Wednesday 29 May 2024

Baseline 2019

I'll be in tomorrow's budget lock-up and on TVNZ's ridiculously early Breakfast panel pre-budget roundup ahead of it. 

For rather some time I've been making the case that government needs to retrench Core Crown Expenditure to pre-Covid levels. 

The Great Wellbeing Budget of 2019 was not austere. It was a substantial increase in spending, as a fraction of GDP, as compared to the prior National government's last budget. 


Take every Vote from Budget 2019 as a percent of GDP.

Make that the baseline for a future budget. Maybe 2025 if they're somewhat ambitious, 2026 if less ambitious. 

Some programmes or structural changes since Budget 2019 might be considered worth keeping. Government would have to trim other spending so there'd be room for it. 

I'm less interested in overs and unders around automatic stabilisers. Benefit spending will be higher in 2025 than 2019 because unemployment is likely to be higher; note too though that jobseeker numbers remained very high relative to unemployment over the period after lockdowns. 

If Budget 2025 were "Hey, this is the same as Budget 2019 would have been, as a fraction of GDP, if unemployment had been at 2025 levels", all good. There would be no structural deficit. 

Let's compare a few numbers here. 

At Budget 2019, Treasury put up forecasts of Core Crown expenditure for the year to June 2023. The bulk of Covid spending should have been 2020 and 2021. The traffic light system ended in September 2022. 

Budget 2019 forecast a 4.3% 2023 unemployment rate. The 2023 half-year fiscal update had a 3.6% unemployment rate for year to June 2023. So higher unemployment isn't responsible for any differences in spend between 2019's forecast 2023 and the actual 2023. 

Let's compare Budget 2019's forecast for core crown expenses by functional classification for 2023 with actual expenditure by those classifications for the year ended June 2023, inflated by the extent to which nominal GDP for 2023 exceeded 2019's forecast GDP for 2023. Nominal GDP in 2023, divided by the forecast of 2023 GDP from Budget 2019, then multiplied by each functional classification line. 

Overall, Core Crown spend is $13.4b higher than had been expected in 2019, after inflating for nominal GDP increase over the period, and accounting for Budget 2019's expectation of about $10 billion in new operating spending by 2023 that couldn't be classified in 2019.

Or put it this way. Budget 2019 expected Core Crown spending in 2023 would be about $104 billion across those functional areas, plus $10 billion in new operating spending, for $114b all up, after adjusting for nominal GDP growth to catch population increase and inflation.

Actual 2023 was almost $127 billion. So $13.4 billion more than would reasonably have been expected.

Despite unemployment being a lot lower in 2023 than had been forecast in 2019 for 2023, social security and welfare spending were $3.8 billion higher than had been forecast for 2023 at Budget 2019.

Health spending was $7.7 billion higher. 

Finance costs are substantially up, and there won't be much government can do about that now other than avoiding making things worse.

Transport is $1.8b higher. Core government services $1.6b higher. Education $1.5b higher. 

Spending has blown out across the board. If you take the excess spend as a proportion of the had-been-forecast spend, the blowout is of course biggest in finance costs, with with housing and community development (60.3%), heritage, culture and recreation (57.8%), environmental protection (52.2%), primary services (48.9%), and transport and communications (47.1%) following - health only blew out by 36.8% as compared to forecast and social security and welfare by only 9.9%. But those two line items are so very very big. 

Getting back to Core Crown expenditure comparable to 2019's when measured against current GDP isn't a small job.

The Taxpayers Union commissioned a poll from Curia. Sample of 1000 respondents. 

They wanted to know whether people viewed Robertson's Wellbeing Budget, with Core Crown spending of 29% of GDP, as being too low, about right, or too high. 

Only Green Party supporters reported that it was too low, or at least in any substantial numbers. Among Green supporters expressing an opinion, about half of Green supporters thought it was too low, and half thought it was about right. 

Among the population at large, 9% thought it was too low, 34% about right, 29% too high, and 29% were unsure. 

Among those expressing an opinion, those thinking spending in 2019 was too high outnumbered those saying it was too low by more than 3 to 1, with most saying it was about right.

It isn't crazy to view the pre-Covid spending proportions as a decent baseline. And most people didn't think Budget 2019 was austerity - far more people said that it spent too much, as a fraction of GDP. 

Budget 2019 reckoned on Core Crown spend of 28.8% of GDP over the medium term.

December's Half-Year fiscal update had 2023 Core Crown spend at 32.2% - the mess I pointed to above. And forecast it would be worse for 2024 at 33.4% of GDP. 

People rightly recognise Budget 2019 as not being austere. 

Getting back to spending consistent with government's share of the economy in 2019 is still going to be a big job. 

