Friday, 22 May 2015

Coasean biosecurity externalities

Michael Reddell beat me to the punch on this one.

The budget's imposed a customs levy on air travellers to cover the costs of biosecurity border enforcement. Michael makes the simple Coasean point:
  • A new tax on international travel.  I wonder if the government looked at the possibility of levying these costs on, for example, the apple and kiwifruit industries, for whose benefit most of the biosecurity apparatus seems to exist?  Are those industries really economic?
It's a bit beyond that. Somebody bringing hoof and mouth disease into the country would do rather more harm. But the simple Coasean point is that it takes two to make an externality. Either the agricultural sector will impose an external cost on the tourist sector, or vice versa. It isn't obvious which side of the ledger ought to bear the burden.

The rest of his post on the budget is well worth reading, as is his follow-up. I especially liked this potted history in the latter post:
The previous government in many ways deserves a lot of credit for keeping spending in check for their first six years, but the structural surplus in 2006 peaked at 4.7 per cent of GDP (OECD estimate). Those huge surpluses just set up an electoral auction in the 2005 election campaign.  No political party will ever want to be in the position of allowing their opposition to spend the surplus their way –  those choices, about priorities, are a large part of what politics is about.  And the large surpluses built up in the early 2000s didn’t even do much to ease pressure on monetary policy, because they were run up well before the peak pressures on resources (2005 to 2008).  Quite possibly, overall macroeconomic management in New Zealand over the last 15 years would have been a little better if piecemeal adjustments had been made throughout.  We’d never have got into a position where we had highly stimulatory discretionary fiscal policy in the period (2005-2007) of greatest pressure on resources (and on the exchange rate).  And it would also have avoided a situation where Treasury, applying its best professional judgement, finally determined only just before the great recession of 2008/09 that the revenue increases looked permanent.  A high stakes judgement that turned out to be quite wrong.  Fiscal institutions, and ambitions, need to take more serious account of the severe limits of anyone’s knowledge.  A Fiscal Council, as the New Zealand Initiative and the former director of the IMF’s Fiscal Affairs Department have recently called for, might explore some of these issues.  Or a Macroeconomic Council might?  Then again, our academics and think tanks might lead such debates.
The best case we can make for yesterday's budget is that it bought the government time to undertake the more substantial reforms to the benefits system behind the scenes: pushing towards outcome-based contracting, outsourcing service provision, running innovative experiments like Tamaki.

Maybe my expectations have been too high. Under the government's budgetary projections, conditional on continued fiscal discipline, by 2018 government spending as a fraction of GDP will be back to where it was in 2004 under Helen Clark. In 2008, I'd have been very happy for government spending to ever return to 2004 levels. So there's that. Conditional on continued fiscal discipline.


  1. Thanks Eric
    I don't claim any expertise on the biosecurity stuff, but I'd have thought most of the apparatus around human movement had to do with concern about fruit flies etc. Foot and mouth would do a lot of damage, but my impression had been that that was mainly controlled by restrictions on the importation of animals (and quarantine when animals do arrive). I presume there is a whole different set of charges for those.
    Apple and kiwifruit exports together are around $1.5bn per annum. There are some other fruit exports as well, but if the bulk of the $100m the passenger tax is going to raise really did relate mainly to those industries, it would represent quite a large share of the export value-added (and total industry value-add would be larger, given domestic consumption).

  2. Certainly, a case could be made to cover the cost of a risk-reducing activity through a levy on those who benefit from a risk being reduced, rather than a levy on those who cause the risk to increase. But it's the numbers of the latter who drive the cost, and so administratively it would seem to be more likely that a levy on the cost-causers can be more easily designed to both be predictable and to match the actual cost, than can a levy on the benefit-experiencers.

  3. They have. It's called government-industry agreements.

    Coase was the basis of this and the biosecurity funding principles I wrote when at the former MAF.

    "Furthermore, the government does not have good information about how much biosecurity is desired and efficient. With the government being the primary funder of readiness and response, MAF often gets signals from industries that everything is a top priority. Because government does not have accurate information about biosecurity needs, the government might not be spending enough on biosecurity, might be spending too much, and/or spending money addressing risks that are not priorities."

  4. Maybe, altho the very diffuse nature of the levy makes it all but impossible for us travellers to negotiate with the industries that benefit (except thru the political process), and so in that sense the choice has been made to preference (perhaps subsidise) some industries at the expense of the free movement of holidaymakers. Perhaps both ability to grow apples and freedom to travel are some sense "good", but in that case it is less clear why it is a good policy to fund biosecurity by this levy rather than from general taxation.