Kiwi News and Views

Public policy frequently suffers because we don’t look at alternatives.

Thus far the Labour Party’s only ‘new’ election (economic) policy is to remove GST from fruit and vegetables.

Even the accompanying promise of adjusting Working for Families is much in line with what it has being doing in the last six years. It is also an acknowledgement that the government has not been able to improve the scheme despite an almost universal agreement by the knowledgeable that the sixteen-year-old scheme is neither efficient nor equitable. The Key-English Government could not solve the conundrum either. The promise to offer free dental care for under 30-year-olds is also an extension of past policies.

That suggests that Labour’s positive campaign is that it has done a good job and promising to progress its policies, but that there is nothing new it needs to offer – except cheaper fruit and vegetables. Whether the electorate considers this a good offer will be revealed on election night.

Why GST off fruit and vegetables? Why not bread and milk? I am guessing it comes from the public health sector, which has been concerned that people do not eat enough fresh fruit and vegetables. It found that higher taxes on alcohol and tobacco contribute to restraining their misuse and use. The sector, assuming this success will as easily apply to other products, has called for increased taxation on what is damaging to health – like sugar – and reduced taxation (or subsidisation) on what should be promoted – like fresh fruit and vegetables. In its enthusiasm it has paid little attention to the practicalities of implementation or the effectiveness of the price alteration in changing behaviour.

There has been considerable criticism of the proposed policy, ranging from the practicalities of implementation – what would be in and out, how food businesses would cope since they would almost have to keep two sets of accounts – to the possibility that most of the reduced tax would be absorbed by food outlets and little would be passed on in lower prices to purchasers. It is also argued that any reduction is greater benefit to high-income households than to low-income ones. Little attention has been given to any health benefits; there is not a lot of evidence one way or the other.

One of the main attractions of GST is its uniformity, which makes its implementation simple. (I applaud the Labour Government’s various measures to broaden coverage.) Varying the rates on one product group tempts a free-for-all on everything else. Casual advocacy can think of reasons for more or less consumption tax on almost every known product.

I support targeted excise duties on specific products which can be shown to be administratively practical and beneficial for the purpose. Currently that includes alcohol and tobacco for health, fuel duties for funding the transport system and carbon taxes for aligning individual decisions to the real cost of the emissions they generate (but I do think our current emissions trading scheme is very muddled). However, most popular proposals do not bother with such careful analysis. That leads to a higgledy-piggledy mess like we had in the Muldoon era.

Labour’s response seems to be that whatever the experts say, GST off fruit and vegetables is a popular policy. Apparently, the party’s focus groups favoured it about two to one.

I do not know exactly how the proposition was posed to the groups. Did they ask ‘do you support the removal of GST from fruit and vegetables?’ or did they ask ‘do you support the removal of GST from fruit and vegetables even if it is difficult to implement and much of the benefit of the lower taxes may go to retailers rather than purchasers?’

You may think the second question is loaded but so is the first, offering a policy change as though it is free. Next time you see the response to a focus group or survey question, ask yourself whether putting the same sentiment another way would have resulted in the same answer.

I would have preferred that the focus group had been asked ‘do you support the removal of GST from fruit and vegetables or would you rather have the cost of the reduction used to give you an extra $140 a year?’ I am guessing that the two-to-one support for the GST reduction would near reverse.

The cost of the lower GST is about $500m a year. The same $500m could be used to cut the bottom income tax rate from 10.5 percent to 9.5 percent so that every taxpayer who earns at least $14,000p.a. would be $140p.a. in the hand better off. It would be proportionally more beneficial to the poor than to those on higher incomes. You might be able think of options to spread the tax reduction more fairly, but this is my guess about the option voters would best respond to.

Putting the policy choice this way, many in the focus groups might be derisive of the size of the giveaway – less than $3 a week for most adults and nothing for children.  (National’s lowest offer is even smaller.) But that is true for the GST reduction. Do we really want that sort of transparency of policy in an election year?

My concern is wider. We usually discuss tax issues by looking at only one side of the story. I can understand people being opposed to a hike in income tax but it would be more popular if it was presented being used to increase spending on, say, health care, thereby reducing waiting lists and the need to go private. (In fairness, the Greens say they want to use the proceeds from their wealth tax to make dentistry free. I support both policies although there are some technical difficulties with free dentistry – did they consult anyone with expertise in dental economics before formulating their policy? But universal free dentistry is not at the top of my priority list for using any additional revenue.)

Regrettably, public discussion focuses on tax changes but not what their effect on public spending would be. That’s fine if one is opposed to all public spending, but it is hard to find anyone who is quite so rigorous. Even ACT MPs are happy to accept their salaries and expenses – once upon a time parliamentarians did not get much of either.

Economics is about tradeoffs. Sadly, these tradeoffs often get ignored in public discussion despite them being integral to public and private life. Even going without fresh fruit and vegetables trades off against your health.

PS. National’s tax package has been well covered by others, and hardly needs comment here. However, a broader point is that proposing new taxes to partially fund the reductions, breaks the consensus of ‘thou shall not introduce new taxes’, paving the way for a less hysterical discussion on capital gains and wealth taxes.

Evergrande and Country Garden – two giant Chinese property development companies – are a portent of the turbulence before us.

The recent financial failures of two ginormous Chinese property companies, Evergrande and Country Garden, at various times ranked the second largest and sixth largest in China have implications for the New Zealand economy.

The Evergrande Group has been struggling since 2021 (here). It has just filed in a New York for Chapter 15, a bankruptcy protection in the US enabling it to restructure its debts. The debts – most are not American –  are estimated to amount to an eye-watering US$300b (say NZ$500b). One assessment concluded that in February 2022  its liquidation would return only between 0% and 10% of principal to creditors.

Also in August 2023, Country Garden defaulted on the US$45 million with regard to interest disbursements linked to two offshore US dollar bonds. I won’t go through all the turmoil which has since happened, but summarise by saying that today Country Garden appears to be where Evergrande was two years ago. It may go down faster because Evergrande has undermined financial market confidence.

Moreover, while not so prominently in the news, there are many Chinese property companies – some comparably large – which are also in increasingly difficult financial troubles. China has many ‘shadow’ banks, that is banks whicch are not legally regulated in the usual way and which have the potential to collapse the entire financial system.

The immediate precipitant was that in August 2020, the Chinese government enacted a ‘three red lines’ rule which regulated the leverage taken on by property developers by limiting their borrowing based on the following metrics: debt-to-cash, debt-to-equity, and debt-to-assets. The rule’s purpose was to rein in the highly indebted property development sector. It has, but at the cost of undermining many of them. By October 2021, 14 of China’s 30 biggest developers had violated the regulations at least once.

More fundamentally, there had been a speculative property boom starting over a decade earlier in which the companies relied on inflating property prices to ‘balance’ their books. It was a kind of Ponzi financing, compounded by local authorities financing themselves by selling land to the companies, who financed the sale from the cash flow coming from new investors and banks.

