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Government Spending Ideology

Written By: - Date published: 7:45 am, December 16th, 2010 - 26 comments
Categories: class war, dpf, public services, tax - Tags: ,

David Farrar sees that the government is borrowing too much – $300 million each week.  But National’s tax cuts for the rich are obviously not to blame, no it’s the bloated public service.

He would like any party that wants to be government to declare what percentage of GDP is an appropriate amount of government spending.  Because all parties I’m sure have an ideological figure that it should be.  Rather than just enough to provide the public services citizens need, but still balancing the books.

The National Party sounding board is glad to see that the government aims to bring it down to the low 30s, but wants it to be mid 20s – “maybe as high as 28% but no higher”.

That would entail massive cuts to public services.  Like the US & Australia you’d want private health insurance and private education for your kids to match the services you get for free in NZ.  Your tax bills may be lower, but your other costs would rise much more than you’d save.  And, as it turns out, the US and Australian governments still spend a lot more than 30% of GDP.  Australia is low for a western country at 34.2% and the US is at 37.4%.

Looking at US Right-wing think tank The Heritage Foundation’s figures, western democracies all spend well above the levels Farrar advocates.  The UK is at 44%, Canada 39.1%, Germany 44.2%, France 52.3%, Sweden 52.4%.  Even Heritage Foundation and National poster-boy / basket-case Ireland is at 35.7%.  If you want good services and a stable society that’s what you pay.  Oddly in the Heritage Foundation’s Economic Freedom Index almost all the top countries are marked down for high government spending -the only exceptions being Hong Kong (not actually a country) and Singapore – 2 incredibly unequal territories where you give up a lot of other freedoms.

Those with ideological blinkers, like Farrar and many in National, cannot see the high correlation between being a free and stable country and paying for it.  They’d rather screw the poor and live in a country like Azerbaijan (27.4%), Kazakhstan (24.4%) or Fiji (25.4%).

26 comments on “Government Spending Ideology”

  1. higherstandard 1

    The only solution I can see to NZ s current economic woes is to.

    1. cut spending

    and

    2. increase taxes

    • Marty G 1.1

      just as a few non-radical suggestions:

      stop new motorway construction (invest half of what’s saved in public transport), half the new capital investment budget of the defence force, no new prisons. Keep real per capita funding of health and education at 2008 levels or higher.

      You’ll still save maybe half a billion a year.

      Undo National’s tax cuts for the rich and you’ll raise another billion or so.

      We’ll return to surplus a year or two earlier and borrow ten billion or more less in the process.

      • higherstandard 1.1.1

        I believe we need as a country to have that the kind of debate about what we can afford and need and how we’re going to pay for it, otherwise we ‘ll be trapped into the cyclical boom and bust for evermore.

        • Rex Widerstrom 1.1.1.1

          Well said, higherstandard. One side giveth and the other taketh away (but giveth other stuff instead) is a recipe for getting at best half-arsed projects with little or no cost-benefit anaylsis and at worst, a huge waste of public money.

          The worst example I’ve seen is in WA, where the Liberal government decided the state needed a train line from Perth to Bunbury (a small city about 200 km south). They started building it, got about as far as the southern part of Perth, and got defeated.

          The new Labor government had agreed with the “need” (I’ve yet to see a credible cost/benefit analysis, though as a commuter it’s great to read a book on the train and not have to drive) but couldn’t bee seen to completely agree with the Liberals so they abandoned the track and took a completely different route south, even though that meant tunnelling under the city and tearing up a really efficient, totally separate bus lane that ran down the middle of the freeway.

          The whole thing was fraught by union trouble; the state government was sued by the contractor; it all took three times as long as it should have and cost almost twice as much as budgeted (and that’s not counting the abandoned line to nowhere).

          I’ve deliberately refreained from finding out the dollar cost of this stupidity, as I fear I wouldn’t live through the experience.

          But the point of this rambling discourse is to point out that the architect of this monument to hubris, Allannah McTiernan, is widely hailed by punters, business people and pollies alike as “effective” because she “got things done”.

          Until we get beyond that level of tit-for-tat posturing, take politics (and politicians) off the table, and decide what we want and what we’re prepared to pay for it, we’re just going to have a series of cock-ups foisted upon us.

          But of course it’ll never happen, because pork barrel infrastructure promises are the butter of politics; the bread being “more police and longer sentences”, and both parties will continue to serve them up.

    • A 1.2

      We need to significantly raise taxes in the long term. We cheap out on things like education, health care and major infrastructure, which are things that the state is better at providing than the market. At the same time, we spend far too much on competitive consumption (status goods), most of which ends up being wasted and does absolutely nothing to improve the quality of life of most people (except the very few winners of the status competition).

