The net fiscal impact of National’s tax and spending changes

April 10th, 2012 at 2:00 pm by David Farrar

I’ve blogged previously on the outrageously dishonest spin from Labour that tax revenues are down 4% of GDP over four years, and trying to assert it is all due to the one set of changes in 2010. Even some journalists who should know better have repeated such absurdities.

I’m going to blog in two parts on this issue. The first part will be today looking at what the Treasury macro-economic advice was for the impact of the tax and spending changes, and tomorrow (if I have time otherwise later in the week), I’m actually going to analyse the actual changes in tax revenues through the 2008 BEFU, the 2008 PREFU, 2008 DEFU, 2009 BEFU, 2009 HYEFU, 2010 BEFU, 2010 HYEFU, 2011 BEFU, and finally the 2011 PREFU. This looks at the changes in overall tax revenues, individual tax revenues, corporate tax revenues and GST.

It is important to understand you need both the forecasts of what a change will do, and what actually happened. Neither are the total picture, but together they give us a reasonable picture.

You see the reality is that if Treasury says (for example) hiking the top tax rate from 33c to 39c will bring in $900m/year of extra revenue, and a Government does it, and revenue only goes up $700m, then no-one really knows why the revenue gain was less than projected. It might be that it did increase revenue by $900m, but that economic growth was flatter and so taxable income was lower. Or it could be that the increase lead to greater tax avoidance, and the increase did not achieve as much extra revenue as projected.

It is easy to diss Treasury projections – even I have done so. But it is worth noting how massively complicated it is to forecast tax tax over an entire economy. Many individual companies have problems forecasting income just for that company. Now imagine having to forecast income for the aggregate of every company and person in New Zealand, without having the knowledge of what is happening in individual companies.

What we have below is the official net fiscal impact as forecast by Treasury for National’s tax and spending changes. As you will see the total effect of these tax changes is negative during the 2008 – 2010 period, which is when there was a fiscal stimulus policy to help cushion the recession, and in the first two years, providing support to the economy during the recession, and have been net positive from 2010 onwards.

Net fiscal impact of the Government’s tax changes ($million increase (decrease) in the operating balance)








Election tax package1







Budget 2009 cancellation of 2nd and 3rd tranches2






SME tax package3







Budget 2010 tax package4





Budget 2011 tax changes5











 1. fiscal impact = revenue (2/3*removal of R&D tax credit + KiwiSaver changes + cancelling remaining tranches of Labour’s tax cuts) minus costs (personal tax + IETC). Source: Cabinet Paper CAB(08)585.

2. cancellation of the 2010 and 2011 tax cuts as announced in the 2009 Budget. Source: Treasury Report T2009/418.

3. SME tax package as announced in February 2009. Source: BEFU 2009, Table 1.7.

4. fiscal impact = revenue (GST increase + depreciation + LAQC + thin cap + WFF + GST base + tobacco + increased audit) minus costs (personal tax + company + PIE and savings vehicles + GST compensation). Source: Budget 2010 Executive Summary, Table 1.

5. savings from changes to KiwiSaver and WFF tax credits. Source: Budget 2011 Executive Summary, Table 2.

It is worth recalling that during this period Labour opposed every single spending cut made by National.

Over the six years of National’s first two terms, the total projected impact of National’s tax changes (and cancellation of spending commitments) has been a net improvement of $4.9b. In other words compared to the policies put in place by Labour in 2008, National’s changes were projected by Treasury to result in $4.9b more revenue over two terms.

It is worth noting these are only the direct tax (and cancelled spending commitments) changes. This is not taking into account National slashing to the contingency for new spending from over $2b a year to $800m and eventually zero. That has also had am impact in the billions.

Now as I said, we will also look tomorrow at what actually happened to tax revenues, but many factors impact tax revenues as well as policy changes. These figures for now show how preposterous Labour’s deception is about how the 2010 tax package is somehow primarily or totally responsible for a decline in tax revenue of 4% of GDP or $7b/year.

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NZ Herald on Spending Cap

December 9th, 2011 at 12:00 pm by David Farrar

An excellent editorial in the NZ Herald:

Sir Roger Douglas has departed the political stage again but he may have left another enduring monument in Act’s agreement with National this week. A law to cap increases in government spending could prove to be as effective as one of his great legacies of the 1980s, the Reserve Bank’s inflation target.

Like the monetary target, the spending cap will sometimes be honoured in the breach but the target is no less effective for that. When it is breached, there needs to be a good reason, and a credible path set to bring inflation back into line. So it will be for the fiscal cap.

I think many have under-estimated the political power the cap will have.

It is too easy, as the previous government proved, to take on ever larger commitments when business is booming, the workforce is fully employed and tax revenue is providing budget surpluses. The country hardly noticed that state spending was steadily becoming a greater proportion of the economy in the years that surpluses also enabled continuing reductions of public debt.

More generous medical subsidies, paid maternity leave, early education, interest-free student loans, higher public service pay rates, a “super goldcard” are not the kind of expenses that can be wound back when the business cycle turns down and revenue drops. They instantly become entitlements that a future government fears to threaten.

Exactly. And the sad reality may be that the days of debt fuelled 3%+ growth could be in the past for-ever. In a new debt-averse world, with Europe taking a decade or more to get its debt under control, we may never get growth again like we have had in the 1990s and 2000s.  We may need to get used to 2% growth being the norm. This is why we need to stop Governments from imposing costs on New Zealand we can’t pay for.

Ultimately, of course, a parliamentary majority can do whatever it wants in this country and no Parliament can bind the next. A statutory spending restriction can be breached and even repealed as readily as the Bill of Rights Act. That act requires the Attorney-General to alert Parliament to proposed legislation that would breach the rights enshrined. The public takes note, the government needs a convincing case to proceed in political safety.

