The Elephant in the Budget Room

Ronald Reagan is a great source of sensible quotes.  He once said, “Entrepreneurs and their small businesses are the source of most of our growth”.

I was thinking about this when mulling over the recent budget.  A wide range of commentators offered their considered views on the budget but I do not recall anyone assessing it in terms of the country’s need for economic growth.  I didn’t hear anyone ask how the budget affected entrepreneurs and small business.  In the big “what’s in it for me” on budget day no one seemed to speak out for those who create economic growth.

I am assuming that economic growth is a good thing.  The left wing, the socialists are never too sure.  The greens like to confuse the matter by putting lots of qualifiers on growth as though somehow it’s a bad thing for the environment.  They obviously never visited Eastern Europe before the ‘wall’ came down – the place was an environmental disaster.

However I digress.  Books have been written about economic growth by people with a lot more skill and experience than I have so I am going with simple.  For me economic growth is about having more choices.  Someone with $500 to spend has more choices than someone with $100.  Australians and Americans, generally have more choices than Kiwis because they have enjoyed more economic growth.  If we grew our economy faster we would have more income and more choices.

But, hang on, you say.  We are doing well in the economic stakes.  One of the big issues underpinning this last budget was our economic growth and that we are doing better than most others.  Much of the backslapping and congratulation was on how well our books look because we are achieving “economic growth”.

Um, yes, true, but nah.  Earthquakes and immigration have been big drivers in the GDP stats, that much we know.  More people, more jobs, more bulldozers, more construction boosts the numbers.  Throw in tourism, dairy, some smart exporting and, yes the GDP figures are comparatively rosy.  I say comparatively because no one in the OECD is doing anything very startling.

The question is “do you have more choices?”  Are you better off?  Driving a later model car, boosted your savings, put in a new kitchen, holidayed in Croatia rather than the Coromandel?  The answer to that question is very narrowly, very slightly, “yes”.  But nothing like it should be or could be.

What we need is productivity growth.  The big GDP figures are masking the reality.  We are making little progress.  In fact, we may be going backwards.  This graph indicates we are working longer for less.  Actual productivity growth is stalled and its productivity growth we need to be better off.

So, why isn’t it happening?

The first problem is that for every $100 spent the government spends $40.  Nearly half of the spending decisions get made by people with little or no incentive to be efficient, innovative or frugal.  The record shows poor labour productivity performance, lack of technology uptake and innovative thinking.  The incentives simply do not exist as they do in the private sector.  

Bureaucracy and inefficiencies are not confined to the state sector. The same applies to big companies.  Bureaucracy and waste are symptoms of size not ownership.  Yesterday I passed some corporate workers replacing footpaths.  Of the seven present two were working and five were watching.  If the contract had gone to a firm of five or ten staff they would have all been working.

The second related problem is we give too much of what we earn to the state.  Takes away the incentive to do better.  Corporate tax needs to be down at 10 – 15%  or even lower.  Its not difficult.  Corporate welfare run by pollies and bureaucrats is no substitute either.

The third issue is the dead hand of regulation.  Try being different, creating disruption as they call it, building a new factory, taking on staff, getting a resource consent, getting export certs, and you face costs and delays that are just too tough.

The fourth matter is capital.  We have been poor savers as a nation over many years and need to use other people’s capital.  That involves hard work finding any investor interested and suitable.  It brings a share of risk.  If you want distribution for an export product, for example, you may need Chinese capital and that can bring some short sighted odium.  Farmers couldn’t fund Silver Fern Farms but many of them fought tooth and nail to stop the Chinese from entering their company. There is a bad attitude prevailing around using someone else’s money.  Funny, though.  We will borrow from a foreign bank with no qualms.

Too many of the potential areas for growth and opportunity are dominated by producer/owners.  Fonterra is a good example.  Payout comes first for a farmer dominated board of directors – research and innovation comes second.  Too much resource is out of reach of the investing market and performing poorly.  Huge sectors – dairy, meat, fruit, etc are controlled by coops and/or producers and their record is dismal. They are heavily indebted with too little room to move and have proven unable to achieve the added value targets they themselves have set.

Distance from markets can still be a tyranny but often its an excuse rather than a reason for not exploring more opportunities.  After all if we can make money flying fresh milk to Shanghai there should be no stopping us.

Education and skills training are underlying causes.  I have no particular gripe if someone wants to learn Maori but it has limitations commercially compared to learning an Asian language.  We have too much “unproductive” content in the curriculum partly because parents are shirking their role as educators/disciplinarians and partly because there are too many socialists engineering the system for their own ideals.  Education is run on a Marxist basis dominated by unions.

Watching the crazy goings on in the USA as millennials dismiss freedom of speech indicates that too much education time is spent on low grade learning and too little on how to be a productive member of society.  There are signs of the same thing happening here.  Colleges and universities have always delivered too many left wing do-gooders without a vestige of real life experience or common sense.  It’s getting worse.  Of course the same people want the highest standard of living available, more money spent on their little causes, lower fees and more subsidies without a clue where the “lolly” might come from.

If we chose to, we could change the settings.  I am concerned too many don’t care, don’t understand or are caught up in ‘fairyland’ economics where hard work, thrift, risk taking, investment, profits and productivity gains are a form of ‘hate speech’ to be banned.

 


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