What can the far away land of the long white cloud teach Croatia?
As Index writes on the 17th of April, 2018, the strong growth of government powers is a somewhat modern phenomenon. Can this situation be stopped, or even actually be reversed? The answer is yes, but this requires great levels of transparency and responsibility for bad decisions, at least according to the former New Zealand MP and Minister Maurice P. McTigue for Imprimis.
Below, we bring you the most important parts of his lecture from back in 2004, which talks about the reforms that New Zealand went through during the mid-1980s.
From 1850 to the 1920s, the share of government spending in the GDP of industrialised economies in the world stood at about six percent. Since then, the share of GDP in some countries has risen to as much as 35 to 40 percent.
Throughout the world today, we see a silent revolution in how people understand the government’s responsibility. People are now wondering what public benefit is from the spending of resources. This issue has always been raised in entrepreneurship, and it is also the very foundation of successful reforms which have taken place in far away New Zealand.
Per capita income in New Zealand before the late 1950s placed the country as the third in the world after the USA and Canada. Until 1984, per capita income fell to 27, the unemployment rate was at 11.6 percent, debt accounted for 65 percent of GDP, and the credit rating of the was experiencing a continual rot.
Government spending amounted to 44 percent of GDP, investment capital was enormous, and government control and micromanagement were heavily present at all levels of the economy.
The government controlled the currency exchange, foreign trade, imports, the price of all goods and services, and wage amounts. Huge amounts of incentives were invested in various industries, and young people were fleeing from the country in their droves.
In 1984, the reformation of the government identified three major problems: excessive consumption, excessive taxation and excessive government powers.
The first step in solving these burdensome problems was to calculate the value obtained for the money actually being spent. Keeping this in mind, the New Zealand government started signing, along with the heads of government agencies, various sale and purchase contracts, which clearly defined what was expected in return for the money spent.
Heads of government agencies began to be selected on the basis of a global search for staff in a term of five years, and could be dismissed only on the basis of poor results. They became like executive directors – they had to make sure that they and their subordinates achieved clearly defined goals in order to hold onto their positions.
The New Zealand government then bought policy advice from each agency to achieve the aforementioned certain goals, such as reducing the number of homeless people. The aim was not to cover as many people as possible with social welfare programs, but to remove them from social welfare entirely, and to be able to give them the chance to live their lives independently.
Taxpayers often subsidise things that they do not benefit from whatsoever. If service costs aren’t charged to actual users, this results in excessive use and an overall fall in the value of that particular service.
With the reforms in the the number of employees in the New Zealand Ministry of Transport, the number was reduced from 5600 to just 53, while forest management with 17,000 employees dropped to just 17. The only employee of the Ministry of Labour – which had previously employed 28,000 people – remained the Minister himself.
This extreme ”shaving” didn’t mean that all these people lost their jobs because the need for them in itself didn’t disappear. They simply ceased to by employed by the government, and the result was a considerable increase in their salaries, which then reflected positively on their general productivity as workers.
New Zealand privatised telecommunications, aviation, irrigation, computer services, insurance companies, banks, railways, buses, hotels and many other sectors because they weren’t a direct part of government affairs.
Privatisation increased productivity and reduced service prices, which resulted in a big gain for the economy. The remaining agencies were organised as profit companies which had to pay taxes and were unable to receive government investment.
The rescheduled agencies began to generate an annual revenue of $1 billion in revenue and taxes, and the number of government officials was reduced by a massive 66 percent.
New Zealand managed to achieve a budget surplus, and the policy that was adopted ensured that this money had to be spent immediately. Most of the surplus was spent on the repatriation of public debt, which fell from 63 percent of GDP to just 17 percent. The rest of the surplus was used to reduce taxes. Income tax was cut in half, and the result was a 20 percent increase in government revenue.
Subsidies, education and competitiveness soon followed.
The main problem with subsidies is that it causes people to become dependent, and dependents are generally not innovative, nor are they creative. In 1984, New Zealand sheep farmers received 44 percent of their income in the form of government incentives, and their lamb price on the international market was $12.50 per lamb.
Within a year, the government abolished all the incentives for sheep farming. Of course, workers in that industry were left more than dissatisfied, but this made them bring a plan to the table to raise the price of their product on the market. This meant the production of a completely different product, the introduction of totally new processing methods, and placement on other markets.
Owing to these moves, it wasn’t long before the price of a New Zealand lamb rose to $30 in 1989, 1991 saw it rise to $42, and by the year 1999, it was a much higher $115. In other words, New Zealand’s sheep farmers entered the market and found people who were willing to pay far more for their product than they were before, under a different system.
Many predicted that the withdrawal of state incentives would result in mass exodus from New Zealand, but that didn’t happen. In addition to that positive outcome, family farms haven’t been replaced by large corporations, quite on the contrary.
In the mid 1980s, New Zealand’s education system was far below the international average, despite major investments in education in general. For the purpose of revising the education system, the government hired international consultants, who found that administrative costs take up as much as 70 percent of each, individual invested dollar.
New Zealand therefore abolished government education committees, and schools were placed under the supervision of parent councils. Each school has been awarded grants according to the number of pupils, and parents have the option to choose which school in which they want to enroll their child.
Private schools began to be funded in the same way as public schools. There were predictions of a mass exodus of students from private schools owing to this change in the system, but that did not happen.
The differences between public and private schools disappeared within a period of just two years. The teachers realised that if they lose their students, they lose their jobs too. The percentage of students in public schools has risen, and today, New Zealand is at a level of educational achievement far beyond the world average.
Many in the public sector today do not realise that competitiveness has become truly global. The only way to keep businesses in the country is to create the best business climate. An interesting example is much closer to home, here in Europe, in Ireland, which in 2002 reduced corporate taxation from 48 to 12 percent, which is why business began to flow to the emerald isle.
This was met with sharp criticism of the European Union, particularly from nearby France. This move was declared discriminatory, with which Ireland agreed: corporate tax was reduced to 10 percent.
The Government of New Zealand concluded that the tax system should not deal with social services. The highest income tax rate was reduced from 66 to 33 percent and the lowest from 38 to 19 percent. The only retained tax was the tax on consumption and that stands at 10 percent. Contrary to expectations, the reform of the tax system actually led to a 20 percent increase in the level of collected tax overall.
Lower taxes meant that a larger number of people paid voluntarily, and fewer were paying expensive lawyers to help them out with difficulties from before the system was altered. This has also been the case in any other country that has lowered its tax rates in a similar manner.
As far as regulations are concerned, the New Zealand government ruled out the old and has adopted entirely new laws, whose purpose is to make sure industry grows and flourishes.
Different thinking is the key.
No country is perfect, but New Zealand managed to solve an enormous amount of its problems simply by changing the mindset of the government and state.
The New Zealand government also abolished the obligation to extend the validity of driving licenses, as it turned out that the extension fees actually didn’t cover the total cost of the extension. Since these extensions are not actual proof of the ability to drive, New Zealand’s driving licenses are now valid as one document before needing to be checked again until 74 years of age.
There are also similar positive moves being made across the Atlantic in the United States. Back in 1993, US Congress adopted a law stating that the government is obliged to come up with a strategic plan, and annually report on its achievements. Nearly 200 federal programs directed at the unemployed amounted to $8.4 billion at the beginning of the last decade. However, had that very same amount been invested in the three most effective programs, it would have created almost seven times more work positions.
A new way of thinking about governments and the state sector needs to incorporate sanctions on administrations that are responsible for failing to manage taxpayer money, McTigue concluded for Imprimis.