Because of the local authority involvement the companies have been building accommodation in third and fourth level cities, where there is no significant demand. There are pictures of rows of apartment blocks which are said to be entirely empty. They will be in the company books at cost plus inflation, but there is little prospect that they can be sold at those prices, if they can be sold at all.

Observe too that a rapidly growing company – anywhere in the world – is unlikely to develop rigorous internal systems to administer and monitor itself. It is not until the receivers move in that we learn just how slack the failing company has been (and how much corruption).

I take it that the central authorities judged that the boom was unsustainable, and that the later the crash the bigger it would be. So they thought it better to act soon, even if that put China’s property and financial markets into turmoil.

There is much more that can be pieced together or guessed. But the issue for this column is the impact on New Zealand and the world.

There is a general agreement that the financial instability may politically weaken Chinese premier Xi Jiang. At the very least, it requires him to pay more attention to domestic issues. Among the issues which would surely worry Xi and the central committee is demonstrations outside Evergrande’s offices by investors who had partly prepaid for housing which has not been built or finished and by subcontractors who had not been paid. The demonstrators may turn on the government.

This does not mean that China will cease to be significant politically in the international system. It is too big and important for that. There is even the uncomfortable possibility that it will be more aggressive externally in order to take its population’s concern off failing domestic issues. (Putin’s Russia is a current example, but history records many others.)

Moreover, the property sector is said to contribute 24-30 percent of China’s GDP. The turmoil in its property market seems to be contributing to the slowdown in the growth of the Chinese economy, which gives Xi less room for economic manouevre; it may slow down its commitment to the Belt and Road Initiative.

(The other great Chinese growth driver has been exporting and that too is hiccupping, partly because the world economy is slowing down and partly because many countries are trying to de-risk their dependence on China. It is also possible that the gains from its thriving export sector are not increasing as fast as they have done over the last few decades.)

One assumes that eventually the government in Beijing will bail out the Chinese property sector (and the local authorities and the banks that have been financing it). There are various ways of comparing the size of the Chinese and New Zealand economies; one says it is about 70 times as big. So Evergrande’s NZ$500b debt is equivalent to about $7b here. (Double it for the other property companies also going under?) Our Treasury and Reserve Bank would blanch at a bailout of this magnitude. (I have more confidence in their expertise to do a bailout; they have had more practice. And they wouldn’t have to deal with a shadow banking system.)

Will the financial turmoil in China impact greatly on the world financial system? The conventional wisdom is that the exposure is not great. There may be some non-Chinese financial institutions which are overexposed and will suffer – even crash – but presumably they are a small proportion of the total.

Of greater concern to New Zealand is whether the slow growth of the Chinese economy will impact on our exports there. Our trade dependence on China is extraordinary. It is the biggest market for milk products, sheepmeats (for beef it is only second), fish, apples, wine and honey (for kiwifruit it is third). Thirty years ago, China did not make New Zealand’s top ten export destinations in any of these products. We may already be seeing an impact from the growth slowdown in international dairy product prices.

We have long been aware of our export overdependence on China, compounded by selling to other markets in East and Southeast Asia (including Australia) which are themselves very dependent on the Chinese economy. (Exports to these markets are about two-thirds of our total; China alone is a third.)

There have been considerable efforts to diversify; we have just settled free trade agreements with Britain and the EU. The big diversification could be with India, but the Indians have not been nearly as enthusiastic as we are. After all, compared to the others they are negotiating with we are a tiddler. A deal was a ‘priority’ for the Key-English Government, it has been for the Ardern-Hipkins one, and National has announced that it would be for them. There is a bit of a pattern here, isn’t there? When we finally get an FTA,  it is likely there will be little improvement for dairy access.

We are negotiating trade deals which will add to the diversification: with the ‘Pacific Alliance’ – the Latin American regional group made up of Chile, Colombia, Mexico and Peru – and with the Gulf states – Saudi Arabia, United Arab Emirates, Qatar, Kuwait, Oman and Bahrain. Negotiations with the Russia-Belarus-Kazakhstan Customs Union are currently suspended, while a long-term ambition for an FTA with the US is hardly on the table.  Open plurilateral deals enable new members to join, as when Britian joined the CPTPP, adding to the diversification; existing bilateral trade deals are also being upgraded.

This probably means that China and its associated economies will continue to dominate the prospects for the New Zealand economy for some time to come. What is going on in China’s property and finance markets may be more important to us than the October 2023 election.

Banning mobile phones in schools points to wider issues.

I don’t have enough information to evaluate National’s election proposal to ban mobile phones in schools, but something has to be said about how they plan to implement it. Compulsion from the top is characteristic of much New Zealand policy reflecting our centralist approach to government.

Many school principals are critical of the diktat. Presumably, they know a lot more about the issue than I do (or, for that matter, Chris Luxon does). Luxon claimed that ‘the ban was one of the ways National would lift “abysmal” achievement levels’, although there does not appear to be any evidence of a causal relationship between phone use and learning – correlation is not causation. (Evidenced-based policy will not be at the forefront during the election campaign.) As I understand it, the usual concern is misuse, especially for bullying, not academic achievement.

Some schools have already instituted bans without a Wellington-based direction. Apparently many principals think there is a problem with mobile phones in schools but that it should be addressed at individual school level, allowing for differences of opinions, circumstances and management styles.

I assume schools would recognise – even welcome – a recommendation from the centre, especially if it was accompanied by guidance about options prepared by an expert panel of school leaders. But it would be up to each school to implement a ban or not, including the practical details of how it would work. I should not be surprised if different schools chose different details in their approach, for circumstances differ from school to school.

This is an example of the application of nudging where the government has a view but rather than order it, it sets up a framework which encourages others towards the government view but leaves the final choice to them.

Perhaps a result of decentralisation would be messy decision-making in which each school – principal, teachers, council, parents and students – has to wrestle with what to do. (Have those schools which have a cell phone have a lot of trouble deciding?) But that is true whenever we have choice. There would be enormous ‘efficiency’ gains (and probably health ones too) if instead of giving superannuitants cash the government delivered its choice of groceries to everyone’s door. The elderly would not even have to decide on breakfast – nanny state would do that for them. Think of all the time and transport savings from not having to shop for food.

The nanny state trope is not mere rhetoric. One of the challenges parents face is how initially they make all the choices for their children and then have to slowly withdraw as the child evolves into an adult and increasingly makes their own decisions; sometimes parents are irritated or anxious by the decisions adolescents make – but you live with it.

What interests me about National’s policy is that it is top down. One usually thinks of National being the more decentralising party and that those to its political left are more prone to running the country by government direction. Recall John Key’s slogan in opposition that Labour was running a ‘nanny state’.

(National’s educational spokesperson is Erica Stafford – electorate East Coast Bays. Her adult background has no practical experience in the education system except that she has a couple of children.)

