Editorial: A cut's better than a cap

OPINION: Depending on the question asked by the pollsters, opinion surveys variously have shown that most New Zealanders would welcome tax cuts, or oppose any rundown of government services.

A majority would probably support the ACT Party's vow to push for a limit on government spending if the question obfuscated the implications for government services.

The prospect of spending limits was raised when ACT wound up its annual conference. Party leader Rodney Hide said its focus this year will be on passing a Regulatory Responsibility Bill (to cut red tape) and placing a cap on government spending. ACT members – it transpired – are frustrated that National is pursuing the same policies as the Clark government and doubts these can lift the country's economic performance. They want a more radical economic agenda. "People are particularly concerned over the level of spending and the regulation that's still hampering New Zealand," Mr Hide said.

ACT's cap would specify the overall size of budgets for the next three years. Mr Hide acknowledged the Government is cutting costs, but nowhere near enough to lower spending to 2004 levels. The idea of capping government spending will have enormous popular appeal.

Taxpayers don't much appreciate the state siphoning significant chunks of their incomes, then redistributing the money – for example – to enable politicians to enjoy an array of perks. More wasteful examples abound.

But effective economic management calls for flexibility and by comparing 2010 government spending with 2004 levels Mr Hide inadvertently spotlights this reality. The economy then was humming: the economy grew 4.8% in the year to December 2004 and the unemployment rate fell to 3.6%. We are now pulling out of a recession and unemployment has hit 7.3%. This calls for higher levels of government spending than usual (on unemployment benefits and initiatives to stimulate the economy) while tax flows have slowed (because incomes and profits have been reduced). Would any types of government expenditure be exempt from ACT's cap? A hefty chunk is made of transfers of money from taxpayers to unemployment and other beneficiaries as well as to superannuitants.

Under National in the 1990s we effectively capped the state's capital spending. The failure to invest sufficiently on economic infrastructure resulted in the neglect of our road and electricity networks and helps to explain our poor productivity performance. Heavy investment is called for now to bring things up to scratch.

Economists at the International Monetary Fund recently reminded policy-makers how the global financial crisis had returned fiscal policy to centre stage as a policy instrument. One reason is that if we cut public spending, we limit a government's ability to respond to unforeseen shocks or adjust to the normal usual ups and down of an economic cycle. And when fiscal policy is bridled, the burden heaped on monetary policy is heightened. The Government by all means should be vigilant about its expenditure. But the smarter objective should be to eliminate the squandering of it, not the capping of it.

- © Fairfax NZ News