Surely no one
likes poverty. Politicians of different parties might share the same preferences,
but they have different budget constraints. The recent Green’s stump speeches
call for ending poverty by significantly increasing social benefits paid for by
higher taxes on the “rich.” Rhetoric aside, a tax increase is not a good
economic idea especially when our productivity is already sluggish. Social
benefits do not end poverty.
For example, over
the period 2001 to 2015, the New Zealand government’s average tax revenue as a
percent of GDP (29 percent on average) is higher than Australia (23 percent on
average); it is significantly higher than Singapore (13 percent on average), Germany
(11 percent on average), and Switzerland (9.5 percent).[1]
For New Zealand, the tax revenues are mostly from taxing consumption, labor
income and company profits. Australia’s average tax revenue is less than New
Zealand’s even though it taxes capital gains and New Zealand doesn’t.[2]
The figure below plots the World Bank Development Indicators data (July 2017).
So why does New
Zealand, which is the least populated among all these countries, has such high
tax revenue/GDP ratio? More spending! Typically, government’s major
expenditures are on health, education, social services, and the military. Our
military spending is trivial, about 1 percent of GDP so I will ignore it.[3]
However, on average over the period from 2001 to 2015, New Zealand spent 9.45
percent of GDP on health (about 26 billion dollars), more than Australia (8.79
percent), only slightly less than Germany (10.7 percent) and Switzerland (10.9
percent) and significantly less than Singapore (3.75 percent).[4]
See the figure below.
On education, New
Zealand’s spending is the highest, nearly 6.5 percent of GDP (about 16 billion
dollars). Australia (5 percent), Germany (4.7 percent) and Switzerland (5
percent) spend less than New Zealand. Singapore spends the least, 3.25 percent
only.
The Labour party
says (here) that it will “address chronic under-funding
of health, education…” even though the data suggest that there is no such
under-funding! New Zealand spends more than Australia on health, just as much as
Germany and Switzerland, and three times as much as Singapore. On education,
spending surpassed all of them.
More public
spending on services does not necessarily mean better outcomes. There is a
strong empirical evidence for that. In education, our students do not do as
well as Singaporeans. Performances in standardized tests such as PISA, for
example, indicate that Singapore, which spends much less public money on
education, is always on the top of the world.[5]
Also, Singapore’s
average annual labor quality growth, although small, 0.9 percent (see
the Conference Board data), still the highest comparably.[6]
Germany and Switzerland have an average annual growth of labor quality
of 0.1 percent only. New Zealand’s average annual labor quality growth
is 0.6 percent, still slower than Singapore, but much higher than both Germany
and Switzerland. The average annual growth rate of labor quality in Australia
is half that of New Zealand (source: Conference Board).
The same is true
for public health. Although it is difficult to measure output, there is no
credible empirical evidence that more spending on national public health
systems improves outcomes.
Government spending
is a function of the size and the scope of market failure. The question is how
much market failure is there in education and health to justify more public
spending. I do not think we answered this question in New Zealand.
Here is the big
spending item. OECD data show that average net total social expenditure as a
percent of GDP for New Zealand is 16.5 percent (43 billion dollars). New
Zealand is not alone: it is 19 percent in Australia, 25.4 percent in Germany,
and nearly 22 percent in Switzerland.[7]
And here is the difference: Singapore spends only 3.5 percent of its GDP on
social programs!
Nevertheless, some
expenditures on social benefits could be justified. However, benefits raise the
reservation wage and increase unemployment. Singapore, which spends the least
on social benefits has the lowest unemployment rate, 1.7 percent in 2015.[8]
Before getting excited about increasing social spending, note that taxes reduce labor productivity.[9]
The plot below shows that Switzerland, Germany, and Singapore, which tax the
least, have higher GDP per capita than us.
My advice to
the politicians who advocate more taxes is to consider alternative policies to help
the poor without taxing potential productivity of the whole country.
New Zealand already has the highest tax
revenue as a percent of GDP. They could reallocate expenditures, e.g., increase
X and reduce Y. There must some waste in the public sector; cut it. Better,
think about firm productivity-indexed wage subsidy (See the Nobel Laureate
Edmund Phelps).
[1] I chose Singapore because the data are available. Korea and Hong
Kong would be just as good examples to use for comparisons regarding tax and
spending issues. I chose Switzerland because there has been some public
interest in this country as a model that New Zealand should emulate.
[2] Since 2009 Germany levies a flat
rate tax on private income from capital and capital
gains. The tax rate is 25 percent plus 5.5 percent solidarity surcharge.
The tax is levied at German sources
as capital yields tax. There is a tax refund for personal
income tax rate below percent.
[3] Australia spends about 1.8 percent, Germany 1.2, and tiny Singapore
spends 3.5 percent of its GDP on defense.
[4] The IMF World Economic Outlook data (2017) estimated GDP at current
prices in 2016 to be 261 billion New Zealand dollar.
[6] “Measure of the changes in the composition of the workforce. This
indicator is based on underlying data on employment and wages by educational
attainment, which are estimated econometrically in some cases.”
[7] Data for Switzerland correspond to 2013 which the last data
published on the OECD stats.
[8] The average unemployment rate for the period 1970-2015 (a proxy for
the natural rate) is 3.78 percent. Unemployment in Germany, Switzerland and
Australia are similar to New Zealand on average.
[9] For international evidence see for example, Razzak and Belkacem
(2016), Taxes, Natural Resource Endowments, and the Supply of Labor: New
Evidence, in Handbook of Research on Public
Finance in Europe and the MENA Region, IGI Global Research Publishing, USA,
(eds.,) M. Mustafa Erdoğdu and Bryan Christiansen,
Chapter 23, PP 520-544, May 2016.