Laws of such limited power should not be under-rated. The lack of any stronger sanction is a strength, it makes it harder for a future government to repeal a statute that can do more than keep governments honest.

And hopefully it will increase the financial literacy of the public. We will know how much more a Government is planning to spend over the baseline amount per capita.

National has been not much keener than Labour on a legislated spending limit but it is already living within the limit agreed with Act. The cap is a credit not only to Sir Roger who has long argued for it, but to the recently deceased director of the Business Roundtable, Roger Kerr, who maintained a lonely watch against rising public expenditure, and Don Brash whose brief leadership of Act restored its focus on economic fundamentals.

Fiscal responsibility is a prosaic, thankless contribution to public welfare but if government spending rises no faster than population growth and low inflation from here on, we should all be better off.

Absolutely. If you look at all OECD countries over the last fifty years, those who manage to have the state consume a lower proportion of GDP have on average much much higher economic growth than those with a higher proportion.

Now it is a balancing act of course. If the state only consumed 5% of GDP, then we’d probably have no publicly funded schools or hospitals. But the current level of state spending is the highest in our history, so I don’t think drawing a line at today’s spending level and saying real spending per capita should not increase beyond today’s level is if anything a little on the generous side.

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The Taxpayer Relief Regulated Period

August 26th, 2011 at 1:00 pm by David Farrar

My column at the NZ Herald is about how today is the start of the Taxpayer Relief Regulated Period.

We are now officially within three months of the general election. Today is the start of what the law calls the regulated period. It restricts how much money political parties can spend of their own money on election advertising, but more popularly cuts off taxpayer funded election advertisements from MPs. …

So if from today you see anything from your MP or from a parliamentary party that has the crest of the House of Representatives on it (indicating Parliament has paid for it), and it is advocating either explicitly or implicitly for or against a party or candidate, then you should send a copy of it to the New Zealand Herald who I am sure will happily inquire to the Parliamentary Service whether the taxpayer is due any refunds.

Only 13 weeks to go until E-day!

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Taxpayers Rights Bill

August 11th, 2011 at 10:00 am by David Farrar

Audrey Young at NZ Herald reports:

A bill capping core Government spending increases to the rate of inflation and population changes was introduced to Parliament yesterday as part of National’s support agreement with Act.

But it is not expected to pass a second reading after consideration by the finance and expenditure select committee.

The Spending Cap (People’s Veto) Bill was introduced by Regulatory Reform Minister and former Act leader Rodney Hide.

It was referred to in the confidence and supply agreement as the Taxpayers’ Rights Bill.

It provides that the only way the cap can be lifted is by majority vote in a referendum.

I like the principle behind the bill – that spending should be capped in real terms, and you need public permission to go higher.

There’s a few countries in Europe that could have benefited from such a law.


Herald on Labour’s attacks

May 10th, 2011 at 3:00 pm by David Farrar

The NZ Herald editorial:

Last week it was his police protection, this week Premier House. The week before, it was the Prime Minister’s use of air force travel, before that, the limousine fleet replacement. Labour seems to think the public begrudges John Key the usual trappings of office.

Not that police protection is one of the trappings. Labour’s claim that anyone would enjoy or invite the company of a security squad was silly beyond words.

I think “silly beyond words” is the polite equivalent of “fucking stupid”.

Premier House in Wellington, where Prime Ministers can live and entertain, is being repainted and recarpeted at a cost of $275,000. Mr Key says it had not been repainted for 11 years. He says he is happy to accept any scrutiny he is put under but wonders why Labour is raising such trivial issues. He is not alone.

I encourage Labour to continue with their campaign. I’m looking forward to the next installment where they reveal that the PMs Office uses 100 gsm paper in their printers and that they could save money if they went for 80 gsm paper.

The public remembers that Labour’s last Prime Minister made use of Premier House, that her police protection was accommodated in a house beside her own in Auckland and that she used the air force or chauffeured limousines when it suited her. It is odd that one of her senior Cabinet ministers, Pete Hodgson, should be leading these lame attacks on her successor.

He should be among the last to question, for example, whether a Prime Minister needs security accompanying him inside Parliament buildings sometimes. Helen Clark asked for it when members of the Exclusive Brethren sect used to try to speak to her on her walk to the chamber.

And Whale Oil produced half a dozen photos showing this.

Labour’s leader should call him off. Most of the public finds this focus on the Prime Minister’s office trite and desperate. In the days leading up to a Budget, the Opposition should be promoting its own view of the state of the economy and what it would do about it. If it needs to criticise Mr Key, his risk-aversion gives Labour plenty of grounds. He has ruled out increasing the pension age, a levy for Christchurch and capital gains tax. He needs to do more than he may find palatable if more private investment is to flow into productive ventures.

Normal expenses of state are nickels and dimes beside the decisions the country needs.

And the reality is that Key has brought in an unprecedented level of transparency over Ministerial spending, has banned taxpayer funded Ministerial travel for spouses, and also banned first class travel (which under Labour could be used for anything beyond Australia).

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Ministerial House expenses

May 9th, 2011 at 11:24 am by David Farrar

Labour have gone from transport to bodyguards and now to paint in their desperate desire to splatter John Key. Maybe at some stage they will remember the public want to hear some policies from them on reducing the cost of living. At the moment their only policy is to increase power prices by 3% and petrol by 3c/litre.

Under this Government, all the ministerial houses are actually being sold, except for Premier House, Vogel House and Bolton Street as they are held in trust. But let us look at some of the house costs under Labour and see how they compare to around $200,000 on painting Premier House:

  • $1.133m on Vogel House when Jim Anderton lived there
  • $46.6m on Government House
  • $215,000 on Premier House in 2000
  • $177,000 on Matt Robson’s Wadestown Ministerial House

Flights to Vanuatu

May 4th, 2011 at 2:00 pm by David Farrar

Whale Oil blogs on the McCully air force plane to Vanuatu:

I thought I was defi­nately onto a bash­ing of immense pro­por­tions here. But as I learned from a cou­ple of screw up over the past few years, fact check­ing is paramount.

