Tuesday, April 24, 2007

Right remedies

Economic issues are definitely not my thing. Like most people, I barely understand them. Well, that’s not really true, is it? We ordinary people do understand economic issues; we have to get by in the world, after all. It’s just the experts and politicians we don’t understand.

I’ve made two posts recently on economic-related issues: One on interest rates in
New Zealand, and also one on the prospect for a common currency with Australia. Both posts centre on the fact that, in my opinion, life is far more complicated than the so-called experts admit. The reality of ordinary people is often very different from what these experts promote (sometimes as a way to advance a particular political ideology).

A case in point is the recent report on New Zealand’s economy from the OECD (the OECD is made up of the world’s richest nations), part of which talks about New Zealand’s standard of living being below the median for the OECD.

The report does indeed sound like a National Party manifesto, as acting Finance Minister Trevor Mallard said. Here’s why:

It calls
New Zealand’s economy one of the most flexible and resilient after 20 years of reforms, but it still lags behind other nations. This is something the right wing parties always say, too. The report goes on to recommend answers: Cut the top tax rate and raise GST (Goods and Services Tax). Raising GST would disproportionately affect the poor and working classes who can least afford the increase or reduce consumption (there are very few exemptions from GST; food and medicines have GST charged on them). The report also recommends raising the age of eligibility for national superannuation (retirement benefit), and reducing its real value over time.

So, to simplify it, the report urges that the richest people get tax cuts and the poor and working classes and the elderly all get hit harder. Sounds like typical neo-conservative nonsense to me.

Interestingly, however, the report also urges that
New Zealand adopt a capital gains tax to discourage investment in property—something that would hit the middle and upper classes hardest.

New Zealand party that’s home to the most neo-conservatives finds some of this too much:

National Party spokesman Bill English told Radio New Zealand raising GST and instituting a capital gains tax were not on the party's agenda.

Their position figures, since all voters would oppose raising GST, and their middle and upper class base would oppose a capital gains tax. Actually, I would, too, and I’m hardly a National Party supporter (I’d like to tell English where to go after he suggested that the government should cut spending on health).

The truth in these matters exists—yet again—between the extremes. Encouraging the middle and upper classes to invest here in
New Zealand, but not in property, would be a good thing—but not too fast or property values would crash, which would hurt all homeowners.

Similarly, encouraging people to save more and spend less would be good overall, but hard to achieve. Punishing people for spending isn’t the way to do it.

Cutting retirement pay is meanspirited—by then it’s too late for people to make up the difference. And, besides, the government is taking steps to deal with future retirement by setting aside money in a huge fund to pay for the future demographic bulge in retirement entitlements. From July this year, the KiwiSaver plan will encourage people to save for retirement.

Both ends of the spectrum can agree that raising productivity would help, but the government is correct to note that the current record low unemployment rate means that large numbers of relatively low-skilled workers have entered the workforce, driving down productivity.

All of this boils down to an argument over numbers, which is sure to make most people’s eyes glaze over. It’s this inattention that encourages politicians to play games with the economy. Some of us are watching, however.

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