Brian Easton says we cannot attain a sustainable Scandinavian-type quality of life while keeping the existing tax system in place

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

New Zealand has ‘Scandinavian ambitions in terms of quality of life, but a US attitude to tax’: Lara Clark.

One of the most perceptive remarks about New Zealand’s fiscal tension was made by former British High Commissioner Lara Clark. She is no FIFO (Fly in-Fly out commentator) but made the assessment at the end of four years in Wellington; she is married to a New Zealander (a human rights lawyer) and she confessed that her husband and children supported the All Blacks in a test against England.

Until the mid-1980s, New Zealand’s aspirations were undoubtedly for a Scandinavian quality of life with high government expenditure and high taxation. Indeed, once it was common, and not unrealistic, to argue that the policies introduced by the First (Savage-Fraser) Labour Government led the world ahead of Britain and Scandinavia. But the roots of the vision go back to the nineteenth century.

Rogernomics began undermining the vision in the 1980s by cutting its high tax rates on the rich. Most obvious were halving the top income tax rate. But as fiscally expensive, and therefore as favourable to those on high incomes, was the ‘imputation’ of corporation tax so that it became, in effect, a withholding tax that halved the already reduced effective income-tax rate on dividends.

The net effect was that the top tenth increased their relative share of disposable household income from 20% to 25%, with a corresponding reduction for the other 90%. (The top 1% did even better.) There was no capital gains tax, despite even some Rogernomes seeing this as a logical extension of their changes. Given the economy was stagnating, some income groups had no increase in their real incomes for more than two decades. Child poverty doubled.

GST was introduced, reducing the net fiscal cost. Even so, there remained a long-run fiscal gap which was obscured by short-term timing flows. National’s Ruth Richardson faced up to the gap when she became Minister of Finance in 1990. She and Jenny Shipley, Minister of Social Welfare, savagely cut benefit levels and cut, or attempted to cut, in other areas such as education (e.g. student loans) and health spending (e.g. charging patients for staying in a public hospital), shifting costs onto households. Government spending promoting the quality of life became less generous.

The two described their measures as ‘redesigning the welfare state’. It was shifting its conception from a Scandinavian one, as set out by the 1972 Royal Commission on Social Security – to enable everyone to feel a sense of participation in and belonging to the community – to a minimalist American one – to enable everyone to sustain life and health.

I’ve never been clear to what extent the two – or other advocates of the change – understood the transformation. In all their writings I have seen, they fudge the issue. But as the High Commissioner implied, once committed to ‘American’ levels of taxation a society, becomes forced to American levels of government spending with its very narrow vision of the quality of life. Hence the ongoing cutting back of social security entitlements.

The shift did not reflect a change in community aspirations although, of course, there was a minority who favoured a narrower role of the state. There was a more widely held view that state involvement in the economy had to be changed reflecting the increasing diversity and complexity of the economy but that it had to be, and could be, done without compromising the state’s involvement in the quality of life.

This left the fiscal tension that Lara Clark drew attention to. Given an American tax philosophy, New Zealand could not pursue a Scandinavia style of government involvement in promoting wellbeing.

Given the unwillingness to contemplate moving New Zealand’s tax regime from near the bottom to the middle of the regimes of affluent economies, I thought that it would be necessary for people to reduce their aspirations. Perhaps as the generations moved, younger ones, having grown up in Ruthanasia/Jennicide world of Richardson and Shipley would think it a norm.

They have not. It is true that they are becoming increasingly vague about the pre-Rogernomics policy framework (some of the social policy advisers to the recent Labour Government did not even understand the report of the Royal Commission on Social Security). But the ‘aorta’ still drives public policy pressures – ‘aorta do something about it’. (I’m trying to set out a reasonably value-free account in this column, but while personally I favour the ‘Scandinavian’ approach, compared to the centre of the population, I am more supportive of initially expecting reliance on self-initiative.)

So the tension remains. We resolve it in a similar manner to the Rogernomics Labour Government, by putting off the day of resolution by fiddling fiscal flows and commitments. The best example is our funding of support of the elderly (I shall write a separate column about that) but also we unsustainably depleting  natural resources while failing to maintain infrastructure and to invest in human capital. The result is a backlog of troubles, steadily building up a horrendous bill for future generations (supposing they don’t emigrate – that is another future column).

The trick then has been to resolve current fiscal tensions by charging future generations. I leave you to make the judgement whether this is moral but note my earlier caveat that future generations can avoid the charge by migrating. (I describe how this happened to Newfoundland and its consequences in Not in Narrow Seas: The Economic History of Aotearoa New Zealand.)

The tensions are nicely illustrated by Jacinda Ardern on the one hand vetoing any rises in taxation and on the other leading the passing of the Child Poverty Reduction Act. It aims to halve child poverty. Back to 1990, when child poverty was doubled to pay for the Rogernomics tax cuts. It is obvious, isn’t it? New Zealand cannot reduce child poverty to pre-1990 levels with American style tax levels? Hence the Ardern Government’s failure to make much of a dent on child poverty.

We cannot attain a sustainable Scandinavian-type quality of life while keeping the existing tax system in place. It is not a matter of just introducing a capital gains tax. That may increase tax revenue (and improve the efficiency of the tax system) but the additional revenue is negligible compared to what the Rogernomes gave away.

As a New Zealand citizen I have my own values – and I am happy to promote them in an appropriate venue. But as a New Zealand economist my task here has been, like Lara Clark, to confront the nation with the stark fiscal tensions it faces. Ignoring them means they will some day be resolved in a brutal way.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.