NZIER on fiscal sustainability

David Farrar

 have done a discussion paper on NZ’s fiscal sustainability.

Their key findings include:

  • Without significant changes in fiscal policy, government debt is projected to head towards 200% of GDP by 2060.  
  • We cannot afford the same spending patterns and tax settings as in the past. Something has to give, and we have to start thinking about the trade-offs sooner rather than later.
  • Recent efforts to get the books back in black after the Global Financial Crisis and the Christchurch earthquakes have been commendable. 
  • The evidence shows that overly high taxes can be harmful to economic growth. 
  • In reality, we would expect fiscal adjustments to come about through a combination of lower government spending, broadening the tax base as well as lifting existing taxes.    

I’m against any lifting of existing tax rates, but not against broadening the tax base. Basically the level of tax burden as a percentage of GDP should drop over time, as that helps economic growth. This means most focus, in my opinion, should be on spending restraint.

They recommend:

  • Seeking a bipartisan agreement on meeting the costs of superannuation 
  • Focusing the social safety net on those who need it most, rather than the middle class 
  • Broadening the tax base to include a tax on land or a tax on capital gains
  • Better highlighting the choices of taxes and spending that are feasible for any given level of debt level over the next few decades so that Kiwis’ expectations can be better managed, and so that they start preparing themselves for a tighter fiscal future.   

I support all those. I think a land tax has significant economic value, and a capital gains tax is also useful, so long as it is comprehensive. But again, there should be reductions in company and income tax rates to compensate so it doesn’t just become a greater tax burden overall.

The attached paper is 26 pages long only, so very readable and a good contribution to the debate.

Political commentator David Farrar posts at Kiwiblog.

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3 Comments & Questions

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Given that economists can't even predict what interest rates, the exchange rate, GDP or any other economic measure is going to be next year, when they start making predictions about what the world will be like in 50 years time they and their discipline just look increasingly foolish.

No one in 1963 had any idea of what the New Zealand of 2013 would be like. The wine industry, the export diary industry, the loss of New Zealand's access to the UK, CER, China as our second largest trading partner, a massive wave of Polynesian and Asian migration, the scale of the NZ diaspora, personal computers and the internet, none of it could have been predicted with any reliability. In fact none of it was.

And now we have NZIER telling us that by the 2060s, if we don't change our wicked spendthrift ways the debt to GDP ratio will be 200%. Hogwash. No one knows what New Zealand will be like in 2060, and that includes the NZIER. But I can tell you one thing, it will be very different to what it is today.

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We will all be dead by then, anyway.

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In fact, economics tells us that changes in price variables like exchange rates and short-term interest rates *should* be unpredictable - so citing economists' inabilities to predict such variables is clutching at the strawest of straw men.

On the other hand, most non-price economic variables - such as GDP - are predicted quite successfully over medium-term horizons.

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