It would seem the culture of centralisation is so deeply embedded in the country that even National succumbs when it is expedient. Perhaps they are influenced by focus groups – apparently about three-quarters of those surveyed support a ban. I am astonished that so many New Zealanders thought they were informed enough to have a view – count me out. I wonder if the groups discussed how the ban would be implemented.

I agreed with the Rogernomes that, at the time, economic decision-making was too centralised and more decisions should be taken at lower levels.  I favour ‘subsidiarity’, a principle which is not prominent in New Zealand political thinking. (A leading Labour Party thinker, who honourably resisted neoliberalism, said he had never heard of it.) Subsidiarity is that social and political issues should be dealt with at the most immediate or local level that is consistent with their resolution.

The notion goes back to at least Thomas Aquinas in the thirteenth century and is prominent in Christian Democrat political philosophy, the European Union where it is a general principle in its law, and in the United States. The principle is not increasing efficiency – sometimes its application may – but reducing the power of those at the top of the hierarchy.

The economy the Rogernomes took over had suffered detailed intervention under Robert Muldoon, the dominant tradition of economic management since the Second World War, compounded by his personality and the wretched fight against inflation. The Rogernomes, rightly in my opinion, wanted to leave more decisions to lower levels where personal choices are co-ordinated by markets.

They did the decentralisation badly for at least three reasons. First, they did not pay enough attention to the need to regulate the market. The list of their failures is long; it includes building leaky buildings and allowing Telecom to be a monopoly.

Second, the market requires a fair income distribution to work properly. The Rogernomes increased inequality by cutting the incomes of those at the bottom. Most people think the resulting distribution is not fair.

Third – this is what this column is about – they saw the only valid agents in the economy as being the central government and private voluntary arrangements – which include businesses and households. Social institutions between them which required some regulatory support were downgraded – hence the Employment Contracts Act, which undercut unionism.

It is true that in places the Fourth Labour Government made some changes supportive of those institutions. It consolidated local government which could have given locals greater autonomy, but they did not address the funding issue and they continually bullied localities – for instance, directing them how they were to run their trading enterprises; we continue to do so today.

Labour also consolidated the health sector into what was then Regional Health Boards and later District Health Boards (interrupted by National’s neoliberal-driven attempt to commercialise the public sector in the early 1990s). Again there has been more bullying – the worst example was the treatment of the successful Canterbury DHB (described here and here). The system is not now subject to central government bullying of locals, because of its centralisation into Health New Zealand (Te Whatu Ora), with local input stripped out. (However, at least one local authority is seeking ways to monitor their local health system; good on them, may others join their effort.)

In David Lange’s post-Picot restructuring of the schooling system was decentralising with the intention of increasing the power of teachers and parents and reducing the power of Wellington bureaucrats and Rogernomes. Although presented as cost-saving, it was not. The Secretary of Education in charge of the transformation, while explaining to me how it was designed to hold off the Rogernomes, said that to make it work properly it needed another $60m p.a. (say $120m in today’s prices). But we still see the kind of bullying that National is practising.

Not that this Labour Government is exempt, despite the record of its 1984 predecessor. In a number of areas its approach has been centralist. (I have also mentioned in previous columns the media merger – now abandoned – the polytech merger and the three waters merger.)

The temptation of politicians to bully is inevitable; Muldoon was just the most prominent in my lifetime, but even the Rogernomes were dreadful bullies, especially if you did not agree with them. It is said that voters are more affected by moods than by specific policies. I shan’t be surprised if an important defining mood in 2023 is about the balance between centralisation and decentralisation.

Was another IT debacle inevitable given the management arrangements?

In February 20022, Archives New Zealand (ANZ) switched its electronic access to the nation’s public records from ‘Archway’ to the new Collections system, also known as  ‘AIMS’ (Archives Integrated Management System). There was immediate outrage by users. As Archives New Zealand politely said: ‘Ongoing issues with poor functionality, bugs, and unplanned disruptions in service caused increasing levels of dissatisfaction from users and government agencies.’

The October 2022 Foreconsulting report which reviewed the failure has just been released. It needs to be put in a wider context of Archives New Zealand increasing loss of professional independence and its shift from professional to generic management.

I have no expertise in the management of electronic files. This column is about general management in the public service. I do care about our public records because they are a fundamental part of a liberal democracy in that they help hold the government to account. This has been brilliantly illustrated by the historical investigations of the Waitangi Tribunal, although where they showed that the government had behaved honourably has not been as widely reported. In contemporary terms, the Public Records Act is critical to the workings of the Official Information Act; without it, officials could legally destroy public records, making the OIA ineffective.

Sadly, the Department of Internal Affairs, of which Archives New Zealand is a part, has no similar commitment to accountability, despite having particular responsibilities in the area. It sees the public records as primarily a part of the nation’s heritage. Certainly they are, but democracy and accountability are more important – totalitarian regimes go on about their heritage too. Its recent briefings to incoming ministers are almost opaque about the issues ANZ faces; they do not even tell ministers that the Chief Archivist has the right to go direct to the minister; he or she is ranked too low in the DIA to be named.

The history of Collections begins in 2015 with a project to look at replacing the suite of products used by ANZ and its customers, because it was thought that these systems were no longer fit for service and were putting operations and customer service at risk. However, the project was put on hold because of funding constraints.

In early 2018 the project was approved. There were four proposals from consultants and in October 2018, the Swedish-based firm Axiell was selected. They began work in late 2019. However, soon after, there was a ‘deteriorating situation’ and the go-live date of May 2021 was abandoned. The COVID lockdown would not have helped, but Foreconsulting also reports that there was ‘personnel turnover at every level … The project team and the receiving organisation were fatigued and relationships were strained. … Project personnel were not available when the significant issues began to occur and the operational team was under-prepared for what hit them … A disconnect between the workers and leadership – project board members did not universally understand their roles.’

In February 2022, nine months after the May deadline, Collections went live, followed by the outrage as members of the public, specialist researchers and archives staff identifying ‘significant issues and challenges.’ The new system was clumsy and did not do some obvious and necessary things that the old system did, such as enabling one to search for an agency, action, or individual, across the entire public record.

The Foreconsulting report draws attention to numerous failures in the management of the project. Perhaps they will be addressed in future such projects although generic managers tend to have such short memories that they do not recall such lessons. After all, this belongs to the ‘yet-another-bloody-IT-consultancy-failure’ debacle pile; do we never learn?

I observe a couple of further takeaways. One is that there seems to have been little consultation with users. It may be that they know little about the electronics of archiving – was there anyone in the ANZ supervising team who did? – but at least they would have discouraged a ‘go-live’ release when the new system was not ready for the users.

The second arises from an almost cryptic comment in the report that during the contract awards process ‘given proximity and relevance we would have expected checks to be undertaken with New South Wales State Archives and Records Authority (NSWARA). We understand later discussions with NSWARA revealed challenges encountered during their implementation journey.’