I checked inter­na­tional flights into and out of Van­u­atu. This is where the story started to come un-raveled. The tim­ing of the meet­ing meant that inter­na­tional flights didn’t pro­vide use­ful con­nec­tions. I think from mem­ory that if they had used com­mer­cial flights then all the Pacific diplo­mats in atten­dence would ahve had to have stayed over 3 more days before the next com­mer­cial flight out from Vanuatu.

Although the RNZAF Boe­ing may have gone over next to empty and con­fig­ured for VIP travel at short notice, how­ever it returned with a greater num­ber of pax on the return leg to New Zealand (I didn’t receive any pas­sen­ger details, but I’m sure it wouldn’t be too hard to find out who has used the ser­vice after the fact if one was that inquis­i­tive), one can only spec­u­late at to who they may be, but as even politi­cians don’t repli­cate that fast it seems log­i­cal that for­eign dig­ni­taries were using the ser­vice and New Zealand as a trans­port hub, which is hardly unheard of, and hardly the travel rort which the first leg made it appear.

Whale has shown no hestitation putting the boot into National MPs over perks, when he thinks it is justified. In fact i doubt any blogger has been as consistent as he has, in attacking MP spending. So when he says this is no big issue, I tend to believe him.

I had a similiar issue to McCully when I was in Noumea. The lack of commercial flights meant I had to stay for six days, for a two day conference. I’m pretty sure Murray would have been happy to holiday in Vanuatu for a few days, but instead he did some diplomacy by transoporting a few of his pacific peers back with him.

I recall Helen Clark got an air force flight back from Australia when there was a problem with Ansett, so this faux outrage at use of air force is fairly tiresome.

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Quote of the Day

May 1st, 2011 at 11:00 am by David Farrar

Danyl at Dim-Post:

Sometimes I just want to strap the entire spectrum of left-wing politicians into dentists chairs and patiently explain to them – using chisels and barbed wire – that most the state’s wealth comes from ordinary people working hard and then giving a huge chunk of their income to the government, so spending it is a sacred trust not an endless opportunity to squander it all on gimmicks and whims and political stunts.

This is in relation to the $500,000 to be wasted on a by-election.

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$230m/yr of potential savings

April 14th, 2011 at 11:00 am by David Farrar

Tracy Watkins reports:

A new Treasury report says government agencies could save more than $230 million a year from back office functions.

The report, which follows a review of costs across the public service on things including property management, human resources, finance and ICT and found that they were higher in New Zealand than international bench marks, Finance Minister Bill English said.

“For example, the average office space per person in our public service is about 21 square metres compared with best practice in some New Zealand agencies of about 15 sq m. This is one of many areas where we believe there is room for improvement.”

That would also take some of the pressure off commercial rents in Wellington.


Not pricey

April 12th, 2011 at 9:11 am by David Farrar

The Herald reports:

Treasury boss John Whitehead took World Bank and International Monetary Fund officials out for pricey dinners just a few months after State Service Commissioner Iain Rennie warned top public servants against doing just that.

Dr Whitehead’s credit card expenses were published this week and show that last month he spent $292 on dinner for three at Wellington waterfront eatery Foxglove with World Bank executive director Jim Hagan.

I’m sorry but this is almost embarrassing. I’m all for responsible use of credit cards, but running a story about spending $95/head at dinner entertaining the Executive Director of the World Bank is ridicolous.

Foxglove is a medium priced restaurant. Far from the most expensive. Should we take the World Bank Executive Director to Uncle Chang’s instead?

Or alternatively have him out for dinner, and then when you get to desserts, tell him “I’m sorry but NZ is so poor, we can’t pay for dessert”.

$95 doesn’t mean there were bottles of expensive wine drunk. $20 for an entree, $40 for a man and $15 for a dessert is $75 so  arguably they had one bottle of $60 wine. I doubt the World Bank executive Dinner is going to regale colleagues in Washington about the awesome night out in Wellington – yeah we had five courses, two bottles of port plus a couple of strippers – all for $95 – it was better than Vegas.

It is good to have scrutiny of public sector spending. In fact I support having all Government payments listed online. But I don’t regard $95/head for the Executive Director of the World Bank as inappropriate or even newsworthy.

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The plastic waka

April 6th, 2011 at 10:15 am by David Farrar

Martin Kay at the Dom Post reports:

Labour MP Shane Jones has hit out at plans for a giant $2 million taxpayer-funded plastic waka to promote Maori during the Rugby World Cup.

Ngati Whatua o Orakei is getting $1.8m of Government funding to create the giant waka as part of Auckland’s world cup celebrations.

The canoe will be 60 metres long and almost 15 metres high.

The hapu will contribute $100,000 for the project, which was estimated to cost $1,988,000, and will then own it after it is built. The waka would be used to promote “brand Maori” during the Rugby World Cup and other international events, hapu trustee Ngarimu Blair said.

Jones said the ”blow-up waka” risked exposing Maori to ridicule and smacked of last-minute desperation to get Maori involved in the tournament’s celebrations.

Jones, who is contesting Maori Party co-leader and Maori Affairs Minister Pita Sharples’ Tamaki Makaurau seat this year, said the only thing Maori wanted to see from the world cup was All Blacks Piri Weepu and Hosea Gear holding the trophy aloft.

I have to say I’m with Shane Jones on this one.

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Press Gallery to be charged rent

April 1st, 2011 at 9:00 am by David Farrar

Expects howls of outrage from the press gallery, when they learn that their free rent is going to end in the budget, as part of Government moves to trim the cost of Parliament.

