Afternoon roundup

The closing of the tabs...

• Transport is in the ETS. Therefore, bus networks do not need decarbonisation strategies. Councils can just assess the all-up costs of different options - with a measure for the cost of particulate matter pollution in places that are less windy than Wellington. I don't know why NZTA has funded research to models weighing up 'different bus decarbonisation strategies'. 


• Canterbury's Mike Grimshaw on the fundamental underlying problem with NZ's universities.


• Ryan Bourne on the War on Prices


• The CFTC had been the safe harbour that let the IEM run. They've since been taken over by Vogons. 

Robertson's Seventh Budget?

Dan Bunskill reports on Finance Minister Nicola Willis's speech this week:

Willis said it wouldn’t be a “big-spending” Budget, knowing that Crown finances could get worse before they get better, but she wouldn’t “overreact” to worsening forecasts either.

It will not be “an austerity Budget, of the sort suggested by a few commentators seemingly enthusiastic to see the mistakes of history repeated”.

“Our Government knows how devastating it would be if we were to give up on overdue tax relief, to drastically cut-back on investment and public services, and to downsize our ambitions for growing New Zealand’s economy”.

"Drastically cut-back". 

Right. 

National hopes to get core spending down to 30% of GDP, sometime. 

Ardern's 2019 Wellbeing Budget was forecast to cost 28.8% of GDP over the medium term. Willis wants to avoid "drastically cutting-back" to a level higher than Ardern had set. 

Pretty easy to read those lines in Robertson's voice really, maybe other than the bit about overdue tax relief. 

As I'd put it in The Post earlier this week:

Tax revenue and government spending are both substantially higher than they were before 2020’s Covid lockdown – whether measured as dollars collected and spent, or as a fraction of overall economic activity.

Core tax revenue rose from just under 28% of GDP in 2019 to just over 29% of GDP forecast for 2024. But core government spending increased from 28% of GDP to 33.4% of GDP over the same period. The difference between the two is a problem.

Government spending increased by over six percentage points of GDP in 2020. Spending to deal with the worst parts of lockdowns and border closures mattered. But wage subsidies are now gone. Borders are open. And core government spending, as a proportion of GDP, is forecast to be only about a percentage point of GDP below its peak.

If you think the continued increase is because government has had to put more money toward healthcare, in the wake of Covid, and toward education, for dealing with the lingering effects of Covid through the school system, check the figures.

In 2019, education and health together were about $30 billion of a $100 billion government budget – 30% of the total. If education and health were pulling spending upward, they would now be a larger fraction of the larger budget. But Budget 2023 had education and health as about $44 billion of a $176 billion government budget – about 25%. Health and education are not what has driven the overall increase.

Compare growth in health and education spending with growth in other areas.

Spending at the Ministry for the Environment increased from $708 million to just under $3.5 billion over the same period. Transport’s budget also more than doubled – from just under $5 billion to just over $10 billion.

The Ministry for Social Development went from $26 billion in 2019 to $41 billion in 2020 – understandable when the wage subsidy was in place and lockdowns blocked jobseeking. But MSD’s 2023 budget was $43 billion, despite relatively low unemployment rates.

I'd there concluded:

Basic maths lays out the options. Spend less, take more in taxes, or a bit of both. Anything else reeks of denial. But surely a May budget set by a National-led coalition Government ought to balk at setting a core spending path entrenching government spending as a larger share of the economy than Finance Minister Robertson promised in 2019.

What I'm really hoping for in Budget 2024 signaled strong consolidation for Budget 2025. Set each budget line for 2025 as the same fraction of GDP as it was in Budget 2019 - as a baseline starting point. Ditch programmes that don't make sense to maintain stronger funding for ones they want to keep. 

I'll be at the lockup. The last lock-up was really rather fun. At least for me. Maybe less so for a few others. 

Fashionable follies

A fashion industry group is lobbying for protections. They make the usual arguments and a newer one. None of it makes sense.

