- Rolling Back Government: Lessons from
New Zealand
-
- by Maurice P. McTigue
Maurice P. McTigue is a distinguished visiting scholar at the Mercatus
Center at George Mason University, where he directs the government
accountability project. Previously, he was a member of the New Zealand
Parliament and New Zealand’s ambassador to Canada, and was closely involved
in New Zealand’s deregulation of labor markets, deregulation of the
transportation industry, and restructuring of the fishing industry through
the creation of conservation incentives. He also served as Minister of
Employment, Minister of State Owned Enterprises, Minister of Railways,
Minister of Works and Development, Minister of Labor and Minister of
Immigration. Among his many honors, Mr. McTigue is a recipient of the
Queen’s Service Order, best owed by Queen Elizabeth II in a ceremony at
Buckingham Palace. In the U.S., he was recently appointed to the Office of
Personnel Management Senior Review Committee, formed to make recommendations
for human resources systems at the Department of Homeland Security. He also
sits on the Performance Management Advisory Committee for the Commonwealth
of Virginia.
The following is adapted from a lecture delivered on February 11, 2004, on
the Hillsdale campus, during a five-day seminar on "The Conditions of
Free-Market Capitalism," co-sponsored by the Center for Constructive
Alternatives and the Ludwig von Mises Lecture Series.
Rolling Back Government: Lessons from New Zealand
If we look back through history, growth in government has been a modern
phenomenon. Beginning in the 1850s and lasting until the 1920s or ‘30s, the
government’s share of GDP in most of the world’s industrialized economies
was about six percent. From that period onwards " and particularly since the
1950s " we’ve seen a massive explosion in government share of GDP, in some
places as much as 35-45 percent. (In the case of Sweden, of course, it
reached 65 percent, and Sweden nearly self-destructed as a result. It is now
starting to dismantle some of its social programs to remain economically
viable.) Can this situation be halted or even rolled back? My view, based
upon personal experience, is that the answer is "yes". But it requires high
levels of transparency and significant consequences for bad decisions and
these are not easy things to bring about.
What we’re seeing around the world at the moment is what I would call a
silent revolution, reflected in a change in how people view government
accountability. The old idea of accountability simply held that government
should spend money in accordance with appropriations. The new accountability
is based on asking, "What did we get in public benefits as a result of the
expenditure of money". This is a question that has always been asked in
business, but has not been the norm for governments. And those governments
today that are struggling valiantly with this question are showing quite
extraordinary results. This was certainly the basis of the successful
reforms in my own country of New Zealand.
New Zealand’s per capita income in the period prior to the late 1950s was
right around number three in the world, behind the United States and Canada.
But by 1984, its per capita income had sunk to 27th in the world, alongside
Portugal and Turkey. Not only that, but our unemployment rate was 11.6
percent, we’d had 23 successive years of deficits (sometimes ranging as high
as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our
credit ratings were continually being downgraded.
Government spending was a full 44 percent of GDP, investment capital was
exiting in huge quantities, and government controls and micromanagement were
pervasive at every level of the economy. We had foreign exchange controls
that meant I couldn’t buy a subscription to The Economist magazine without
the permission of the Minister of Finance. I couldn’t buy shares in a
foreign company without surrendering my citizenship. There were price
controls on all goods and services, on all shops and on all service
industries. There were wage controls and wage freezes. I couldn’t pay my
employees more "or pay them bonuses" if I wanted to. There were import
controls on the goods that I could bring into the country. There were
massive levels of subsidies on industries in order to keep them viable.
Young people were leaving in droves.
Spending and Taxes
When a reform government was elected in 1984, it identified three
problems: too much spending, too much taxing and too much government. The
question was how to cut spending and taxes and diminish government’s role in
the economy. Well, the first thing you have to do in this situation is to
figure out what you’re getting for dollars spent. Towards this end, we
implemented a new policy whereby money wouldn’t simply be allocated to
government agencies; instead, there would be a purchase contract with the
senior executives of those agencies that clearly delineated what was
expected in return for the money. Those who headed up government agencies
were now chosen on the basis of a worldwide search and received term
contracts five years with a possible extension of another three years. The
only ground for their removal was non-performance, so a newly elected
government couldn’t simply throw them out as had happened with civil
servants under the old system. And of course, with those kinds of
incentives, agency heads "like CEOs in the private sector" made certain that
the next tier of people had very clear objectives that they were expected to
achieve as well.