The gallery currently enjoy free office space in the Beehive Annex, totalling around 600 square metres. With wellington office spare exceeding $300/square metre, this could reduce the cost of Parliament by $180,000 a year.

What is unusual, is that the Greens are supporting this move. Russel Norman has pointed out Fairfax made a A$165m profit last year, APN made A$103m and Mediaworks A$50m, and that it is outrageous for struggling Kiwi families to subsidise these Australian corporates.

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Two good trends

March 30th, 2011 at 7:49 am by David Farrar

Tracy Watkins in the Dom Post reports:

The figures, to be issued by State Services Minister Tony Ryall, largely relate to the core public service and will show numbers have dropped to about 35,900 from about 38,800 in 2008.

But some parts of the public service are excluded because they are considered frontline. There has been a rise in some occupations, including 1400 more teachers, 1000 more nurses, 500 doctors, and police.

If those numbers are correct, I can’t see Labour getting much traction with their campaign against the changes the Government has made.

Public Service Association national secretary Brenda Pilott said there was no way the Government could cut spending further without cutting services.

The PSA might be correct (obviously at some point, services would be impacted), but the problem for them is that they have made the same claim for the last two years.

He would not say what might fall into the “nice to have” category, but the Government had already chopped things such as community education classes

Oh I had forgotten about those. Remember all the fuss the Oppoosition made about the basket weaving courses no longer being free.

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Spending restraint

March 22nd, 2011 at 10:00 am by David Farrar

The Government has sensibly announced there will be even tighter spending restraint in this year’s budget, due to the impact of the earthquake. It’s not going to be slash and burn, just very tight fiscal discipline.

This should be no surprise. But what is interesting is that Labour still are 1000% opposed to any spending restraint. You have to wonder what could cause them to actually adopt fiscal restraint.

The 2008 recession wasn’t enough.

The global credit crisis wasn’t enough

The first earthquake wasn’t enough

The double dip recession wasn’t enough

The second earthquake wasn’t enough

I have this vision of a meteor hitting New Zealand and wiping out 90% of NZ, and still Labour’s response will be you can’t cut spending.

Even worse is Labour’s preferred coalition partner – Winston. He’s just come out promising it will cost no more than $10 to visit the doctor for oldies. National has ruled Winston out, but Labour would be forced to agree to his demands as the price of forming a Government. So you can add hundreds of millions of extra spending to the deficit.


Explaining is Losing

February 18th, 2011 at 12:00 pm by David Farrar

There’s an old saying in politics – that explaining is losing. This seems to apply to the saga of the new BMWs. It does appear that no Minister was told of this until after the contract was signed, and even that the decision saved money, but explaining this means that the story stays alive for another day. At this stage one is in a lose/lose situation. If you explain you lose, and if you don’t explain you lose.

The Government isn’t able to release the contract that Labour signed in 2008, but what they have been able to say is:

DIA had advised that the cost savings from a three-year replacement versus a five-year replacement, are considerable.

 “Based on a fleet of 35 cars, if the existing fleet is kept for five years, the total cost of ownership  over the five years would be $4,697,175. If we keep the cycle of replacing every 3 years, the total cost over five years of the existing fleet held for three years plus two years of the new fleet, would be $2,612,365. So, the savings over five years would be $2,084,810 .”

So the contract signed by Labour in 2008 had an option for a renewal in 2011. And while it was not compulsory to renew in 2011, it would cost you more over the long term if you did not renew. This is presumably why DIA decided to renew. Purely on fiscal grounds, it saves money. But they over-looked the political aspect which I’ll come to.

Next we have the issue of whether DIA were entitled to sign off the replacement cars without ministerial authority or even notification. The delegation to the Chief Executive of Internal Affairs is for capital expenditure of up to $15, so he was legally entitled to renew the fleet without ministerial approval.

However I beleive DIA made a very bad mistake by not seeking at least an opinion from their Minister or Ministers. The reason they should have done so is because the Ministers are seen to be the recepients of the benefits of having a new fleet. This should absolutely have been notified under the no surprises policy.  I hope and trust DIA have been left under no misunderstanding that in future this should occur.

It is possible of course that DIA made a deliberate decision not to tell Ministers. They possibly concluded (correctly) that if they had told Ministers in advance, the Ministers would try and delay the upgrade. And if it really was cheaper to upgrade in 2011, then DIA could well have an incentive to sign the deal before telling Ministers, in case the Ministers were not happy.

Trevor Mallard is going on about how Ministers should have known in advance because there was a reference made to it in a select committee report. That’s absurd – Mallard knows that Ministers don’t read select committee reports – hell they have several boxes of reading every night as it is.

After the contract was signed, the Internal Affairs Minister was told, and he in turn told the Finance Minister. While the contract was already signed, if I had been one of thise Ministers my first reaction would have been to ask can the contract be rescinded, and if so how much would it cost. The answer might have been that it was too late, but the Government would have possibly have had that as an option if they had moved quickly. It’s easier to cancel a contract a week after it is signed compared to three months later.

The other fair criticism of the Government is its response to the story. They were effectively given a hospital pass on this issue, but having had knowledge of the purchases before the story broke, they should have been ready with a response (stating the savings, the fact Labour signed the contract, the fact they were only told afterwards) to go out within minutes of the story breaking.

Instead the facts have only come out over a period of three to four days, ensuring it stays in the news for 3 to 4 days. So while there was always going to be some damage from a hospital pass, the damage has been compounded a bit by the way the story has been kept alive.


More on BMWs

February 16th, 2011 at 1:36 pm by David Farrar

Maggie Tait at NZPA reports:

The Internal Affairs Department is responsible for a decision to provide the Government with brand new BMWs when the old ones were only three years-old, Prime Minister John Key says.

My first response to reading this is that sure DIA made the decision, but they must have got sign off from at least their Minister – or at least notified him. So I thought this was just trying to avoid blame.