What this seems to be saying is that the NSWARA either used Axiell or its approach to archives management and that it had ‘challenges’ which if ANZ had known about, they may have used a different contractor or been better prepared for the difficulties they were to face.

Why was NSWARA not approached? The Foreconsulting report gives no clue, so allow me to hazard a guess. At the time of the 2018 contract, the Chief Archivist had an impressive IT background, but no background in archive management. Am I allowed to guess that he had no knowledge of the NSWARA, or informal contacts with his equivalent in that agency? One of the features of senior professionals is that they have informal international relationships through correspondence, visits and conferences. But the Chief Archivist at the time was not a professional archivist – his predecessor had not been either. (His successor was a professional but by the time he took over, the die was cast. The current acting Chief Archivist is not a professional archivist.)

We have yet another example of the dangers of generic managers, who are not knowledgeable about what they are managing. The result was a lemon. The Foreconsulting report does not discuss costs, but it was probably an awfully expensive lemon.

The report was commissioned to identify lessons to be learnt. Nobody is held to account. Will any of those involved have their employment record flagged that they were in this management disaster? Generic management is about passing the buck.

Once every three years, the accountability of the government is assessed by voters. But only that of the politicians – not of the officials. Which is not quite fair since there are instances of officials thwarting the politicians. But the politicians do little about this and have even reduced the accountability of officials to parliament, as with the Public Service Act 2020. Perhaps they get what they deserve; democracy does not.

(Footnote: In December 2022, it was announced that there were serious security breaches of personal records at Archives New Zealand. Among those who apologised was Axiell (as well as Archives New Zealand). They are not discussed in the Foreconsulting report which was finalised before the breaches were made public.)

Why doesn’t our government reflect New Zealanders; why doesn’t Parliament make them?

There will be many claims over the next few months that the minor parties will hold the major parties/politics/New Zealanders to ransom. That reflects a misunderstanding of how our system works. Any ransom occurs because the two main parties will not contemplate a ‘grand coalition’ of the two forming the government. It has happened in the past – during the First World War and the Great Depression – but nobody considers that possibility nowadays.

I leave others to explain why, although allow me to add another, venal, reason. If the larger of the two parties forms a grand coalition then it will get, say, eleven Cabinet positions; if it joins up with a minor party it will get sixteen or more. The grand coalition option does not offer the same spoils to the victor.

(As an aside, all governments struggle to find enough people of ability to be valuable Cabinet ministers. The usual rule is that up to five in a cabinet deserve to be there on other than political grounds – there may be some junior members who will develop, but most do not. With luck a grand coalition might find ten — half a cbinet.)

We have gone to a lot of trouble to have a more representative Parliament under MMP; it is not a perfect system but it is much better than the previous system, where each seat was won on the basis of Winner Takes All. However, the resulting government is hardly representative because it is based on the winner-takes-all approach, which MMP was specifically designed to ameliorate.

I reported an example from the 2017 election in Not in Narrow Seas.

‘     ‘While New Zealanders’ fundamental political ideology probably did not change much between 2014 and 2017, that of the government dramatically did. The MMP electoral system produces a parliament which reflects the demography and ideology of voters reasonably closely, much more so than front-runner parliaments did. However, parliament selects the government on a winner-takes-all principle rather than a proportional one. In 2017 and perhaps always, there was no acceptable combination of parties which reflected the voters’ ideology. The choices offered, National–NZF and Labour–NZF–Green – others were ruled out – were some distance from the political centre. The first coalition was about 0.8 standard deviations to the right of the New Zealand centre on a left–right scale and the second about the same distance to the left. That meant that only about 15 percent of the population were on the right of the first coalition or on the left of the second. On the social conservative–progressive scale the first coalition was also about 0.85SDs on the conservative side, while the second was a slightly closer 0.65SDs on the progressive side, with about 25 percent more progressive. The sharp change in the politics of the government did not reflect a sharp change in the politics of the voters.’

Don’t worry about the exact measurement. The kicker is in that last sentence. The substantial switch of the government from centre-right to centre-left did not reflect as great a change in the public’s political viewpoint, but rather reflected the eccentricities of how governments are formed in New Zealand. Had a grand coalition been formed, the result would have been a government closer to the public’s political preference.

My guess is that unless something dramatic happens, grand coalitions will be ruled out in the foreseeable future, so we are stuck with a winner-takes-all unrepresentative government. Is there anything we can do about it? The first thing is that the problem is not MMP. Sure, we can fine-tune the way we select MPs – and we should – but we are still stuck with a system of WTA government.

The only obvious improvement I can see – and it is not a total solution – would be a stronger, more independent Parliament, better at holding the government to account. It is not happening at the moment. Parliament makes a lot of noise, especially from the Opposition, but it is surprisingly ineffective. This is one thing the London Parliament does better than us. Even its government backbenchers show more independence and can challenge a particular policy of their own government. (It is possible that ours do so in caucus meetings, but the convention is not to report proceedings, which weakens any public accountability.) This may be because the London Parliament is six times bigger than the Wellington one, so there are more backbenchers trying to stand out.

How does one get backbenchers to be more challenging? Any proposals one would put up would be promptly blocked by the party leaderships. It certainly would help if MPs were to state repeatedly that their function, once they had chosen a government, is to hold it to account. When did you last hear an MP say that? It is not the same thing as mindlessly opposing the government – that is done very well – because good accountability is a constructive activity in which government backbenchers can be involved.

I’ve heard it said that the process happens in select committees, but I am unimpressed by those I have connected with. Usually legislation put before them by the government is a fait accompli, while their reviewing of bureaucratic failure is ineffective.

(Since I drafted this, it has been reported a select committee has found a government department – the Ministry of Local Government in the Department of Internal Affairs – has ignored them and redrafted a Three Waters bill according to its desires. The committee has given the officials a bollocking. Good on them. A reminder of who thinks they are in charge, and who ought to be in charge.)

The one place where Parliament accountability does work well is the Officers of Parliament. There are three:

            The Auditor General;

            The Commissioner for the Environment;

            The Ombudsman (who also deals with complaints under the 1982 Official Information Act).

However, there are other commissioners also charged with providing checks and balances on the bureaucracy but who are, bizarrely, subordinate to the self-same bureaucracy they are meant to be holding to account. They include:

            Chief Archivist;

            Commissioner for Children;

            Health and Disability Commissioner;

            Human Rights Commissioner;

            Police Complaints Commissioner;

            Privacy Commissioner;

            Race Relations Commissioner;

            Retirement Commissioner.

Is the independence of these commissioners compromised by their position in the bureaucracy? The short answer is that even where it is not currently, it can be. A longer answer is that there are cases where the ability of some commissioners to carry out their functions seems to have been compromised. (Even the Ombudsman is undermined by failing to vote the office sufficient funds to deal with OIA requests speedily.)