The first purchase that we made from every agency was policy advice. That
policy advice was meant to produce a vigorous debate between the government
and the agency heads about how to achieve goals like reducing hunger and
homelessness. This didn’t mean, by the way, how government could feed or
house more people, that’s not important. What’s important is the extent to
which hunger and homelessness are actually reduced. In other words, we made
it clear that what’s important is not how many people are on welfare, but
how many people get off welfare and into independent living.
As we started to work through this process, we also asked some fundamental
questions of the agencies. The first question was, "What are you doing"? The
second question was, "What should you be doing"? Based on the answers, we
then said, "Eliminate what you shouldn’t be doing", that is, if you are
doing something that clearly is not a responsibility of the government, stop
doing it. Then we asked the final question: "Who should be paying?, the
taxpayer, the user, the consumer, or the industry?" We asked this because,
in many instances, the taxpayers were subsidizing things that did not
benefit them. And if you take the cost of services away from actual
consumers and users, you promote overuse and devalue whatever it is that
you’re doing.
When we started this process with the Department of Transportation, it had
5,600 employees. When we finished, it had 53. When we started with the
Forest Service, it had17,000 employees. When we finished, it had 17. When we
applied it to the Ministry of Works, it had 28,000 employees. I used to be
Minister of Works, and ended up being the only employee. In the latter case,
most of what the department did was construction and engineering, and there
are plenty of people who can do that without government involvement. And if
you say to me, "But you killed all those jobs!", well, that’s just not true.
The government stopped employing people in those jobs, but the need for the
jobs didn’t disappear. I visited some of the forestry workers some months
after they’d lost their government jobs, and they were quite happy. They
told me that they were now earning about three times what they used to earn,
on top of which, they were surprised to learn that they could do about 60
percent more than they used to! The same lesson applies to the other jobs I
mentioned.
Some of the things that government was doing simply didn’t belong in the
government. So we sold off telecommunications, airlines, irrigation schemes,
computing services, government printing offices, insurance companies, banks,
securities, mortgages, railways, bus services, hotels, shipping lines,
agricultural advisory services, etc. In the main, when we sold those things
off, their productivity went up and the cost of their services went down,
translating into major gains for the economy. Furthermore, we decided that
other agencies should be run as profit-making and tax-paying enterprises by
government. For instance, the air traffic control system was made into a
stand-alone company, given instructions that it had to make an acceptable
rate of return and pay taxes, and told that it couldn’t get any investment
capital from its owner (the government). We did that with about 35 agencies.
Together, these used to cost us about one billion dollars per year; now they
produced about one billion dollars per year in revenues and taxes.
We achieved an overall reduction of 66 percent in the size of government,
measured by the number of employees. The government’s share of GDP dropped
from 44 to 27 percent. We were now running surpluses, and we established a
policy never to leave dollars on the table: We knew that if we didn’t get
rid of this money, some clown would spend it. So we used most of the surplus
to pay off debt, and debt went from 63 percent down to 17 percent of GDP. We
used the remainder of the surplus each year for tax relief. We reduced
income tax rates by half and eliminated incidental taxes. As a result of
these policies, revenue increased by 20 percent. Yes, Ronald Reagan was
right: lower tax rates do produce more revenue.
What about regulations? The regulatory power is customarily delegated to
non-elected officials who then constrain the people’s liberties with little
or no accountability. These regulations are extremely difficult to eliminate
once they are in place. But we found a way: We simply rewrote the statutes
on which they were based. For instance, we rewrote the environmental laws,
transforming them into the Resource Management Act, reducing a law that was
25 inches thick to 348 pages. We rewrote the tax code, all of the farm acts,
and the occupational safety and health acts. To do this, we brought our
brightest brains together and told them to pretend that there was no
pre-existing law and that they should create for us the best possible
environment for industry to thrive. We then marketed it in terms of what it
would save in taxes. These new laws, in effect, repealed the old, which
meant that all existing regulations died , the whole lot, every single one.
Subsidies, Education, and Competitiveness
......What about invasive government in the form of subsidies?