  2. Bored 2

    The lines are drawn, those who have versus those who dont. Full on class war will come with the economic decline we are heading into as the energy runs out. The “middle” who all the politicians seem to chase will have to take sides. I have no confidence the fence sitting “aspiring” centre will go with their real interests, more likely their dreams of continuous growth, prosperity and the associated baubles. Then watch the turmoil as a destitute desparate middle emerges demanding jobs, welfare, health and education

  3. Rob A 3

    It seems to me that this is a long term problem needing a long term solution instead of what we’ve been doing like playing with tax rates and govt spending.

    How about we take the billions in the Super Fund and Kiwisaver and invest some of it back into New Zealand industry instead of sending it all overseas.

    For instance the company where I work tried for two years to raise capital fpr expansion in New Zealand but in the end we’ve sold 51% of it to the Chinese.

    • That’s the constant refrain isnit it? The Chinese are taking over so lets become a pawn in the US desperate struggle to stop the Chinese. But US corporates are in China exploiting Chinese workers. General Motors majorityowned by the US government has revived by expansion in China.
      The common enemy of NZ workers and Chinese and US workers is the US and Chinese ruling classes. It is not nation against nation but class against class. NZ is a pawn in the competition between US and Chiinese ruling classes over global domination of resources and workers. The worlds workers have no interest in siding with their national bosses in this struggle. We have a common interest in socialising those resources and managing them with our own labour.

    • prism 3.2

      China story. I was talking to a chap who buys fabric internationally for 10 stores in NZ. Much of what’s on offer comes from China. Interestingly, the Chinese haven’t any interest in doing business with NZs – we are too small to be bothered with. So they announce themselves as Australians and then bargain their way down to the amounts of fabric they need. The Chinese expect them to have a market size that will provide repeat orders and put up with these otherwise minor orders.

      After all the NZ manufacturing business our government has abandoned by withdrawing nearly all tariffs, are we to find that we can’t even buy the goods overseas that we require?

      antispam – fact

  4. prism 4

    Wealthy people can be very hard to extract payment for services from. They know what they want but when settling bills time comes, don’t want to pay for it. Likewise with our country, once they have the money they want, they don’t want to pay into the system to keep the standards that supported their accretion of money as expected from an advanced developed country.

    • Bored 4.1

      You are right, the wealthy wont give a cent without coercion, in fact they will also try and take more at the very time they are pressed to give. Their response backed by historic evidence of every similar event will be to back whichever armed coercive group they can create or align with to reinforce their hold on the failing status quo.

  5. Nick C 5

    This post is actually quite well written relative to some of the rubbish the bloggers here write. I agree that how high our taxes and government spending are is simply a manifestation of what sort of services we want then government to provide and what sort we want the provite sector to provide. I think the reason that those on ‘the right’ generally call for lower government spending and lower taxes is that we believe we get more choice when recieving services from the market. When I go to the supermarket and any other market I get to pick every single product I buy amoung thousands of other products every single time. When I got to the ballot box I get 2 ticks, to pick from a handful of parties with any chance of making parliament, and only once every 3 years. Statistically it is almost impossible for my individual vote to in any way affect the election outcome.

    I think the issue of equality is different from who provides what services also. You could say ‘the poor person gets no real choice at the supermarket’ and that is true to an extent. But say we were to have a guarenteed minimum income so that all citizens were able to live without getting free stuff. I think the case for governmetn provision of a lot of free stuff dries up quickly.

    • Bunji 5.1

      I see a great misnomer in the concept of “choice”, which is popular with many politicians (it was certainly the mantra when I was in the UK).

      I don’t want a “choice” of schools, I want my local one to be the best possible. I don’t need it to be better than my neighbours – I want every New Zealander to have the best possible education. Partly that’s altruistic, but even if every bone of my body is selfish, I’ll do better if I’m in a highly educated society of achievers.

      I don’t want a “choice” of doctor, or hospital, or even medical treatment. I’m not in a position to choose who or what’s best, so I just want the highest quality we can achieve and afford (cost being a particular issue with modern health care). I don’t see I deserve better than anyone else, so I don’t see that I should get a choice that disadvantages someone else.

      I don’t want a “choice” in my national infrastructure either. I don’t need 2 roads / sets of rails / lines of fibre between me and everyone I might want to be in contact with. I don’t see any second option as helping me at all, it’s just consuming the nation’s resources.

      In a lot of these things “choice” merely equates to me getting something better at someone else’s loss. Which equates to those with the wealth and education getting the best choices, which quickly evolves into a privileged class and an underclass caught into a poverty trap.

      I’d rather no “choice” and a focus on getting everywhere the best we can, particularly on those basic services that everyone should have.