Mr Key said a six-year deal for the cars was signed by Labour with a three-year rollover clause.

“That decision to invoke that rollover and bring new cars in was made by the Department of Internal Affairs without reference either to their minister or to me,” he told reporters.

However reading on, the PM says that the decision was made without reference to the Minister or PM at all. That indicates that not only did they not approve of it, they were not even told of it.

If this is the case, then DIA should get a bit of a bollocking for this. Departments are meant to operate a no surprises policy with Ministers, and 34 new BMWs should definitely qualify as meeting the threshold for no surprises.

Mr Key found out about the new cars when one of the drivers told him.

That is not the way the Minister for Ministerial Services should find out.

“It’s not a situation where we as the Government have decided to do that, the department just made that decision.”

The department did not think it had to check as it had authority from the former Labour Government.

The Department was wrong. They should have checked.

Earlier, Finance Minister Bill English was critical of Labour’s original contract and Green Party criticism of the Government spending in tight financial times.

“It’s a bit rich from the Greens because one of the reasons the Labour Government bought the BMWs was because they were meant to reduce carbon emissions, they were meant to be the most fuel efficient cars even though their capital cost might have been higher than other options,” he told Radio New Zealand.

“I think it does show that being driven by a fad, which at the time was to have lower carbon emissions, means that you can make decisions — which were made by the previous Government — turn out more expensive than they expected.”

Mr English said when the contract came up for renewal the Government would see if there was a better deal and probably a “more mainstream model of car”.

“I don’t think a Government in the current recession would decide to pick a luxury brand car with all those extra bits…whatever the value for money.”

If no Minister was even informed of the new BMWs, then blaming them is a bit unfair. But the damage has probably already been done in terms of perceptions.

I still think DIA should be given a bollocking for not having the common sense to check with the current Government whether they wanted brand new BMWs to be turning up a few months befiore the election.

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A stupid blunder

February 16th, 2011 at 7:40 am by David Farrar

Tom Hunt at Stuff reports:

The Government has splashed out on 34 new top-of-the-line BMWs that sell for more than $200,000 each.

The Green Party has called the ordering of the cars a disgrace.

But the Internal Affairs Department says it has been three years since the Government bought its last fleet, which will be sold when the new cars start to arrive later this year. …

A spokesman for Prime Minister John Key said this was the same process that had happened for years. “It is standard for a progressive upgrade of the VIP fleet to happen every three years or when the vehicle reaches 90,000 kilometres.”

What’s standard is how unpopular this is. I give the Government a big fail for this move. When Labour did the same in 2008 I put it down to advanced third termitis (when you no longer sense what may be unpopular), but this is even worse as National is in their first term.

It does not matter what the contract said about upgrades, or what level of discount the Government gets upgrading in year three – the only thing the public will remember is a Government saying times are tight having money to buy new BMWs for Ministers. An incredibly stupid blunder.

Someone should have intervened and ensured that any fleet replacement does not take place in election year. Unless one actually wants to lose votes.

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Key signals less debt while Goff promises more debt

January 26th, 2011 at 11:48 am by David Farrar

Over two days we’ve seen two dramatically different paths outlines for the Government. Yesterday Phil Goff promised more borrowing and more debt. Today John Key announced the opposite – that National would reduce future spending to reduce debt – and also flagged allowing the private sector to invest in four current SOEs (which will also reduce debt).

This is excellent – both the reduced spending cap, and the flagging of an election policy to allow minority shareholdings in some energy companies.

Some extracts from Key’s speech:

Growth over the last decade was built on all the wrong things – debt, consumption, and government spending.

People borrowed heavily to buy houses and farms, property prices soared and New Zealanders felt wealthier as a result. They spent a lot on consumer goods, which led to a bubble of economic activity.

 The Labour Government thought this bubble, and the tax revenue it generated, would go on forever and spent up large on permanent new spending programmes. The Government’s spending increased by more than 50 per cent in just six years.

Labour literally had to keep thinking up new ways to spend money, as their refusal to drop tax rates led to fiscal drag and large surpluses. Rather than have modest spending growth, and lower taxes, they did nothing except huge spending increases.

The internationally-competitive sectors of the economy actually went into recession in 2004, and experienced a 10 per cent drop in output over the next five years.

A five year recession for the competitive sector of the economy.

By the time the National-led Government came into office at the end of 2008 the economy was deep in recession, and inflation was the highest it had been in 18 years.

The Government’s books had been left in a mess, with Treasury projecting no end to budget deficits and government debt spiralling out of control.

This is worth remembering – the official forecasts were for deficits and debt to be so big, that we would never ever return to surplus.

As an incoming government, we moved quickly to steady the ship, help the economy through the recession and set a credible path back to surplus.

 Even so, when we tally up everything the Government is spending this year, we still need to borrow $300 million a week on average to pay the bills.

 In the worst of the recession, running a budget deficit was the right thing to do, as it gave much-needed support to the economy.

 Now, as the economy recovers, borrowing $300 million a week is unaffordable and is holding the economy back.

 It is crowding out our internationally-competitive sectors of the economy, keeping the exchange rate high, and tying up resources that could be better used elsewhere in the economy.

And this borrowing will, of course, have to be repaid in future years, with interest.

Annual interest payments on our debt will, in four years time, cost more than spending on the Police, defence and early childhood education combined.

Which is why we need policies to reduce the growth in debt and lead us back to surplus.

When we are borrowing $300 million a week, have an overvalued exchange rate, and face the prospect of a credit rating downgrade, the Government believes it should be spending less and therefore borrowing less.

I have therefore challenged my Ministers to balance the books more quickly.

Government spending will continue to increase each year in dollar terms, but at a slower pace than the rest of the economy.

