www.geocities.com/nzwomen/SusanStJohn/2002402letterIndependent.htm

 The Independent 2 April 2002

Dear Editor

Roger Kerr and the Business Roundtable are determined to have an argument about government spending and growth rates. The fundamental issue is that such use of Government spending/ GDP ratios and OECD averages or totals are fraught with danger, both over time within one country, and in cross country comparisons. Using these flawed measures selectively to prove that higher ratios mean lower growth is especially dangerous. Perhaps the BRT 'expert' James Gwartney who believes that 10-15% is 'perfectly adequate' for government spending and taxation might explain why the many developing countries for whom such ratios are the norm have living standards and growth rates that are extremely poor.

Misgivings about growth studies aside, I fail to see how Roger Kerr's perennial claim that New Zealand is "well above the OECD average" can possibly be substantiated. I have especially complained about the BRT use of totals rather than simple averages which are very biased towards what happens in the USA. Even those figures are so imprecise to have needed the marked revision over a short time as Roger Kerr's letter (13th March) acknowledges. I have also complained about the use of a spending measure that lumps transfer spending in with capital and current spending. For instance transfer spending, tax incentives, mandatory savings may all be legitimate vehicles for the state to accomplish its objectives for retirement but each has vastly different implications for the measure of government spending. An Irish study costs the hidden form of government expenditure on pensions implied by their generous tax incentives at 1.5% of GDP. (Thus this hidden Irish subsidy is almost 40 percent of our total pension cost).

At the UN conference on Financing for Development at Monterrey last week I heard a Chilean expert describe the problems of their mandatory privatised pension scheme. The very high administration costs of that scheme add to GDP but not to human welfare. Nor do they add to government spending, because contributions are not counted as a tax, nor payouts as government spending. The outcome is a poor coverage of the population, poor returns and evasion is rife, but it looks very cheap and is good for the ratios.

New Zealand could easily meet the BRT requirements to reduce the government spending / GDP ratio. Just change NZ superannuation into a negative income tax, treat all family tax credits as reduction in tax collected, not welfare spending, and the ratio could be 7-8 percentage points lower. Should we then expect our growth problems to be over?

Susan St John