Instructively, Parliament has complied to demands from the bureaucracy to reduce the independence and powers of these commissioners. The case for the change is always in terms of bureaucratic rationalisation; the impact on accountability is never mentioned.

It is the usual complacent way we run New Zealand. When was the last time Parliament was strengthened? Thirty years ago when we introduced MMP? It is easy enough to identify instances where the power of Parliament has since been weakened. Are we really sure that we have a well-functioning system of government?

We have it around the wrong way. The issue is not what the arts contribute to market output. It is what market output contributes to the arts – and a lot more besides.

According to its Minister, Carmel Sepuloni, the arts, culture and heritage sector ‘contributed $12.9 billion to our economy’s GDP’ in the year to March 2022. I await a similar release from the Minister for Corrections. A calculation for the justice sector using the same method would find that crime made a similar contribution. (Nobody seems to have done the calculation.) Is that something to celebrate?

The paradox arises because the ‘contribution’ of a sector to GDP tells us little about its value to society. Strictly the ‘contribution’ is the cost of the sector – apparently $12.9b in the case of the cultural sector (although we might want to query the exact description of what it encompasses). We may – and in my view should – celebrate this as the economy’s contribution to arts, culture and heritage.

On the other hand, the ‘contribution’ of crime to GDP is also its cost to GDP but it is to be regretted. Life would be better if there was less crime – arts is the opposite.

So the ‘contribution’ of a sector to GDP tells us very little about the sector’s value to society. Nor does it tell us much about the effective size of the activity. Consider doubling the number of bureaucrats in the Ministry of Culture and Heritage. That would increase the ‘contribution’ but I doubt it would make much difference to the actual quantity and quality of arts, cultural and heritage activities.

GDP also omits all the voluntary (non-market) activity in the arts. I had not realised, until Concert RNZ alerted me, the amount of amateur (i.e. unpaid) choral activity there was; it underpins just how well our singing does internationally. The omission of non-market activity does not matter when we use GDP for the purposes for which it was designed – such as monitoring market activity and market employment – but it does, if we confuse GDP with wellbeing, say.

Sober economics is clear that a sector’s ‘contribution to the economy’ is about the cost – use of resources – of the sector, not about the sector’s value to society. But in our inebriation we misinterpret the calculation and GDP has become a fetish.

Curiously, the cultural community has bought into the fetish, as the minister’s statement illustrates. The minister talks about the government ‘investing’ in the arts. The term ‘spending’ would be more precise, but it does not reinforce the GDP fetish. (‘Spend’ is Anglo-Saxon rather than Latin but does not carry the same mana.)

There is an economic analysis which shows that under certain – not always implausible – assumptions if we want to maximise market output/GDP, then economic activities should maximise their profits like businesses are supposed to. We should not disregard this theory, especially if we want to divert some of that output to progress the arts or whatever. But, to my mind anyway, we should not be pursuing GDP as the ultimate goal.

The cultural community is not alone with the GDP fetish. The education and science sectors seem to be comfortable with it too. So does the media – I don’t mean their journalists; I mean the way it organises itself.

That is the point, we may have a fetish for fairies or whatever, but we do not organise our institutions around fairies. Yet we organise so many institutions around commerce. Have you noticed the websites of RNZ (https://www.rnz.co.nz) or the NZSO (https://www.nzso.co.nz), the  choice of web-address suggestings they are commercial entities? (We should make a list of non-commercial organisations which use a web address with a ‘co.nz’.) They will deny they are commercial. But the business model is pervasive and riddles their thinking.

Universities are ac.nz, but I am struck how often their thinking is framed by the business model. Many of our universities are currently going through crises. Whether the crisis is a temporary fluctuation or it reflects fundamental changes is too soon to tell. Their standard response has been to blame it on reductions in public funding. But there has been surprising little discussion on the purpose of a university.

Ever since Rogernomics, their focus has been on their contribution to the economy. I am old-fashioned enough to think that there are other roles for universities, which means that the government should be supporting the arts, humanities and pure sciences more than the vocational courses which aim to contribute to GDP and which should rely more on market funding. Unlike the Hawke report, I take it that education is not just vocational training.

Additionally, in my view education is a life-long activity and an integral part of a liberal democracy and an individual’s wellbeing; universities have a vital role in promoting such education. (I also think that universities have a vital role in a liberal democracy as forward-looking homes of the critics and consciences of society and not just purveyors of the conventional wisdom. I am not sure our universities take that role seriously enough; their inability to analyse their own plight is an example of this failure.) All of these add to the cost of the economy – make a ‘contribution’. None really increases output although they increase wellbeing.

The challenge the universities faces here applies to many other parts of cultural activity. We will not resolve them as long as we fetishise GDP as the purpose of public policy rather than an important means by which we pursue our real goals.

Are we evaluating the economy on the right criteria? Perhaps we should be paying more attention to rising overseas debt.

The commentariat’s announcement last week that the New Zealand economy was in an ‘official recession’ by March 2023 – two quarters of output/GDP decline – was greeted with white faces by officials in the Reserve Bank and Treasury. There was queuing for the lavatories; some of the forecasters handed in their resignations to the Minister of Finance; one or two tested the windows to see whether they could jump out.

OF COURSE NOT. The officials would have been puzzled by the term ‘official recession’, since neither institution nor Statistics New Zealand (SNZ) use it. Later the commentariat changed the term to ‘technical recession’; I doubt any serious economist has the foggiest idea what a ‘non-technical recession’ is.

Instead, like me, the officials would have turned to their forecasts. The Treasury quarterly track in their Budget Economic and Fiscal Update (BEFU) forecast had a March 2023 increase of 0.3 percent instead of the 0.1 percent fall, so the economy appears to be tracking lower than they expected.

However, there is measurement error. One source of the error is that numbers inevitably bump around in a small economy (not to mention the complications from Easter being a moveable feast); another is that in order to publish the data early enough some, of the data input are estimates which will be updated when better figures come in. Based on the evidence of recent revisions, the March quarter could turn out to be mildly positive.

Unquestionably the economy is neither booming nor troughing; the cautious judgement – unlikely to be headlined by the media – is that the economy is flat or stagnating. If performance is measured by per capita output, the fall is somewhat larger since population has increased by about 1 percent in the two quarters.

Perhaps more important about the SNZ release was the contracting industries. Because of quarterly measurement and volatility, I looked at the year-on-year change. Negative growth is largely confined to agriculture, forestry, and fishing, mining and manufacturing – the tradeable sectors. That is not really good news because, some services such as tourism (which is not doing very well either) aside , they are the main contributors to foreign exchange earning and saving (import substitution).

I imagine there was a vigorous discussion within the Reserve Bank and Treasury between those who thought the data indicated the economy was contracting faster than expected, those who thought it was contracting earlier than expected, and the wait-and see-faction (which I probably would have belonged to). Some of the discussion would have been about the extent to which the RBNZ’s measures were working – perhaps faster than expected.