As the first step in reducing spending growth, we will run a tighter Budget this year than was indicated in the Budget Policy Statement in December.

Currently we have a new spending allowance of $1.1 billion each year, compared to Labour’s average of $2.8 billion a year over its last five budgets.

Our plan is to reduce that new spending allowance in Budget 2011 even further, to around $800 to $900 million.

Nonetheless, this year’s Budget will continue to prioritise new spending to health and education in particular, and to initiatives that promote economic growth.

 This would be a good time for the PPTA to reconsider the wisdom of ongoing strike action for their 4% pay claim.

Key says that Treasury project this reduction in future spending will see NZ get back into surplus in 2014/15 instead of 2015/16. This of course will only occur if the 2011 – 2014 Government has tight fiscal discipline.

Now onto the capital side:

The Investment Statement shows that the government, on behalf of taxpayers, owns $220 billion of assets across a whole range of social, financial and commercial investments – everything from hospitals, roads, prisons, schools and Police stations to the Super Fund, electricity companies and coal mining operations.

We also expect to acquire $33 billion of net new assets over the next five years, including new schools, operating theatres, ultra-fast broadband and major investments in our state highways and other transport infrastructure. That is a considerable spend by any reckoning.

At the margin there are two ways we can acquire new assets – either we can borrow more or we can change the mix of assets we own.

Indeed, and it is stupidity to insist that our current mix of assets is perfect, and in no way can any existing asset be sold or even sold down.

The greatest scope to change the mix of assets lies with the government’s portfolio of commercial assets.

In particular, the sort of mixed-ownership model under which Air New Zealand operates – where the government owns most of the company but there is a minority of outside equity – gives the best of both worlds.

Under this model, the government has a controlling stake in what is a crucial piece of transport infrastructure and guarantees that it will be majority New Zealand owned. But by not owning 100 percent of the airline, the government also has capital free to invest in other assets.

This model could be extended to more of the government’s commercial assets.

As well as freeing up capital, there are three other potential benefits of a mixed ownership model.

The first is that it broadens the pool of investments for New Zealand savers, either directly themselves, or through investment funds such as KiwiSaver.

New, quality listings on the stock exchange would give “mum and dad” investors the option of putting their savings into large and proven companies, rather than relying, as is so often the case, on property investments.

The second is that the company reaps the benefits of sharper commercial disciplines, more transparency and greater external oversight.

Under the mixed ownership model Air New Zealand has been a creative and innovative company and a model corporate citizen. It has also offered some very competitive prices for air travel.

I am convinced that Air New Zealand would not be run as well, nor provide as good a service to customers, if it was owned 100 percent by the government.

And the third potential benefit is the opportunity for the companies involved to obtain more capital to grow further, without depending entirely on a cash-strapped government to support them.

Having some SOEs able to access capital, without the taxpayers having to borrow more will be good for them, and allow them to grow.

And NZ investors would love having some solid companies to be able to invest in – which will help boost savings.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

For all these reasons, the Government has asked Treasury for advice on the merits and viability of extending the mixed ownership model to four other state-owned companies – Mighty River Power, Meridian, Genesis and Solid Energy.

In each case, the government would retain majority ownership and control, and the freed-up capital would be used to purchase other public assets, thereby reducing the government’s need to borrow.

The Government has also asked Treasury for advice on the merits and viability of reducing the government’s shareholding in Air New Zealand, again while retaining a majority stake.

Only the companies I have just mentioned will be considered for a mixed ownership model.

Yay. We are currently the only country in the OECD that has a policy based on pure ideology of banning any private sector investment in current state assets. This probable policy is a step in the right direction.

It is subject to finalisation and approval from voters at the 2011 election. It will maintain Government control of the five companies, but allow for Kiwi mums and dads to invest in those companies, providing the companies with capital, and the investors with good returns.

Kiwis will have some clear choices for the 2011 election – policies which boost savings, reduce future spending and reduce debt vs policies to tax rich pricks more and borrow more.

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$300m a week

December 15th, 2010 at 9:00 am by David Farrar

The Government is now borrowing $300m a week. This level of borrowing is simply not sustainable. The answer is not to tax and spend as Labour has promised (they have indicated they will increase at least the top tax rate) but to restrain or even reduce spending.

The OBEGAL (Operating Balance Excluding Gains and Losses) is forecast to just his surplus in 2015. To achieve that will require massive fiscal discipline – no spending sprees in both the 2011 and the 2014 election years. And even after 2015, massive restraint will be needed to give us a cushion going forward.

By 2015 core expenses are forecast to be 31.7% of GDP, down from 34.9% this year. That is going in the right direction but still too high in my opinion. I’d like to see both National and Labour indicate what their desired level of spending as a % of the overall economy is. These would not be legal straitjackets, but targets they can be measured against.

I think a realistic long-term goal is in the mid 20s – maybe as high as 28% but no higher. If we keep spending down, then the average economic growth will be significantly higher – and that is how we create jobs, grow wages, and close the gap with Australia.

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Prosperity creates spending, not vice-versa

September 17th, 2010 at 7:20 am by David Farrar

Roger Kerr blogs:

Roberts uses a neat analogy to describe US stimulus package policy later in his post:

Think of having a lot of wet wood and trying to get it going by lighting newspaper as kindling. There’s a fire for a while, while the newspaper is burning. But once the newspaper is consumed, the wood hasn’t caught. Even burning a lot more newspaper (bigger stimulus package) isn’t going to get the wood dry enough to catch fire.

The same applies to government spending in New Zealand. The role of the government should be to provide a framework that allows the economy to prosper. Cutting government spending is a sure way to heat up a damp economy.

Cutting government spending will generate higher growth. Growth generates prosperity. Prosperity creates spending: a roaring fire using dry wood without wasting stacks of paper getting it going.