      (I’m quite happy to have choice on my washing powder though, although I’m not sure that does me any good either – I don’t really know which one works best for my buck, and they all claim top-billing…)

      [I’ve made this into a post, to allow more discussion on “choice”]

    • Bunji 5.2

      I’d also say that the average person can have a lot more “choice” in their political party. If people get involved (and they used to in much greater numbers than they do now) they can influence the direction of that party. It’s a lot easier influencing parties that you already largely agree with, or small parties, but everyone can have input a lot more often than once every 3 years, with 2 ticks (and some want to take one of those ticks away!)

    • Jeremy Harris 5.3

      Nick C, has covered much of what I’d like to say but I’d also add that when running a business government tax rates greatly affect your ability to expand and hire more people and invest in increasing productivity… When it comes time to pay staff, their salaries minus the income taxes are paid out to them as if salary minus tax was their salaries but the taxes on their salaries are just another business expense, ditto company tax rates…

      That would entail massive cuts to public services. Like the US & Australia you’d want private health insurance and private education for your kids to match the services you get for free in NZ. Your tax bills may be lower, but your other costs would rise much more than you’d save.

      What evidence caused you to make this statement..?

      • Bunji 5.3.1

        Having to pay the staff greatly affects your ability to expand too. But wages and taxes are the price we pay for a stable, healthy, well-regulated and policed society, where people can a) afford your product and b) can’t murder you if they don’t like your product (see: Somalia).

        Evidence of other costs increasing more than you save in taxes: the US health system. With 16.7% of the population uninsured (and paying the consequences with their health instead of their wallet), still Americans pay as a country twice as much as other western countries. Private education economics don’t work out great either.

        • Jeremy Harris 5.3.1.1

          @Bunji, the cost of Police, Armed Forces, Courts, Prisons and Parliament usually runs at about 5% of GDP, so when your talking about the difference between that example, countries (who objectively have out of control government spending in Europe that you cite) and Somalia, Somalia really is a redundant example… Somalia is an example of no government not small government, a fact seemingly lost on those on this blog that constantly bring it up whenever a right winger speaks up…

          The US Health System is hardly private, Medicare and Medicaid are massive programmes, it is a mixture and is taking the worst parts of both government run health care and private big business protected by government…

          • Bunji 5.3.1.1.1

            As I specified stable and healthy as well, you might like to include the costs of public health and unemployment. Without unemployment benefits there’ll be a lot more disorder, and without public health your workers will be a lot more sick.

            Somalia was obviously a cheap shot, but they do technically have a government…

      • Pascal's bookie 5.3.2

        When it comes time to pay staff, their salaries minus the income taxes are paid out to them as if salary minus tax was their salaries but the taxes on their salaries are just another business expense,

        This is just sophistry. If PAYE really was an extra business expense above and beyond labour costs, which is what you are implying, then employers would get to pocket any cuts to income tax rates. If the payment of PAYE is stressing the company, then it is their labour costs that are the stress.

        The broader point just seems to be special pleading. ‘Oh if we didn’t have to pay tax we could do ever so much good, someone else should carry the tax burden.’ But everyone can argue that. Employees could similarly argue that paying their tax was greatly affecting their ability to create more retail demand, and make more use of small businesses like lawn-mowing and house cleaning services, builders, house painters and artists and what have you.

        In the US at the moment companies are hoarding cash. So are the banks. Why? It’s not profitable to be expanding production and hiring people because the demand isn’t there. Demand for services will always be the primary driver of whether or not a company expands or contracts. Beyond that I’d guess that availability of labour and capital would be the next biggest issues. The idea that taxation on profits, which is far a more predictable variable than anything else in business, is the thing that’s holding them back just seems silly in light of all the other things.

        • Jeremy Harris 5.3.2.1

          I’m not talking about companies in stressed situations but if PAYE was reduced the reduction would intially go to employees yes, over time large reductions have the same effect as a reduced or removed business expense, including the ability to pay higher wages…

          The broader point just seems to be special pleading. ‘Oh if we didn’t have to pay tax we could do ever so much good, someone else should carry the tax burden.’ But everyone can argue that. Employees could similarly argue that paying their tax was greatly affecting their ability to create more retail demand, and make more use of small businesses like lawn-mowing and house cleaning services, builders, house painters and artists and what have you.

          No you misunderstand the point I was making I think, I don’t want someone else to carry the tax burden, I want the burden removed through reduced spending…

          That is part of what was so predictable about the massive hole in the Treasury books, cutting taxes, especially taxes for the wealthiest individuals, while not cutting spending by a greater amount was always going to fail as an economic driver… What I thought they should have done (at it’s simplest level) was introduce a tax free threshold (to put money in the lowest earners pockets) at a cost of $2 billion a year and cut WFF at a saving of $3 billion a year…

          US banks and companies are hoarding money for many reasons, they are unsure about Congress, the Fed, Europe and Wall St, with good reason…

          The idea that taxation on profits, which is far a more predictable variable than anything else in business, is the thing that’s holding them back just seems silly in light of all the other things.