An industry group says it pumped $7.8 billion into the economy last year - that's 1.9 percent of New Zealand's GDP.

They could be right; I'm not going to check the figure. But if the industry entirely disappeared and we relied on greater imports of clothing, GDP would not drop by 1.9%. Capital and labour would shift to other sectors, which would expand.

"What we really need is someone to take us under their wing and fight for us," designer and Mindful Fashion chair Juliette Hogan said.

"From the beginning with a levy on garments coming into the market, then at the end that levy is actually used to invest in recycling technology."

This is protectionism wrapped in circular economy nonsense. Setting a fixed per-garment charge raises the relative price of low cost product relative to higher cost products. 

Suppose that it currently costs $20 to get a garment of similar quality to a $10 import. If you buy local, you're sacrificing two shirts or whatever to get one local one. If a $10 fixed charge is set on every garment, then imports rise to $20 and locals rise to $30. You now only have to sacrifice 1.5 shirts or whatever when choosing to buy local. 

The fixed levy shifts relative price ratios between local and foreign-sourced goods. And that's the protectionist point of the thing. Or, if they've convinced themselves that that isn't really what they're doing, it's nevertheless the effect.

In any case, garments do go through a life cycle. New, to used, to thrift shop, to rags, to landfill. Landfills charge on amount disposed. It's all fine. If there really were a more cost-effective way of reusing, people would be doing it already. 

The Government has ruled out putting levies on products from overseas.

That's a relief!

Another challenge it wants help with is training. 

Tim Deane owns Norsewear, a company that uses top-end knitting machines to make merino socks. 

He's trying to find ways to teach his 20 staff to use new and complex machinery.  

"It's almost impossible for me to find any technical courses that can be used to upskill them. Now there is nothing," he said.

If a polytech put on a course training people to use very specific industry machines, could it recover the tuition cost? Courses for forklift operators can make sense - the country has a lot of forklifts and there are basics that transfer across the things. 

It could be that there are enough top-end knitting machines across the country that a polytech could put on a course and not lose money on it - oughtn't that be the test? 

Update: Haimona Gray on it here. 

Inflation and GST thresholds

I hadn't thought about this one until a helpful email showed up in my inbox.

It's pretty obvious that income tax thresholds should automatically index with inflation - whether to anchor the thresholds in percentiles of the income distribution, or to anchor against a real consumption bundle. 

But what about the threshold for filing GST?

My correspondent notes that when GST was first set in 1986, the threshold was $24,000. $24,000, CPI-adjusted to today's dollars, is $65,000. But the GST filing threshold is $60,000. So should it go up? There's a petition before Parliament on it. 

That's a far more fun question than inflation-adjusting income tax thresholds. 

The threshold for filing GST, as I've understood things, tries to balance the cost imposed on small businesses against revenue lost from failing to impose GST. If, as a small trader, you do not file for GST, you cannot claim back the GST on your inputs. The government loses only the 15% of the value that your firm adds in transforming inputs into goods or services for others - not 15% of your turnover. 

If you're at the threshold and purchase inputs equal to half your turnover, then not filing means that the government misses out on 15% of $30,000: $4500. If it costs that business more than $4500 to deal with the GST system, then making them file destroys value. 

When the threshold was set in 1986, accountancy software like Xero didn't exist that lets you submit GST by clicking a button, so long as you're keeping the rest of your accounts up to date in there - which many companies would want to be doing to simplify their year-end company accounts. 

So the question isn't whether inflation has reduced the real value of the filing threshold as compared to 1986. The question rather is whether inflation has reduced the real value of the filing threshold by more than tech has reduced the real pain of filing GST for small traders. Filing GST can still be painful. But I have no sense of how much less painful it is now than it would have been for a small trader in 1986. 

If tech has simplified things enough, you could even imagine a case for reducing the filing threshold rather than increasing it. 