There may well have been more discussion in informed quarters on the previous day’s SNZ release on the balance of payments. It reported that in the year ended 31 December 2022 the current account deficit of $34.4 billion (9.0 percent of GDP) compared to $24.2 billion in the year ended 31 March 2022. It is the biggest deficit for the 20 years that SNZ reported.

SNZ attributed the main components of the deficit to a $6.4 billion widening of the goods deficit and a $2.2 billion widening of the primary income deficit. The primary income deficit indicates that New Zealand investors earned less overseas than overseas investors earned from New Zealand.

The above has focused on sectoral flows. Combining them, last year we borrowed more than in any year for two decades. Our net international liabilities have been rising.

Back to the BEFU forecast. There are some complications in interpreting their figures, but my reading is that the current account deficit is bigger than Treasury was forecasting – more than one could explain by data problems.

That means that in various places in the economy, sectors and households are borrowing to sustain their expenditures. We do not have the comprehensive investment and savings account to identify exactly where. We know that some of the borrowing is in the public sector, but that is only a partial explanation. Some will be for productive investment, some for residential housing purchases, and probably there are households who are borrowing or running down their savings.

Part of the worry has to be that with the economy stagnant or depressed, one might expect the savings deficit to increase as the economy begins expanding again – perhaps in early 2024.

However, as I worked through the data I was struck by the SNZ graph which showed the net international investment position – how much we owe overseas (net). We owed $90b odd, in March 2003; as we borrowed more, the debt increased to $160b just before the Global Financial Crisis. After that shock the overseas debt stabilised and was $150b in March 2018. Since then, it has begun increasing again and is about $190b today. (There was some recovery in 2021. COVID?)

It is all very well saying that most of this debt is private and not a matter for public policy. We saw how in the GFC, the private debt of the commercial banks became a public concern. I have no doubt that at our next credit rating review, officials will be pressed by the credit rating agencies. The resulting rating guides the international investors who are lending to us. If the officials don’t have a satisfactory response, the interest rates at which we borrow internationally will be higher, including feeding through to those on residential mortgages.

One of the lessons from New Zealand’s economic history is that our big economic crises have usually been associated with our overseas debt. Of course, I may be wrong next time; the ostriches do not expect another major crisis here or globally. But it seems to me that the debt level issue is far more important than the commentariat wittering away about whether we are in a recession, be it ‘official’, ‘technical’ or just an old-fashioned downturn.

The ACT party election manifesto will propose to introduce a Regulatory Standards Act to set a higher bar for new regulation, and test regulations against the key principles of the Regulatory Standards Act.

To make my position clear I have had doubts, going back to Muldoon’s time in the 1970s, about the casual way we introduce regulations. Since then we have made a number of improvements to how they are introduced. But I am uneasy about the proposed legislation; at the very least, I think it requires a wide public debate before it is enacted.

We know roughly the content of what legislation ACT has in mind because in 2021 it introduced a Regulatory Standards Bill to Parliament – it did not get past the first reading. It said its purpose was to improve the quality of Acts of Parliament and other kinds of legislation by

‘(a) specifying principles of responsible regulation that apply to new legislation and, over time, to all legislation; and

‘(b) requiring those proposing new legislation to state whether the legislation is compatible with those principles and, if not, the reasons for the incompatibility; and

‘(c) granting courts the power to declare legislation to be incompatible with those principles.’

The heart of the proposal is the ‘principles of responsible regulation’. Perhaps the most troubling is principle (c) which reads that legislation (or regulation)

should not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless

(i) the taking or impairment is necessary in the public interest; and

(ii) full compensation for the taking or impairment is provided to the owner; and

(iii) that compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or impairment:

Let me explain by example. When in 2006, the Government announced it would force Telecom to unbundle its operations separating the copper network from the ‘value-added’ services it delivered over the network, the market capitalisation of Telecom fell by about $3 billion; Telecom shareholders had their property (the shares) ‘impaired’ by that amount.

It is not difficult to favour principle c(i). Telecom was a monopoly, as a consequence of the botched privatisation in 1989 which did not go through a select committee while the cabinet committee did not even have a paper reviewing the regulatory (i.e. monopoly) issues the privatisation raised. The purchasers of the business made big monopoly profits. However, Telecom was unable to work out how to do a commercial broadband roll-out, and New Zealand was internationally way behind in electronic connectivity.

A main purpose of the separation was to improve that connectivity. Chorus – which evolved from the Telecom network – together with a lot of government funding and some competition has got our network up to speed. So much so, you think of what is provided today as normal. But reflect how much more difficult the Covid lockdowns would have been had we still had the Telecom network. Working from home would be a joke. So we may take it that the separation of Telecom was in the public interest if it was necessary for the broadband roll out.

The downside for the holders of Telecom shares was that having lost its monopoly, their company would not be as profitable. That is why the share price fell so dramatically. Here is where principle c(ii) applies. Under the Regulatory Standards Bill the government would have had to compensate the shareholder for their $3b loss.

It didn’t. Should it have compensated? At which point the argument gets tortuous.

You could say that the shareholders did not deserve their monopoly profits. That may be true for the first purchasers of the privatised company, as they used its market power to extract higher prices (often with poor services) from consumers. But most sold their shares at favourable prices, so many of the 2006 shareholders paid a higher price for their holdings because the monopoly returns were built into the price of the shares they bought.

n the other hand, you could argue that they should have bought into the company knowing there was regulatory risk – that at any time the government could change the regulatory framework which might be detrimental to their share value. Certainly, the Labour Government had signalled that in 1999 it established a review of the industry.

You might argue that regulatory risk is an integral part of a market economy. Higher profit rates partly reflect this. However, there are economies in which that risk is so high, that investment and innovation are distorted and those economies function poorly, often with low formal employment and negligible economic growth.

The Regulatory Standards Bill cuts through this complex argument by setting a standard that any change in the regulatory framework should result in anyone who suffers being compensated. I am not sure how pervasive the principle is intended to be. For instance, would those who suffer from the introduction of a capital gains tax or a higher income tax rates have to be compensated?

As I understand it, the bill does not require the compensation in regard to parliamentary statutes. Rather, the courts could declare that principle c(ii) was infringed but the government could still go ahead with the policy. The Bill of Rights Act works like this. The effect of the principle is to give property rights a similar status to human rights.

Much of the literature goes back to a provision in the US Bill of Rights which is an integral part of their constitution. The Fifth Amendment includes that no person ‘shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.’

At first, the last part was concerned about the government taking land without paying for it, but over the years economists and lawyers realised that the notion of ‘property’ could apply to many other things. There has been an ongoing discussion about the application of the notion. Some US states have passed related legislation. A particular pressure has been from neoliberals for it would reduce the range of interventions available to a government.