First, we need to recognize that the main problem with subsidies is that
they make people dependent; and when you make people dependent, they lose
their innovation and their creativity and become even more dependent.
Let me give you an example: By 1984, New Zealand sheep farming was receiving
about 44 percent of its income from government subsidies. Its major product
was lamb, and lamb in the international marketplace was selling for about
$12.50 (with the government providing another $12.50) per carcass. Well, we
did away with all sheep farming subsidies within one year. And of course the
sheep farmers were unhappy. But once they accepted the fact that the
subsidies weren’t coming back, they put together a team of people charged
with figuring out how they could get $30 per lamb carcass. The team reported
back that this would be difficult, but not impossible. It required producing
an entirely different product, processing it in a different way and selling
it in different markets. And within two years, by 1989, they had succeeded
in converting their $12.50 product into something worth $30.By 1991, it was
worth $42; by 1994 it was worth $74; and by 1999 it was worth $115. In other
words, the New Zealand sheep industry went out into the marketplace and
found people who would pay higher prices for its product. You can now go
into the best restaurants in the U.S. and buy New Zealand lamb, and you’ll
be paying somewhere between $35 and $60 per pound.
Needless to say, as we took government support away from industry, it was
widely predicted that there would be a massive exodus of people. But that
didn’t happen. To give you one example, we lost only about three-quarters of
one percent of the farming enterprises, and these were people who shouldn’t
have been farming in the first place. In addition, some predicted a major
move towards corporate as opposed to family farming. But we’ve seen exactly
the reverse. Corporate farming moved out and family farming expanded,
probably because families are prepared to work for less than corporations.
In the end, it was the best thing that possibly could have happened. And it
demonstrated that if you give people no choice but to be creative and
innovative, they will find solutions.
New Zealand had an education system that was failing as well. It was failing
about 30 percent of its children, especially those in lower socio-economic
areas. We had put more and more money into education for 20 years, and
achieved worse and worse results.
It cost us twice as much to get a poorer result than we did 20 years
previously with much less money. So we decided to rethink what we were doing
here as well. The first thing we did was to identify where the dollars were
going that we were pouring into education. We hired international
consultants (because we didn’t trust our own departments to do it), and they
reported that for every dollar we were spending on education, 70 cents was
being swallowed up by administration. Once we heard this, we immediately
eliminated all of the Boards of Education in the country. Every single
school came under the control of a board of trustees elected by the parents
of the children at that school, and by nobody else. We gave schools a block
of money based on the number of students that went to them, with no strings
attached. At the same time, we told the parents that they had an absolute
right to choose where their children would go to school. It is absolutely
obnoxious to me that anybody would tell parents that they must send their
children to a bad school. We converted 4,500 schools to this new system all
on the same day.
But we went even further: We made it possible for privately owned schools to
be funded inexactly the same way as publicly owned schools, giving parents
the ability to spend their education dollars wherever they chose. Again,
everybody predicted that there would be a major exodus of students from the
public to the private schools, because the private schools showed an
academic advantage of 14 to 15 percent. It didn’t happen, however, because
the differential between schools disappeared in about 18-24 months. Why?
Because all of a sudden teachers realized that if they lost their students,
they would lose their funding; and if they lost their funding, they would
lose their jobs. Eighty-five percent of our students went to public schools
at the beginning of this process. That fell to only about 84 percent over
the first year or so of our reforms. But three years later, 87 percent of
the students were going to public schools. More importantly, we moved from
being about 14 or 15 percent below our international peers to being about14
or 15 percent above our international peers in terms of educational
attainment.
Now consider taxation and competitiveness: What many in the public sector
today fail to recognize is that the challenge of competitiveness is
worldwide. Capital and labor can move so freely and rapidly from place to
place that the only way to stop business from leaving is to make certain
that your business climate is better than anybody else’s. Along these lines,
there was a very interesting circumstance in Ireland just two years ago. The
European Union, led by France, was highly critical of Irish tax policy,
"particularly on corporations" because the Irish had reduced their tax on
corporations from 48 percent to12 percent and business was flooding into
Ireland. The European Union wanted to impose a penalty on Ireland in the
form of a 17 percent corporate tax hike to bring them into line with other
European countries. Needless to say, the Irish didn’t buy that. The European
community responded by saying that what the Irish were doing was unfair and
uncompetitive. The Irish Minister of Finance agreed: He pointed out that
Ireland was charging corporations 12 percent, while charging its citizens
only 10 percent. So Ireland reduced the tax rate to 10 percent for
corporations as well. There’s another one the French lost!
