The former - the commercial assets - generate income streams we call "profit" and "interest". The latter - public domain assets - generate the income streams that we call "taxation".

Here, I am interested in publicly owned commercial assets.

Once we shift to a proper system of social dividends - and away from the Mickey Mouse system that grants tax cuts to the rich and sells them as growth dividends - we will be able to deal properly with the matter of sales of publicly owned commercial assets.

If we had a proper system of social dividends, the present sale of the Crown's 50% share of Auckland International airport would go like this:

• 100% of the profits payable to the Crown from this asset would stand to be deducted from the pre-sale social dividend payout. Deducting the contribution of the Auckland Airport profits from the social dividend would be a transparent means of showing the cost of the sale to the present owners of the "government's" share.
• All of the receipts from the purchase would be distributed in cash equally to all New Zealanders, freeing each of us to make alternative investments. Such a sale would therefore represent a demutualisation process; a process more transparent than the AMP demutualisation which has been conducted as if there are many winners and no losers.

In that way, the agent conducting the sale - the government of the day - would become a truly disinterested party. The situation would be like any private sale of a revenue-earning asset.

And the situation would in fact be a bit like redundancy pay; the people would gain a lump sum while losing a revenue stream. The likelihood is that people would prefer to retain the revenue stream if they had direct access to it. Similarly, they generally prefer to keep their jobs rather than become redundant, even when redundancy pay is on offer.

If however, one prospective buyer really was going to run the asset much more efficiently, then that buyer would offer a higher price than an alternative buyer who had no plans to increase efficiency. It would then make sense for us to sell the asset, and gain higher income streams from alternative investments.

If it is true; that in practice publicly owned assets are run less efficiently than privately owned assets, then the reason is almost certainly that public owners are less assertive than private owners in securing the revenue (or income stream) that derives from that asset. In other words, there may well be a greater principal-agent problem with respect to commercial assets in public ownership than with respect to such assets in private ownership.

A solution that doesn't require the sale of public assets is the device of a publicly-owned holding company; a company much like the ARST (see Whither the Auckland Regional Services Trust?). There is no reason why the publicly accountable directors of a public holding company would be any less effective than the directors of private holding companies such as Brierleys at sorting out inefficient companies and raising their market value and their revenue streams. Indeed, it may be argued that, since its inception in 1992, the ARST has been more commercially effective than has Brierleys. Much of that effectiveness resulted from a board of directors from 1992 to 1995- dominated by the Alliance Party - that really did act on behalf of the owners it represented.

There is another argument for privatisation; namely access to technology in the control of some or other transnational corporation. This argument is valid to a point, certainly it was valid re Telecom in 1989, but may not be valid re Auckland's airport. Inasmuch as the argument is valid, the ideal ownership structure of any remaining commercial assets in public ownership might be, say, 20% transnational corporation, 45% public holding company, and 35% direct Crown ownership, with the Crown acting as a "sleeping partner". In this way, 80% of the airport's profits would directly fund a portion of our social dividends.

Do New Zealanders Pay too much Tax?    (2 July)

Japan also has more room to raise taxes: its tax burden is only 32% of GDP, compared with 45-50% in continental Europe.
   from "Fallen idol; Japan's Economic Plight"; The Economist, 20 June 1998.

An article in the Sunday Star-Times (28 June, p.D1) claims that taxation in New Zealand represents around 34-35% of GDP. It would prove to be much higher than that if tax concessions were accounted for as benefits, as I believe they should be.

The point here, though, is that Sunday's article is presented as an argument for further tax reductions. In Japan, a marginally lower figure is presented by the conservative yet prestigious Economist as a low proportion of tax.

While there is no doubt that many low income New Zealanders receive very low after-tax incomes by OECD standards, the average level of taxation in New Zealand is not high.

As usual, the only proposals for further reducing tax - and such proposals come in quick succession - reduce tax only for the high income people and established companies who pay relatively little tax in a country that pays relatively little tax.

If high tax is so bad, and low tax is so good, then how come the Western European economies are growing much faster than the economies of Asian nations such as Japan, which experienced a 1.4% seasonally adjusted quarterly fall in GDP, following a fall in the previous quarter? (The fall in New Zealand was 0.9%, and that followed three quarters of strong growth.)

Do the Rich Pay Twice?    (1 July)

The neoliberal Act Party takes the view that people who utilise private health and education services should get compensatory tax cuts.

In a sense such people do pay twice. The remnants of the public system is social wage funded - ie equally funded by all - whereas the private system is privately funded.

However, in most cases, these people are paying for an additional service rather than a substitute service. They still utilise the acute care facilities of public hospitals, and they still benefit from some GP subsidies. And they are not excluded from public schools. The users of private schools, by contributing to the public system as well, are purchasing a separate product from education; they are purchasing exclusivity. They are paying low income families to send their children to another school.

What about elective surgery? People without community service cards have to pay twice for elective treatment in public hospitals.

The problem here is one of targeting. Actually, the people who are grumbling about paying twice are the very ones who wanted targeting of social wage expenditure. They saw that as a means to reduced taxes. Rather than now claiming that targeting is unfair, which is what they are doing in effect, they should be advocating a return to properly funded, fully universal public health and education systems. Then, there would be no question of having to pay twice.

Under such universal public provision, paying twice would be seen, unquestionably, as a matter of choice. Those who make that choice - who choose to pay more for a deluxe service - would not be asking to have their choices subsidised. That's really what Act wants to do: subsidise those who want more, and can afford more without a subsidy to pay for it.

Saving AND Spending Today's Tax Cuts    (1 July)

Do we (ie those of us who get "tax cuts" - really increased tax concessions, or increased benefits paid through the income tax system) save them or spend them?

We do both, says Winston. By putting them in the bank, the bank will ensure that they are spent, by lending the money we don't spend to New Zealand firms.

That's true. Banks may invest our savings productively in New Zealand. But it's equally true that our money will be invested by the bank if we put it in our cheque accounts and spend it. The money then ends up in someone else's bank account. Money in cheque accounts supports lending by banks as much as money in savings accounts does.

So long as there are unemployed resources, it's possible to expand investment expenditure (by firms) without reducing consumption spending. Indeed firms are more likely to want to borrow and invest if people are still spending. More saving, by definition, means less spending. Why would firms invest more if people are buying less?

Interestingly, Peters' central policy plank is to maintain a budget surplus, which means continuance of government savings. When the government saves, it doesn't put money in the bank. It just spends less; that's all.

So Peters' argument is actually a claim that household savings is much better for the country than government saving. Therefore, if we was logically consistent, he would be advocating, as policy, a budget deficit.

In practice, simultaneous non-spending by both government and households constitutes a major disincentive to firms to invest, regardless of how much money is sitting in bank accounts waiting for firms to use it.

© 1998 Keith Rankin

Rankin File