It is worth remembering that the US had a giant fiscal stimulus and their unemployment rate is 9.6%. They spent $800 billion on fiscal stimulus and claimed it would yield $1.50 in growth for every $1 spent.

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Parliamentary Service Amendment Bill 2010 Submission

August 23rd, 2010 at 10:00 am by David Farrar


About the Submitter

  1. This submission is made by David Farrar in a personal capacity. I would like to appear before the Committee to speak to my submission.

Executive Summary

  1. I support the Parliamentary Service Amendment Bill 2010 as it provides a necessary limitation on what advertisements can be funded by the taxpayer during an election campaign.
  2. The history of this issue goes back to the 2005 election, when the Auditor-General found much of the parliamentary spending was illegal and outside the law.
  3. Parliament’s response was to legislate an interim definition of what was allowable that was wide – anything that did not explicitly call for votes, money or members was okay.
  4. The problem with the interim definition is that it would have allowed a repeat of 2005, when you could have taxpayer funded election pledge cards being paid for by Parliament, just weeks or days before an election.
  5. One solution is to adopt a more narrow definition during the entire parliamentary term – banning any publications that promote a political party or MP. The problem with this solution is that in practice it could never work. Almost all parliamentary publications involve a degree of party and MP promotion. One can not easily draw a fine line between parliamentary and political publications. The Opposition should be able to campaign against (for example) the Government’s budget, from their parliamentary budget. Otherwise the Government will be too powerful.
  6. The solution adopted in this bill, is to have a wide definition of what is allowable for two years and nine months (approx), and to have a much tighter definition during the three month regulated period.
  7. I support this solution, and in fact have publicly urged such a solution since 2006. It doesn’t unduly restrict the operations of Parliament during most of the parliamentary term, but makes the election period fairer by preventing parliamentary parties and incumbent MPs from being able to spend taxpayer money on their advertising materials.
  8. The ability to get an advisory opinion from the Electoral Commission as to whether a proposed publication is an election advertisement will, I am sure, be welcomed by MPs and staff of the Parliamentary Service.
  9. One issue I would raise is whether s3A(2)((a)(i) and (ii) should also exclude communications that explicitly call on people not to elect a particular person or party vote for a particular party. This would seem desirable to me, as I don’t think (for example) taxpayer funded pamphlets should ever explicitly refer to how people should vote.

In summary I urge the Electoral Legislation Committee to recommend the Parliamentary Service Amendment Bill 2010 be passed.

David Farrar

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Fiscal Discipline pays off

April 22nd, 2010 at 1:11 pm by David Farrar

Bill English has just announced:

In the Budget last year, we identified $2 billion of lower quality spending over the subsequent four years to redirect into higher priority areas.

In this year’s Budget, we will find another $1.8 billion of low quality spending between now and 2014 for reprioritising into higher priority initiatives.

$3.8 billion of savings is not bad. That is around $3.799 billion more than what would have happened under Labour.

I said in last year’s Budget that most Government agencies will receive no budget increases over the next few years. And in this Budget, I will say the same thing again.

Not because they don’t deliver worthwhile services, but simply because we cannot allow debt to escalate further.

And the private sector has had to cope with falling revenue. Staying constant is relatively a better position to be in.

And in the release:

“The Government will continue to weed out low quality spending. We will live within the $1.1 billion annual operating allowance for new spending we have set ourselves, and restrict annual increases in this figure to 2 per cent from 2011/12.”

Mr English repeated that most Government agencies would receive no budget increases over the next three or four years, as the Government moved to get back to Budget surplus as soon as possible.

This fiscal discipline is necessary so we can stop borrowing, and start paying off debt. Borrowing $240 million a week is not sustainable.

“I want to get the Government back into budget surplus as quickly as possible, because surpluses give us choices.

“For example, surpluses give us choices to invest more in public services; to pay down public debt; to resume contributions to the New Zealand Super Fund – or to do any number of other things.

“As long as we run deficits, we don’t have those choices,”


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A spending cap

April 20th, 2010 at 6:41 am by David Farrar

The Herald reports:

Prime Minister John Key has swiftly shot down speculation that next month’s Budget would include an announcement on some form of legislated cap on Government spending.

This is a pity. I am definitely fan of a cap on spending as a percentage of GDP.

“We have our own self-imposed cap,” he said referring to the $1.1 billion limit on new spending announced last year.

And that is a useful discipline, but I think there is a difference between a cap on new spending and a target for how large the state’s portion of the economy should be.

The Act Party favours a legislated cap which would freeze government spending in real per capita terms, that is, only allow spending to increase in line with inflation and population growth unless over-ridden by a public referendum.

Again I think this is a worthwhile policy. Only allowing inflation and population adjustments might be a bit too restrictive, but one could set it as a maximum increase in real per capita terms of 1% a year for example.

The 2025 taskforce chaired by Don Brash recommended legislation requiring the Government to set a medium-term target for its operating spending either in real per capita terms or as a share of GDP.

And such a requirement would force transparency from parties on their spending plans. I want to have parties tell us their desired share of GDP for the state. National might say 30%, Labour 35% and ACT 25%, and one can make an informed choice about which policy you prefer.

Key said he did not support measures limiting something to a specified share of GDP.

Many governments had responded to the global financial crisis over the past 12 to 18 months by increasing their spending as a percentage of the economy. “If they are talking about something different, we could look at that.”

The PM’s concern seems to be that such a legislated cap would remove the ability of a Government to respond to a recession. But I think one can deal with that issue by having the cap as a medium term target, with the legislative requirement being to report progress against it – not to be illegal to ever exceed it.

Key does not seem to have ruled out a cap, if it leaves the Government with some flexibility. I think that is achievable and would encourage National to work towards that.