You can get a sense of this by imagining the principle applying in the past. I leave others to describe what might have happened when the government was interfering with Maori land rights. But suppose it had applied in 1984 when Muldoon left office. Virtually every regulatory change made since then infringed principle c(ii) in regard to someone or some institution. For instance, unions would have a grievance from the Employment Contracts Act, as would have had many workers. Perhaps it would not matter so much if Parliament set out the change in statute but most such statutes require supplementary regulations. Social security benefits are set under regulation.

An irony is that some of the advocates of a regulatory standards act were closely involved in those regulatory changes. They were acting in good faith then, if breaching the principles they now want to enact.

My view of the post-1984 regulatory changes is mixed. Some I supported, some I opposed, some I was uncomfortable with. (I think a degree of regulatory risk is inevitable in a thriving modern economy, but that it should not be excessive.)

I was, and am, particularly concerned with the massive change to the income distribution. (We don’t have data to tell us what happened to the wealth distribution.) In particular child poverty about doubled, while the rich had marked increases in their income (those on middle incomes were worse off too).

The effect of implementing a regulatory standards act would be to consolidate the existing income distribution, stalling the government from changing it. Do we want to do that? What is special about the current income distribution? Why not the 1984 distribution, or any other year you might choose?

There may be two caveats to the proposal. First, the courts would only be able to declare a legislated change was against the principles of the act; they could only strike down changes under regulation. Do I trust lawyers and judges to have a sophisticated understanding of how such economic regulation works? Do I trust economists?

But second, the 2021 Regulatory Standards Bill had a provision that it would not come into force unless it was endorsed by a majority in a referendum. I don’t know whether ACT still has that provision in mind. It might argue that ACT’s election to government (when that occurs) is such a referendum, but it is likely to have only 10 percent or so of the vote, which hardly constitutes a majority.

I regret that Parliament did not send the 2021 Regulatory Standards Bill to a select committee where these issues could have been properly debated. Many of the brief contributions during its first reading were hardly coherent. We really need a proper discussion on ACT’s proposal before it gets into office and tries to implement it.

PS. I have not covered principle c(iii) here because of space. It seems to imply that the beneficiaries from the detriment may have to be taxed to compensate those who suffer detriment.

A canter through some of the issues facing tax policies.

The Treasury experienced vigorous internal debates before Rogernomics. One was over the purpose of taxes. Eventually, a senior economist, notorious for his common sense, settled it. There it is in the 1984 Economic Management: ‘The purpose of of any tax system is to raise revenue.’ (Of course there are other purposes of taxation such as redistribution and changing behaviour – the Treasury debate had substance.)

Fair enough; the level of taxation is the main determinant of the balance between community and private spending. There is a strong right-wing lobby arguing taxes should be lower, which means lower government spending – more private, less community. That is its political judgement, although I wish its advocates would not contradict themselves by pointing out failures of the public sector arising from inadequate funding.

Of course there are inefficiencies in government spending (as there are in private spending). Most are like the fat in prime steak: difficult to get at without destroying the texture of the meat. Even so, there is a view that this government has been sloppy over monitoring the effectiveness of its spending, but whether it is that Treasury is not doing its job or whether cabinet is ignoring it is unclear.

There are programs which might be abandoned, but usually the advocates of the cutting ignore the consequences on people. I was heartened by ACT, who when opposing free prescriptions – I don’t – went on to say the funds could be better spent in reducing GP charges – I hope they remember the tradeoff when they get into power.

What strikes me is how feeble left-wing advocacy has been in contrast to the right-wing message. The dominant rhetoric is for tax cuts; there is never the same clamour that it means public expenditure cuts too. Perhaps the left’s failure explains Labour’s unwillingness to contemplate new taxes.

The case for the taxes is not well made. Here follow some notes.

Like the Treasury, the Reserve Bank, the IMF and the OECD, I support a (real) capital gains tax (while acknowledging it is administratively difficult). The concern is that the tax system is currently distorting investment decisions. I’d favour using the revenue from a capital gains tax to reduce tax rates on interest income; we should not be taxing interest’s inflation component.

I would apply the capital gains tax to second houses and very expensive first houses – say, those worth more than twice the price of an average New Zealand house. They are distorting investment too.

When I looked at wealth taxes back in the 1970s, I concluded that they were really a requirement that the rich should get a higher nominal return on their investments than others to get the same after-tax return. I am not uncomfortable with that proposition (except I concluded that income from assets on which wealth tax was levied should not also be taxed). Historically, it was common to tax investment income differently from labour income; presumably the economic logic was that the supply conditions are sufficiently different. An important effect of a wealth tax is that it would cover assets which do not earn taxable income such as houses and yachts. (Administering a wealth tax is not simple.)

When we had inheritance taxes, I supported a lifetime capital accumulation tax which is a progressive tax (with a substantial exemption) based on transfers – estates and gifts – over an individual’s lifetime instead of estate duty. Its effect encourages a wider spread of wealth since the rich can reduce their tax burden by sharing their wealth around, making wealth ownership less unequal. Estate duty was abandoned by Ruth Richardson in 1992, partly for ideological reasons but also because Queensland had already abandoned it, so one could escape death duties by migrating across the Tasman. The revenue loss was made up by reducing the state support for those in residential care.

I agree with the proposed change on taxing trusts, aligning their tax rates with the top income rate to reduce tax avoidance. However, I would treat trusts similar to corporations, where the taxation is essentially a withholding tax, so that New Zealanders who receive disbursements from a trust are not taxed, while those who pay below the tax rate would get some tax remission.

There is a fashion – even in right-wing circles – to argue for a land tax on the basis that land is immobile while labour and investment can avoid taxation by going overseas. However, most of the discussion I have seen does not cover the impact on the farm sector, which remains a key element in New Zealand’s prosperity. The proposal is usually dismissed because we already have a kind of land tax in local authority rates.

A minor issue in terms of revenue, but important politically, is that non-residents pay income tax only on their New Zealand income. (A non-resident is someone whose permanent place of abode is here or who spends not more than 183 days a year in New Zealand.) That seems sensible, except I would restrict the notion of ‘non-doms’ (not domiciled here) also to those who do not participate in political life in New Zealand by voting or funding political lobbying. Taxation is the price of citizenship.

(While chasing up the nuances, I discovered that the IRD made special provision for the non-doms who were forced to overstay their 183 days because of the COVID lockdowns. On the other hand, the MSD made no similar provision for New Zealand Superannuitants trapped overseas during the lockdown. I leave others to explain the different treatment.)

I like the proposal to have an income exemption from income tax. The exemption was removed in the 1970s because there was no GST. When GST was introduced in the 1980s, the income exemption should have reintroduced but the priority was reducing taxes on the rich so the poor were forgotten. Introducing an income exemption is very expensive and almost certainly requires higher taxes elsewhere. Even so, when consideration is given to the next round of income tax cuts, consideration could be given to reducing the bottom rate (currently 10.5%). The effect of a 1 percentage reduction would be to give almost everyone a $2.70 a week reduction, peanuts to the rich but much appreciated by the poorest. (It would cost about $500m p.a.)