I'm hoping tomorrow to see reasonable work in that direction at least. Especially if they also want to deliver tax reductions, given the size of the deficit. 

National will be damned as austerity merchants for any spending reductions, regardless of how many people viewed 2019's budget as too generous. 

If you're going to be hanged anyway, better to be hanged for a sheep than for a lamb. I don't expect any sheep here. But they could at least aim for hogget. 

Campus speech

Victoria University's panel on free speech at universities seemed designed to be tedious, providing the smallest target for criticisms of the university. 

Rather than any discussion among panelists, we heard a series of statements in response to less-than-useful questions from Corin Dann. 

Because of Dann's framing, a pile of discussion was around who should be allowed to speak on campus.

Dann could not be expected to know that there has been a standard solution to this. Or at least there was for the period I was on campus at Canterbury. It worked well. Michael Johnston briefly alluded to that standard solution, but that didn't stop the 'but who should be allowed to speak on campus' bit. Or "Should someone be allowed on campus to debate cutting off Corin Dann's head" - as one of the panelists put it. 

Someone can speak on campus if they have been invited to do so by a member of the academic community

An academic can invite guest speakers to present to their class. 

Departments invite guest speakers to present working papers in regular workshops. Ours were on Friday afternoons, followed by excellent beer at the Staff Club. 

If an academic wants to host a guest speaker for a more public event, they need to get a room booking. At one point that was done through the Department because we controlled a couple of our own lecture theatres; later, that required centralised room booking. But the academic's name was on the booking; the academic had thought the speaker worth hearing out.

If a student group wanted to host a guest speaker, they could do it at the student union, or they could ask a member of faculty to book one of the lecture theatres. I think the student union restricted that to recognised student groups - but there was a broad set of recognised student groups, from ACT On Campus to Maoists. 

In any case, the guest was there because a member of the academic community thought they were worth hearing. 

For plenary speakers where there might be resourcing issues, or if it were part of a University named lecture series, that would need sign-off from whoever ran that series. Not getting signoff didn't mean the person couldn't speak on campus. It just meant they wouldn't speak in that slot. If other ways of financing a visit could be worked out, the academic could just book a room. 

The test shouldn't be some big public discourse about who is or isn't worth hearing, or who is or isn't presenting misinformation. 

There was useless, tedious discussion of whether Julian Bachelor (an activist favouring one reading of the implications of the Treaty of Waitangi) should be allowed to talk on campus. 

The only test should be whether a member of the academic community thinks he is worth hearing. Not whether his views are respected in, say, the Faculty of Law. I expect they think he's nuts, and they could well be right. It isn't my field. 

But I know that the Accounting Department regularly hosted speakers that folks in econ/finance thought were barking mad. And one fine Accounting colleague would often send all-college emails about how all of economics is wrong, as proven by their guest speaker who didn't have a clue about the content of intermediate micro, just that it was 'neoliberal'. 

The test wasn't whether we thought the speaker was an idiot, or wrong, or providing misinformation. Some of the Accounting guests were all three - at least in the view of the econ tea room. 

The test was whether the people in Accounting thought that the speaker was worth hearing. 

An equilibrium where we would have gotten to veto speakers that we thought were idiots and they got to veto speakers that they thought were idiots would have been terrible. 

So there's a simple answer on the Bachelor, or anyone else, question. They should be allowed to speak on campus if a member of the academic community has asked them to do so. 

That raises a separate question: would faculty still feel safe in inviting speakers that they think are very much worth hearing, but that might draw complaint?


After the session, I walked back toward the train station with a couple of Vic academics that I ran into outside the event. 

They noted that they’d been approached by a journo for their views.

They said they’d politely declined.

They also said that they hadn’t told the journo the reason for declining. Namely, that Vic is not a safe place for freely airing one’s views on such matters. They did not expect the Uni to have their backs if there were pushback, and they were surprised how many of their colleagues in the audience appeared supportive of restricting speech on campus. 

Wednesday 22 May 2024

Free trade for free countries

Matthew Yglesias at Slow Boring reiterates the case for American free trade with likeminded countries

What we ought to be doing is trying to minimize the total amount of trade barriers, and thus the economic cost of pursuing competition with China, by reducing as many trade barriers as we can. We should stop complaining about cheap Canadian lumber. We should stop blocking imports of Latin American sugar. We should let Toyota sell cheap small trucks to Americans who want them. We should, frankly, probably start buying (or leasing2) warships from Japan and Korea, where they actually know how to build ships. America is toast in a conflict with China if we can’t count on cooperation with our friends, so we may as well optimize on maximum economic efficiency and the freest possible trade within the free world. This also applies to quasi-trade in professional services — we should make it easier for foreign doctors to practice here, and have the FDA and European drug regulators work together so approval by one agency will let you sell on either side of the Atlantic. There’s a lot we can do to work together internationally and increase prosperity.