I wonder whether anyone's able to compare the pain of small-trader-filing for GST in 1986 as compared to now. Is it 10% easier? 50% easier? Or has something else dumb happened that made it actually harder despite tech?

I don't have any answer here. Just the way of framing the question. The relevant question isn't inflation per se. It's the real value of the filing threshold relative to the cost of filing. 

Deeply unserious country

Every bit of this seems insane. And people wonder why productivity is falling through the floor. 

Energy News reports that the Environment Court finally threw out Allan Crafar's appeal against a solar farm.

From the story:

• Consent was granted in 2022.
• Crafar appealed November 2022. On what grounds? That turning a dairy farm into a solar farm would mean the effort of turning it into a dairy farm would have gone to waste. In his view, there would be a $30m annual loss to the country.
• Competing experts provided evidence about whether there would be a net national benefit. I don't know why this was a consideration.  
• Bryan Leland, for Crafar, insisted that solar farms ought to have their own backup energy storage.
• James Findlay, for Crafar, claimed that agricultural returns are commonly believed to 'have six-times multiplier effects'.
• Crafar claimed the Paris Agreement means a dairy paddock (in a country that doesn't have a carbon price on ag emissions and in a part of the country trying to push down nutrient load from runoff from dairy farms) can't convert to solar panels because of effects on food production. 
• Judge Tepania dismissed the appeal.

It isn't crazy to object to a land use change that would have substantial adverse flow-on effect on your land use. 

It's nuts that the system entertains objections like this one where there is zero reported real effect - only what amounts to a view that the outfit putting in the solar farm might lose money as compared to keeping it as a dairy farm. 

It's nuts that Todd felt they had to commission an economic analysis to prove net benefits.

It's nuts to invoke Paris Agreement as a reason to block a reduction in dairying. 

And it's darned weird to say that, at current system balance, a solar farm ought to have its own specific backup. When the sun is shining, solar is low-cost power and the hydro lakes spin less water through the turbines, saving it for when the sun isn't shining. 

Deeply unserious system. And environmentalists wonder why National is pursuing a fast-track consenting process that cuts all this crap out (along with potentially less unreasonable objections). 

Fun minor grudges

Grudges are bad. Better to move on. But it can be fun to keep a couple of really trivial ones, so you're not tempted to have other ones. 

For example, because of the rootkit fiasco of 2005, no Sony products in our household. 

It's a low-stakes grudge. Differences across major brands aren't huge; I forgo little by dropping one brand when considering the next TV or headset. 

I'm thinking of taking up a second one. 

I mean, just look at this.

A neighbourhood fish’n’chip shop, trading as Popeye’s for at least 30 years, has bowed to the legal threats of a fried chicken chain, forsaking its name.

...

It was not a brand known to Bill Cao and May Zhou, who have owned and operated Popeye’s Takeaways on North St in Feilding since 2008, until they were served with a cease and desist request from its lawyers in late April, claiming unauthorised use of a registered trademark.

The letter from AJ Park, which has been sighted by Manawatū Standard, expressed concern consumers would mistake the two businesses as being connected as they offered “identical” products and services.

It ordered the owners of Popeye’s Takeaways to stop using and displaying its name, which had been registered in New Zealand by its client in 2022, and to provide a written declaration they would never seek to register it themselves.

Failure to comply would lead to further action, such as seeking damages and even the shop’s profits.

Zhou and Cao were stunned. The shop had been Popeye’s when they bought it, and customers we spoke with recalled the name being around for at least a decade before that.

It was named after Popeye the Sailor, the spinach-munching comic strip character.

Feels like the kind of thing eminently suitable for a low-stakes grudge.  

GST back to councils?

If a localist agenda involves punting more responsibility down to councils, then central government assistance in funding some of those responsibilities could make sense. 