There are other taxes we might consider. I am comfortable with indirect taxes which reconcile private behaviour with the public good, as we do in the case of alcohol and tobacco. I am not quite so convinced of the effectiveness of a sugar tax. Our greenhouse emissions strategy needs a total overhaul; it needs to fund the retreat from the coast because of sea-level rising and making infrastructure more robust to storms. There is also a role for user-group pays taxes where it is not easy to charge for individual behaviour. An example is the road taxes to pay for road maintenance and extensions. (Proposals for charging motorists individually go back at least 60 years but, except in special cases, implementation has proved impractical.) I am not unsympathetic to a financial transactions tax (a.k.a. Tobin tax) as a substitute for the sector not paying GST. But we should wait for others to implement it first, in order to reduce avoidance. It will, however, not generate the enormous revenue its proponents claim, since the financial sector will be smart enough to find (legal) ways to avoid paying, demonstrating that perhaps they are smarter than the FTT’s proponents.

This column has been about getting the tax structure right rather than the levels which shape the fairness of the system. It is no secret that I am concerned with child poverty. That involves a better system of child support than the current Working for Families.

This canter though some of the taxation possibilities indicates some of the complexities which the general public discussion tends to overlook. I have been explicit about my own values. Yours may be quite different. But I hope this column contributes to a public discussion which is sober and rational – rather than uninformed and hysterical – despite our differences.

The Chatham Islands flag waves above the New Zealand one. Perhaps the Chathams offer insights on to how to govern New Zealand better.

It is said that our first minister of regional development – in the early 1970s – claimed that he wanted all our regions to have above average incomes. Duh! You would expect that there would be some variation in regional incomes. They are probably not large (partly because ours is a small country). They are not measured but we do have estimates of per capita regional domestic production (similar to GDP) which in March Year Ending 2022 ranged from 17 percent above average for the Wellington Region to 34 percent below for Northland. Because of income tax and social security benefits, the income range will be narrower. (Another factor which narrows the income range is that some of the profits of a region will go elsewhere; for instance Taranaki does well on the GDP measure but much of its profits from its hydrocarbon resources do not stay in the province.)

Should we worry about these disparities? There is a simple answer if the disparities arise out of central government prioritising the richer regions over others, as it often does with its infrastructural spending. But what if, for any of a number of reasons, the region is less productive on average?

One could argue that this is a question of fairness to be resolved by the tax and benefit system. However, that ignores the effects on social structure. People tend to migrate out of low productivity regions because there are fewer opportunities and poorer pay. That means that those left have to struggle with the costs of infrastructure, civic amenities, education and health services spread across fewer people, which makes them more expensive on a per capita basis and more limited, with lower quality. The effect is compounded by those more likely to migrate being at the younger end of working age, which undermines the local tax base as well as the social structure and balance.

(A friend recently wondered whether it was ‘racist’ to observe that our two lowest productivity regions – Northland and Gisborne – are more Māori. It is nothing to do with race. Māori are more likely to live in their rohe, while non-Māori are less likely to be attracted to low productivity regions.)

These meditations form a background to Hugh Rennie’s recently published Chathams Resurgent: How the Islanders Overcame 150 Years of Misrule. Rennie, a greatly respected lawyer, has connections to the Chathams going back almost 60 years to when he began to give legal advice to the Chatham Island Council. His book focuses on constitutional issues and gives little room to environmental and conservation history, fraught Moriori-Māori relations, or economic development. Constitutional issues tend to be a bit dry and, so, initially is the book. Don’t let that put you off; once it gets to the postwar era it is a fascinating read.

At the heart of the problem is that the Chatham Islands are an anomaly – some 0.3 percent of New Zealand’s land area and 0.02 percent of its population sitting 800kms plus to its east. (For the record, we are 0.2 percent of the world’s land area, 0.06 percent of its population and pretty isolated too.)

Whether the Chathams is inherently a low productivity economy, its great handicap is its occasional and expensive transport links (almost New Zealand and the world again), which lowers its ability to generate effective income. The islands’ governance hardly existed in the nineteenth century which left the Wellington government greatly troubled about its legal status; the easy solution was neglect. It was not until 1926 that the Chatham Islands County Council was established, some 50 years after the introduction of councils for the rest of New Zealand. Even then, there was much travail getting it to be effective. Today, central government administrative responsibility rests with the Ministry of Local Government, which is part of the Department of Internal Affairs. On Rennie’s account it has not done a very good job. Very often, decisions were dominated by insensitive officials who had never been to the Chathams.

Instructively, Rennie describes a 1985 official options paper for the future of the Chathams as ‘offensive’ to islanders. It was certainly not designed to engage with them and would end in a stalemate. The subtext was that the market would set the right level for effective regional development; that social considerations were irrelevant. In any case, the government was blind to its past failures, and refused to take them into consideration in future policy settings. This was Rogernomics as it seeped into all our thinking.

Not much later, Treasury paper by Treasury when it was out of control – or at its Rogernomics peak which was much the same thing –  proposed to pay Chatham Islanders to relocate to New Zealand rather than continue to subsidise core utilities and other services that made livestock farming viable (like keeping the meat works going).  

Perhaps not surprisingly, an independence movement was triggered. When the independence proposal was put to a later Prime Minister, ‘pleasantly and firmly’ advised that ‘declare independence one day, and there would be soldiers on the Island the next’. (Jim Bolger had more confidence in their speed of response than I have.)

Some islanders seemed to think that the Chathams would be economically viable without central government financial support if they controlled all the fishing quota that arose from the oceans around them. They overestimate the fiscal value of the quota and the capacity of the Chatham Islands navy to enforce its use.

Slowly and tortuously a solution was found. (Secretary of Internal Affairs, Perry Cameron, played a very honourable part.) The Rogernomics solution of a commercial Local Authority Trading Enterprise (LATE) was rejected in favour of the Chatham Islands Enterprise Trust. (Rennie was chairman for its first 11 years.) Its responsibilities include the airport, sea port and transport connections plus electricity generation and meatworks. In June 2022 the Trust was worth a net $63m (almost $80,000 an Islander).

You can read the book for the details but I was struck that the Trust handled its responsibilities far better than these same responsibilities had been previously handled by central government. They knew more about what was going on, were more focused and the locals had confidence in them. There were still some government grants, even though the Trust reduced some of the previous waste because of its greater focus. I get the impression that central government could trust the integrity and competence of those who managed the Trust despite the small pool of talent it drew upon – given there were only about 800 people.

While you might read Rennie’s book for its insights into the Chathams, it also shows the possibility that we could have a stronger, more decentralised system of New Zealand local government.

Hugh Rennie (2022) Chathams Resurgent: How the Islanders Overcame 150 Years of Misrule. (Fraser Books)

Footnote: For an earlier (affectionate) column on the Chathams see here.