Professor Robert MacCulloch: Can NZ's Budgetary Problems be Blamed on our Voting System, MMP?

Why is National getting so many bad headlines for its budget cuts? Part of the answer may lie in MMP. Before the election, the Nats had prepared a fully costed budget. One could, of course, argue about whether its foreign (residential) buyers property tax, for example, would raise as much as the Nats estimated. The media featured endless stories on that topic, which turned out to be a waste of time. Why? Because in the MMP negotiations, NZ First didn't want to allow any foreign buyers into that market, so the tax on them was scuttled.

The Coalition Agreement, a feature of MMP governments, has thereby had monumental consequences for our economic future. Whether it is cuts to suicide prevention or support for the disabled, you can blame a whole range of them on the vetoing by NZ First of National's proposed foreign buyer tax. NZ First also will not entertain a single change to the retirement age, since the elderly comprise much of its support base. More broadly, MMP has meant that the proposed budgets of every party, including Labour and National, are nothing more than marketing gimmicks leading up to NZ General Elections. Since the major parties will almost certainly have to form coalitions, major parts of those budgets will end up being dropped in ways that we, the voters. cannot predict.

The implications for the country are not obvious. Some may say its good to have these compromises since that's democracy in action and reflects voters' wishes. However, it also means there is no coherence to any new government's economic plans in NZ - they become a mish-mash of different plans, with unpredictable consequences. Imagine if Trump and Biden both won this year's US General Election, which they both probably will - what would be the consequences? But that is somewhat the situation we are in. The revenue loss from National's foreign buyers tax has thrown large parts of the rest of the budget into chaos as Nicola Willis scraps around for cuts. What I can't figure is how most of those cuts are being done without use of cost-benefit analysis, which the new coalition swore to do for every such decision in its coalition agreement. School lunch programs, for example, are strongly supported by cost-benefit analysis in the UK. Telling all departments to make cuts of x%, which Willis has reportedly ordered, rides rough shod over any weighing of costs versus benefits for each particular activity, which should be done on a case by case basis. Ultimately the government appears to be going down the Bill English guide to economics, which is two lines long: cut taxes, cut spending & over time balance the budget. Any deeper ideology or thinking appears to be missing in action.

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.