          It not variability but the fact that money isn’t on the balance sheet…

          • Lanthanide 5.3.2.1.1

            I was going to make the same reply that PB did earlier, but couldn’t be arsed because I figure you’d probably misunderstand it anyway. And you did.

            “I’m not talking about companies in stressed situations but if PAYE was reduced the reduction would intially go to employees yes, over time large reductions have the same effect as a reduced or removed business expense, including the ability to pay higher wages…”

            Sorry, but that is complete and utter bullshit. I’ll give you some examples:
            A: Tax rate is 30%, person gets paid $100k, gets $70k in pocket
            B: Tax rate is 15%, person gets paid $100k, gets $85k in pocket

            In both cases, the cost to the business is $100k, reducing the PAYE rate hasn’t saved the business any money.

            Now, how about this:
            C: Tax rate is 15%, person gets paid $82,353, gets $70k in pocket

            In this case the company has gone from paying $100k to only $82,353 with the staff member still getting the same after-tax rate. But this company is now paying it’s staff less than it was paying in case A.

            So if anything, all this allows a company to do is pay their staff less, while still giving the staff the same after-tax rate. Over the long term, this doesn’t enable the company to pay their staff more:
            D: Tax rate is 15%, person get’s paid $117,647, gets $100k in the pocket.
            E: Tax rate is 30%, person get’s paid $142,857, gets $100k in the pocket.

            Again the only difference here is that a lower tax rate allows the company to pay the employee less money than they would in a higher tax environment, but with the employee getting the same net benefit.

            Again as PB said, effectively what you are arguing is that if the government cuts personal tax rates, a business will happily say to it’s employees “we are going to cut your pay at the same rate, so you get the same after-tax pay”. I don’t think they’d have many people working for them after pulling a stunt like that.

            Long story short: employees care about their headline pay rate specifically, as tax is universal and will be applied to them equally anywhere they work. So any business trying to take advantage of a tax rate change would have to pay their employees LESS, rather than more as you’re trying to say.

            • Pascal's bookie 5.3.2.1.1.1

              Remember when telecom shareholders clawed back some of the CEO’s dosh when the top tax rate got slashed?

              Me neither.

              • Lanthanide

                Good example.

                My boyfriend also pointed out that all job advertisements are for your salary, eg before tax, not your after tax salary.

          • Pascal's bookie 5.3.2.1.2

            No you misunderstand the point I was making I think, I don’t want someone else to carry the tax burden, I want the burden removed through reduced spending…

            That might be true, but it’s a separate point. You were, and seem to be still, saying, that taxation is the main thing holding companies back. The effect on the govts books of cutting taxes is irrelevant in finding out if that is true.

            The only thing that matters in finding out if that is true is “the fact that the money is on the balance sheet”

            I agree, and I’ve said repeatedly, that cutting taxes without cutting spending is a bullshit mess. It’s not a tax cut until the spending is cut. What it is, is a transference of the tax burden, not only onto future taxpayers, but usually onto different types of tax payers.

            It not variability but the fact that money isn’t on the balance sheet…

            But you are talking as if a tax on profits destroys the availability of capital. That’s silly. businesses have many many more sources of capital for expansion than retained profits.

            At the moment for example, there is all that cash that companies and banks are hoarding. Your answer doesn’t explain this at all, it just waives it’s hands at the government as if that, rather than the collapse in demand is the primary issue.

            What are your thoughts on the importance of aggregate demand, and what do you think would be the effect on demand of the tax shift you suggest re WFF/tax free threshold?

            That’s the problem I have with what you are saying. You point out the benefits of lower taxation, but don’t seem to account for the fact that those taxes are mostly redistributed in ways that create demand. Remove the taxes, you reduce that demand. It needs to be replaced somewhere. We can’t cut taxes for the wealthy by eliminating transfer payments, and still have the same amount of demand in the economy.

            • Lanthanide 5.3.2.1.2.1

              Also note that the majority of money that is invested into a business as capital to help it grow and expand is tax deductible anyway, so a lower corporate tax rate should make no difference in investment into companies. The only thing that increases is your after-tax profits (which goes to the shareholders). In real, practical terms it probably means that a company that was going to go out of business in March, can now operate for a bit long and instead goes out of business in April.

              In other words you’re unlikely to see a corporate tax cut passed on to customers; more likely the tax cut will be absorbed into the balance sheet to help recoup an eroding profit margin (as they tend to do over time due to inflation and labour costs). In this case the corporate rate is going from 30% to 28%, which is even less likely to be passed on to customers because it’s such a small amount,.

  6. MrSmith 6

    Well I think i have just fallen on the Nat’s plan to raise productivity and eliminate the ‘P’ epidemic. Cocaine my friends, this stuff is pouring into the country! so not much sleep for some, may as well go to work then and at $300 a gram they will need to work, productivity and ‘P’ problem solved just like that .

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