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Friday, January 28, 2005

Don Brash from 2001 Knowledge Wave Conference - scary.

Nobody that I have ever met in New Zealand wants to deny those who are temporarily down on their luck sufficient income support to enable them to get back on their feet. In that respect, we are not willing to pay the price which Singapore paid to achieve very high growth, a society almost devoid of taxpayer-funded income support. But increasingly it is recognised that we will not achieve a radical improvement in our economic growth rate while we have to provide income support to more than 350,000 people of working age - 60,000 more than when unemployment reached its post-World-War-II peak in the early nineties - to say nothing of the 450,000 people who derive most of their income from New Zealand Superannuation.

This is partly because of the huge fiscal costs of these transfer payments - amounting to an estimated $13 billion this financial year, or some 11 per cent of estimated GDP (both figures include the fiscal cost of New Zealand Superannuation)). This cost substantially constrains the government from devoting more resources to education, law and order, research and development, and tax reduction. Indeed, it is probably fair to say that there is no other part of the government budget which can provide resources for these things. Certainly, it is hard to see scope for big reductions in the health or education budgets, the only other really major categories of government spending.

But I mention these transfer payments and the very high effective tax rates faced by those trying to get off them at this point not simply to draw attention to the fiscal costs but mainly because these payments have an influence on the numbers of those contributing to the production of goods and services in the market economy.

Are there ways in which we can change the incentives facing people now receiving such transfer payments? There are clearly a number of alternatives to the present way in which we provide income support short of adopting a cold-turkey Singaporean approach, and there is no single "right" way of doing it. Could we, for example, drop all benefits to the able-bodied and scrap the statutory minimum wage, so that pay rates could fall to the point where the labour market fully clears, but simultaneously introduce a form of negative income tax to sustain total incomes at a socially-acceptable level? Could we introduce some kind of life-time limit on the period during which an able-bodied individual could claim benefits from the state? Could we, perhaps, gradually raise the age at which people become eligible for New Zealand Superannuation, reflecting the gradual increase in life expectancy and improved health among the elderly? One of my colleagues has suggested the idea of abolishing the unemployment benefit but introducing some kind of "employer of last resort" system, perhaps run by local authorities with support from central government, under which every local authority would be required to offer daily employment to anybody and everybody who asked for it. Clearly, there would be huge benefits not just to economic growth but also to social cohesion if we were able to achieve a radical reduction in the number of those dependent on income transfers from the state.

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