It seems obviously crazy that the US wants countries to reduce trade links with China while setting tariffs on countries that it calls friends and allies that encourage them to trade with China instead. 

That was my column over in the Post on Monday. 

I think it's a bit crazy that New Zealand has been talking about tighter defence arrangements with the US without having a secure trade deal with the US already in hand. China is our largest trading partner. We have a free trade agreement with them. And while there have been occasional bits of weirdness facing goods entering, they don't stick giant tariffs on our exports. 

Easy to check this for yourself, even though MFAT in general seems to prefer not making a big deal about how protectionist America is (contrast MFAT's correct and explicit views on the evils of Canadian trade practices, with softpeddling on America's). 

MFAT has a Tariff FinderMFAT has a Tariff Finder. Click the Exporting button; you're pretending to be a NZ-based exporter. Then compare tariffs on your exports if you're exporting to China, and if you're exporting to America. You can find China among the FTA partner countries on the drop-down list; the United States is on the non-FTA partner list. 

When NZ got its FTA with the UK, people made a big deal about onions now getting tariff-free access to the UK. So let's check onions. The US charges 0.83 cents/kg; no tariffs for entry into China. 

Is the Chinese ambassador wrong when he says that China has been a more reliable trade partner for New Zealand than the US has been? 

NZ trade with China can be subject to holdups at the ports if the Chinese government is mad at us - and what happened with Australian wine is concerning. 

But NZ trade with the US depends on madness in American farm states and whatever populism Congress wishes to appease [and trade with Canada is even worse - America at least tries to do its protectionism within the rules; Canada signs agreements it knows full well it will immediately break]. 


If US trade policy really were about global geostrategic stuff, rather than mainly being protectionism, they would be opening trade as Yglesias suggests. 

And while neither the Republicans nor the Democrats show much interest in being reliable trade partners for anyone, I'd be a bit nervous about AUKUS. 

Contestable advice

Danyl McLauchlan over at The Listener on the recent shift toward more contestability in public policy advice in education:
Education Minister Erica Stanford, one of National’s highest-ranked MPs, is trying to circumvent the establishment, taking advice from a smaller pool of experts – some linked to right-wing think tank the New Zealand Initiative – instead of the traditional so-called experts. The Education Ministry itself is facing heavy job losses – 755 staff. Many of its core functions will be contracted out to consulting firms, especially in areas linked to Stanford’s reform programme: rebuilding the curriculum; an emphasis on reading, writing and numeracy; consistent assessment and reporting; better use of data and analysis.

There’s also a focus on improved teacher training. A recent Education Review Office report said 60% of principals believed their new teachers were unprepared to enter a classroom. It urged the sector to adopt stricter entry criteria for training programmes and to conduct exit exams.

The universities rejected the criticism, and the government is now considering expanding private-sector training.

If one cluster of advisors centered around MinEd has been providing advice that leads to terrible outcomes, good idea to seek advice elsewhere.

Tuesday 21 May 2024

Afternoon roundup

A closing of the browser tabs:

Paper-clip monitoring departments

Great piece by Adrian Wooldridge at Bloomberg, syndicated at BusinessDesk, on the dangers when corporates shift into stakeholder management.
Regulation not only diverts companies’ focus from outside (serving customers and mastering technological change) to inside (monitoring internal processes). It also contributes to internal bureaucratisation.

After the government creates a department of paper-clip regulation, the corporation must perforce create its own internal department of paper-clip monitoring – and soon the head of the paper-clip monitoring department is demanding a seat on the executive committee. A second culprit is the shift from shareholder capitalism to stakeholder capitalism.

Shareholder capitalism provided companies with an external discipline: If CEOs diversify into unrelated businesses or engage in vanity projects they are soon punished by the market and disciplined by their boards.

But stakeholder capitalism weakens external discipline and increases the power of jostling pressure groups. CEOs can claim they need to engage in this or that grand project to earn their licence to operate regardless of the short-term impact on shareholders. Pressure groups can argue the company needs to pursue this or that good cause to satisfy this or that stakeholder group.

New Zealand's External Reporting Board requires so much paper-clip monitoring.... 

Monday 13 May 2024

Afternoon roundup

The closing of the tabs...

Friday 10 May 2024

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". 


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. 

Wednesday 8 May 2024

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? 

Tuesday 7 May 2024

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. 

Monday 6 May 2024

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). 

Friday 3 May 2024

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. 

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 ManawatÅ« 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.