When we in New Zealand looked at our revenue gathering process, we found the
system extremely complicated in a way that distorted business as well as
private decisions. So we asked ourselves some questions: Was our tax system
concerned with collecting revenue? Was it concerned with collecting revenue
and also delivering social services? Or was it concerned with collecting
revenue, delivering social services and changing behavior, all three? We
decided that the social services and behavioral components didn’t have any
place in a rational system of taxation. So we resolved that we would have
only two mechanisms for gathering revenue "a tax on income and a tax on
consumption" and that we would simplify those mechanisms and lower the rates
as much as we possibly could. We lowered the high income tax rate from 66 to
33 percent, and set that flat rate for high-income earners. In addition, we
brought the low end down from 38 to 19 percent, which became the flat rate
for low-income earners. We then set a consumption tax rate of 10 percent and
eliminated all other taxes, capital gains taxes, property taxes, etc. We
carefully designed this system to produce exactly the same revenue as we
were getting before and presented it to the public as a zero sum game.
But what actually happened was that we received 20 percent more revenue than
before. Why? We hadn’t allowed for the increase in voluntary compliance. If
tax rates are low, taxpayers won’t employ high priced lawyers and
accountants to find loopholes. Indeed, every country that I’ve looked at in
the world that has dramatically simplified and lowered its tax rates has
ended up with more revenue, not less.
Thinking Differently About Government
What I have been discussing is really just a new way of thinking
about government. Let me tell you how we solved our deer problem: Our
country had no large indigenous animals until the English imported deer for
hunting. These deer proceeded to escape into the wild and become obnoxious
pests. We then spent 120 years trying to eliminate them, until one day
someone suggested that we just let people farm them. So we told the farming
community that they could catch and farm the deer, as long as they would
keep them inside eight-foot high fences. And we haven’t spent a dollar on
deer eradication from that day onwards. Not one. And New Zealand now
supplies 40 percent of the world market in venison. By applying simple
common sense, we turned a liability into an asset.
Let me share with you one last story: The Department of Transportation came
to us one day and said they needed to increase the fees for driver’s
licenses. When we asked why, they said that the cost of re-licensing wasn’t
being fully recovered at the current fee levels. Then we asked why we should
be doing this sort of thing at all. The transportation people clearly
thought that was a very stupid question: Everybody needs a driver’s license,
they said. I then pointed out that I received mine when I was fifteen and
asked them: "What is it about re-licensing that in any way tests driver
competency"? We gave them ten days to think this over. At one point they
suggested to us that the police need driver’s licenses for identification
purposes. We responded that this was the purpose of an identity card, not a
driver’s license. Finally they admitted that they could think of no good
reason for what they were doing, so we abolished the whole process! Now a
driver’s license is good until a person is 74 years old, after which he must
get an annual medical test to ensure he is still competent to drive. So not
only did we not need new fees, we abolished a whole department. That’s what
I mean by thinking differently.
There are some great things happening along these lines in the United States
today. You might not know it, but back in 1993 Congress passed a law called
the Government Performance and Results Act. This law orders government
departments to identify in a strategic plan what it is that they intend to
achieve, and to report each year what they actually did achieve in terms of
public benefits. Following on this, two years ago President Bush brought to
the table something called the President’s Management Agenda, which sifts
through the information in these reports and decides how to respond. These
mechanisms are promising if they are used properly. Consider this: There are
currently 178 federal programs designed to help people get back to work.
They cost $8.4 billion, and 2.4 million people are employed as a result of
them. But if we took the most effective three programs out of those 178 and
put the $8.4 billion into them alone, the result would likely be that 14.7
million people would find jobs. The status quo costs America over 11 million
jobs. The kind of new thinking I am talking about would build into the
system a consequence for the administrator who is responsible for this
failure of sound stewardship of taxpayer dollars. It is in this direction
that the government needs to move.
Link:
http://cafr1.com/April-04.html
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