If councils were only responsible for core infrastructure, that can and should be covered by rates revenue and user charges on use of the infrastructure. If the resulting rates charges are unaffordable because of low income in the district, that's generally a problem for central government redistribution policy. Central government takes a lot of money from higher earning households and redistributes it to lower earning households, particularly lower income households with children. 

And if central government wants the council to provide infrastructure services to a higher standard than the council's residents would choose for themselves, because of central government priorities, it's appropriate for central government to assist with the cost difference. 

But if a more localist approach would have councils taking on more responsibilities over social services, that should not be funded through rates. Social services are inherently part of the state's vast redistribution mechanism. If local councils funded education, or health, or other such services out of local revenues, then central government would need to look to mechanisms like those used in Canada for topping up the accounts of poorer councils so that comparable bundles of those services could be provided in different places. The education system is already fairly redistributive, with a lot more central government funding for schools serving poorer communities' needs than those serving richer communities - whether it's done through decile measures or the more recent index measure. 

Anyway, that's just background and what I've thought is fairly settled standard local public finance in NZ. 

A couple years before I joined the Initiative, Jason Krupp at the Initiative had been arguing for giving the GST on new housing builds back to councils. I argued against it because it's impossible to track GST that way. But they were simply using GST as shorthand. What they were, and have continued, to suggest is taking the value of new housing construction in a district, multiplying it by the current GST rate, and sending it to council as a grant to help encourage them to build more housing. They could put it toward defraying the cost of necessary infrastructure; they could build a golden statue of the mayor with it. So long as it made councils more likely to say yes to housing. And I think that all makes sense - there are substantial spillover costs on the rest of the country and on central government when councils don't enable enough housing in places where people want to live - up and out.

Yesterday, Politik newsletter reported on some work by Infometrics on returning the GST charged on local council rates back to councils.

This seems a tremendously bad idea. 

Brad Olson was quoted:

"Rates should still be charged GST, as councils are providing goods and services for local residents, ratepayers, and others. But given the constant discussion about the need to fund local Government differently, perhaps GST on rates should be collected and then returned to local councils," says Mr Olsen.

I completely agree with the first line. There's a populist line about GST on rates being a tax on a tax, but if it weren't there, it would cause no end of distortions. There are all kinds of margins on which ratepayers might prefer to shift service delivery from the private sector or from households over to council provision if council-provided services had a preferential tax treatment, and from user-charges set by council to general rates funding for things already provided by council. 

As simple example, Wellington currently charges a per-bag collection fee for trash and people can choose to contract with private waste collection services if they prefer that instead. It's all fine. User charging like this recovers the cost of landfill services while providing incentive to avoid generating more trash than would otherwise be optimal. I don't know whether council is charging the right amount relative to a full cost recovery model, but the bones of the thing are right.

And suppose that an average household spent $100 per year plus GST on trashbags from council for collection services. 

If council shifted that service to just being rates funded - put out as much trash as you like, and it's covered in your standard rates bill! - and if households did not change the amount of trash they put out, then council could charge the $100 extra on rates and get $15 back from central government. Or charge a bit less and get a bit less back such that they were back to cost-recovery. 

If households put out more trash because they faced no marginal cost, council would still be better off - so long as they didn't increase trash generation by more than 15%. But more likely, households would generate more trash than that, and then either rates would have to increase by a greater amount, or councils would start rationing trash bags by non-price mechanisms, or some combination of the two. It would be a mess. 

Don't do this.

Basic drill on local public finance, or as best I've understood it, is:

1. Set appropriate user charges on everything that can reasonably be user charged.
2. Use rates to cover the cost of services that cannot reasonably be user-charged. 

Rebating GST on rates to council pushes councils away from user charging on stuff that can reasonably be user-charged. It also distorts toward council over private service delivery - at the margin, some things best provided privately get shifted into council's wheelhouse because council provision is tax-preferred. 

And if you set it instead such that councils get a GST rebate on both rates and user charges, you still have the distortion toward council over private provision.