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Spending Cuts in the UK

April 9th, 2010 at 11:00 am by David Farrar

My weekly column at NBR 24/7 takes a look at the UK elections. An extract and a proposal:

Both Labour and the Conservatives are promising to cut public spending faster than Margaret Thatcher did in her first term. Labour has pledged to cut the deficit in half within four years. The Conservatives are promising a further £8 billion of spending cuts beyond that.

And one good proposal:

One welcome manifesto pledge from the Conservatives is to publish online all items of government spending over £25,000. For the size of their economy, this is equivalent to publishing all items of spending in New Zealand over $1,000.

I suggest:

Think of how popular Bill English would become if he ordered every Government department, ministry and agency to list every payment that make, online in a searchable database?

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Editorials 8 April 2010

April 8th, 2010 at 2:00 pm by David Farrar

The Herald calls for transparency over MPs legal expenses:

Taxpayers have a right to know how their dollars are being spent. That includes the allowances paid to the country’s parliamentarians for accommodation or travel, as some MPs have learned to their discomfort over the past year or so. It should also include the use of public money to cover legal costs when parliamentarians are sued. …

Clearly, there are occasions when it is legitimate for MPs’ legal bills to be paid with public money. Parliamentarians should act vigorously on behalf of their constituents. …

Yet but for the publication of documents by the New Zealand Herald and an admission by Dr Smith of the use of some public funding, taxpayers would have been none the wiser about either of the requests for reimbursement or their granting or denial.

The Prime Minister, John Key, said yesterday that taxpayers were entitled to know that money from the public kitty was being used for MPs’ legal costs, and that he would be open to such information being made public. That is a refreshing outlook, and one that indicates Mr Key is fully aware of the harsh spotlight on MPs’ expenses and allowances, both here and in Britain.

As I blogged, I’d include it in the six monthly expense reports.

The Dominion Post also wants more transparency, but around a health spending scandal:

Unacceptable. There is no other word for the situation that police claim has developed with Waikanae’s Te Runanga O Te Ati Awa Ki Whakarongotai, its health-provider arm Hora Te Pai and Capital & Coast District Health Board.

Stripped to its essentials, the police allege that money that was meant to be spent improving health has been siphoned off into other areas.

Regardless of the final outcome of the police inquiries, that is no way to manage $590,000 of taxpayers’ money. It is public money, and the handling of it should be transparent, with the details of where it is or what it has been spent on readily available.

I agree. Phil Kitchin does an invaluable job in expsoing their spending scandals. But we should not have to rely on him.

As I have said previously, I’d do what some US states do and have the entire cheque register for the Government put online. People could then file OIAs about spending that looks dodgy.

The Press says the dam decision is a close call:

The benefits from building a hydro dam on the Mokihinui River, north of Westport, are obvious.

It would, by using a resource that on the West Coast is endlessly renewable, give the region enough electricity to power 45,000 homes.

The dam would not only supply most of the region’s electricity needs in an undeniably carbon-zero way, it would also end the reliance on a long and vulnerable transmission line that brings the area’s present power supply from the Waitaki. Supply would not only be more secure, it would be more efficient and West Coast electricity prices, at present some of the highest in the country, would be lower.

Which is why many locals support it.

The proposal would require a 85-metre high, 300m wide dam across the river that would create a narrow, 14 kilometre long lake covering 340 hectares. Meridian says that the impact would be minor and it has made a considerable effort to make sure they are kept to a minimum. No endangered species are threatened, it says. In addition, the resource consents Meridian has received have more than 200 conditions attached to them to further reduce the impact. Nonetheless, according to the objectors, a precious, irreplaceable part of the landscape will be irretrievably changed. …

But the country cannot afford to have decisions like this one made on emotion and sentiment. Electricity demand is growing by 2 per cent a year, equivalent to the needs of a city the size of Dunedin. The two-to-one vote on this scheme shows that the commissioners’ approval was not easily arrived at but it was made, as it must be under the Resource Management Act, after rigorously detached consideration of all the arguments. In this case the commissioners decided the development’s impact on the environment are not bad enough to block the project.

I’ve blogged on this separately also.

And the ODT looks at Easter trading:

Parliament, as it so often does, tried to design a horse with its legislative provisions controlling private enterprise during Easter, and instead produced a camel.

A particulary stupid camel, that has a limp.

There is nothing about the regulations that can in 2010 be considered just and necessary, let alone reflective of contemporary society.

The creation of geographic exemptions to trading on Good Friday and Easter Sunday, meaning some places can open their doors while others must close – backed by farcically small penalties – is simply unjustly partial. …

The Muldoon National government passed the legislation in 1980 which provided for shops to be open on Saturdays, and also broadened the range of heavily restricted goods able to be sold on Sundays.

The world did not come to a halt as a result; indeed, apart from the predictable complaints from the unions, the public in general welcomed the measure, which also signalled the decade’s major social change – the end of the five-day, 40-hour working week.

And one day when we have sensible laws around Easter, we will look back with bemusement over how long it took us to do it.

It is time for the matter to be settled and the only way that will happen is to abandon the so-called “personal vote” in Parliament and achieve suitable legislation by way of a Government Bill.

Whether John Key’s administration has the fortitude to do so, or is prepared to risk the undoubted wrath of church and union, is arguable: Mr Key agrees the present regulations are a shambles and would like them to be liberalised, and he has voted accordingly in the past.

It is time for a national solution: declaring Easter Sunday to be a public holiday would protect workers’ wage levels, and sending a Bill to a select committee would ensure public opinion – more accurately reflecting the times in which we live rather than electorate pressure on individual MPs – could be canvassed.

I’m a big supporter of change, and have myself mooted a trade off of making all of Easter public holidays in exchange for removign the trading restrictions.

But I am reluctant to have this become a party whipped issue. I think MPs should have freedom of choice on this.

Having said that, I note that Labour have almost adoped a party line on the issue, so maybe in time National will also.

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