Tax Inefficiencies only tell half the story

The New Zealand Initiative has released a report slamming the Government's spending as inefficient and wasteful, but there’s more to the numbers than meets the eye, Thomas Coughlan reports.

A new report from thinktank, The New Zealand Initiative, into government spending comes with the headline-grabbing tagline that up to a third of state expenditure is "wasteful".

That calculation is taken from a 2013 report published by the Canadian libertarian thinktank, the Fraser Institute. It used metrics of outcomes in areas like health, education and economic performance to measure what governments achieved for their level of spending.

That report found that South Korea had the lowest government spending per capita.

For the New Zealand Initiative’s report, senior research fellow Bryce Wilkinson used data from the Fraser Institute to argue that if our state spending had been as efficient as South Korea’s — based on outputs attained per dollar spent - Government expenditure, and therefore taxes, could be cut by a third.

“On that indicative calculation, wasteful government spending is about 13 percent of GDP,” the report said.

But that doesn’t quite tell the whole story.

Part of the problem relates to New Zealand’s generally poor productivity.

A large component of public spending is the cost of labour— and our record of labour productivity is dismal. OECD data shows a 12 percent gap in labour productivity between South Korea and New Zealand in 2017.

OECD data shows productivity in New Zealand lower than in South Korea. Photo: OECD

The Productivity Commission’s recent report on our sluggish productivity noted a key constraint was our distance from the rest of the world (less of a problem for South Korea, which is located in the most densely populated corner of the globe).

Another contributing factor is the poor capital depth of New Zealand businesses, meaning workers are not adequately equipped to function at their most productive.

This problem was raised again during the recent strike action by MBIE and IRD workers.

Staff at IRD complained that an inadequate computer system was forcing them to manually enter details for Best Start payments for new parents.

A further constraint on productivity is significant under-investment in infrastructure. New Zealanders lose hours of productive time stuck in traffic. An NZIER report found productivity gains from easing congestion could deliver a boost of $1.3 billion a year to the economy.

And it’s not clear a 'small government' as described in today's report is what most New Zealanders would want. An OECD report from 2015 found our public spending was slightly below the OECD average, but New Zealander’s satisfaction with that spending was higher than the OECD average.

The Initiative’s report traces the precipitous growth in public spending since 1900, noting that the government back then provided public works, post, telegraph, rail, as well as some education services. But, having become used to universal healthcare, free education for all right through high school, health and safety regulation, the benefit safety net and much more that the state provides, it is unlikely most New Zealanders would want to return to a 1900s-style 'small government'.

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