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Wadestown, Wellington
New Zealand

Michael Dunn is the Managing Principal of Economic and Fiscal Consulting Limited (ECOFISC) which he founded in 2008. Michael has more than 20 years of experience in economic analysis and modelling, in revenue and fiscal forecasting, and in advising Governments in New Zealand and globally. 

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Blog

Blog for "ecofisc" as the trading name of Economic and Fisacl Consulting Limited, Wellington, New Zealand. Pricipal author Dr.Michael Dunn.

 

Fiscal impact of a rapid escalation in the minimum wage in New Zealand

Michael Dunn

During the recent election campaign, we published our analyses of the proposals by the Green Party and the Labour Party for rapid increases in the minimum wage rate, from the current level of $14.25 per hour to $16 or $16.25 per hour from 1 April 2015 and to as much as $18 per hour by 1 April 2017 (in the case of the Green Party).

The Green party had claimed that their estimated $1.1 billion of increased Government expenditure from payment of higher wages and increased costs of service contracts over the next 3 years would be more than offset by increases in taxes on the incremental wages (and spending) of those (up to 360,000 wage-earners) whose incomes would be increased. Such a result would be remarkable, and lead to the conclusion that a Government could benefit fiscally from general wage escalation.

Our analysis as originally posted on the Taxpayers' Union website suggests otherwise. We point out that the impact upon employers will be such that some jobs will be lost, and the rate of future increase in employment will be reduced. That will lead to a reduction in income tax and expenditure taxes offsetting much of the claimed gain from higher wages. Further, the profits of many employers will be reduced, leading to lower tax payments on business income, and less money available for reinvestment and distribution to shareholders, many of whom would also pay less tax as a consequence.

We do agree on the $1.1 billion cost to Government, but with a near-zero revenue offset.

Our claims of reductions in actual and future employment were challenged by those who pointed to studies by David Card and others in the US that showed a minimal impact from increasing minimum wage rates in the US. We pointed out that whereas US minimum wages (State by State) are around 38% of the median wage, in New Zealand our minimum wage is already above 60% of the median wage. Therefore, we should look to studies in other countries where the median wage has a similar relativity to the median wage. A recent article by the US Labor Department reported here shows that countries with wage rate relativities comparable to New Zealand include France, Portugal and possibly Israel. Countries with lower relative minimum wage rates (but still above 50% of the median wage) include Hungary, Australia, and Belgium, while Turkey has a higher relativity, around 72%. The latter may be highly relevant, as the Green party policy would lift the minimum wage to 76% of the median.

In an update to our earlier work also published on the Taxpayers' Union website we point to studies which show significant adverse impacts of increasing minimum wages on employment in countries where the minimum wage is above 50% of the median wage. We would refer those who remain sceptical to a more recent paper that reviews a large number of previous studies: David Neumark and William Wascher, "Minimum Wages and Employment: A Review of Evidence from the new Minimum Wage Research", NBER working paper 12663, November 2006. This paper has subsequently been republished by the highly regarded Institute for Study of Labor, as IZA Discussion Paper No 2570, 2007.

 

Estimating the fiscal cost of United Future's priority policies

Michael Dunn

The United Future Party have four quantifiable policies among their election priorities.  These include:

  • Taxable income splitting between parents of dependent children, the fiscal cost of which was estimated in an official Government discussion document released in 2008 at $160 million per year if restricted to parents with a child up to age 5, and at $370 per year for all parents with a child up to age 18 (note that we consider this to be a tax cut policy);
  • The adoption of compulsory KiwiSaver, which we consider to be the same as Labour's universal KiwiSaver, with a fiscal cost of $374 million over the relevant three years;
  • Advance indexing of New Zealand Superannuation, based upon estimated inflation / wage growth, which we estimate will add 2% to the $12.5 billion average annual cost of NZ Super, amounting to $250 million per year, or $750 million in total over three years;
  • Flexi-Super, allowing people to take up New Zealand Superannuation from age 60 onwards at reduced rates, from age 65 at the standard rate, or from an age up to 70 at increased rates, in a fiscally neutral manner over the long term, but with a transitional cost - we estimate this below.

Fiscal cost of the Introduction of Flexi-Super

We assume:

  • an average standard annual payment net of tax of $16,120 (this is between the current single living alone rate and the partnered rate);
  • on policy introduction, 20% of those between ages 60 and 64 will elect to commence NZS early - at reduced rates, averaging 80% of the standard rate;
  • in future years, 20% of those reaching 60 will elect to take early NZS;
  • year by year, 40% of those reaching 65 without having taken up NZS will elect to defer NZS (for at least 3 years).

We calculate (using latest SNZ population estimates as at 30 June 2014):

  • 49,000 people age 60-64 elect to take average 80% of standard NZS at inception, fiscal cost $632 million
  • 9,600 people age 65 elect to defer NZS in inception year, fiscal saving $155 million
  • each year after the first, the number of 60-64 year olds with early NZS is unchanged
  • each year after the first, 7,680 more people reaching age 65 without having already taken up NZS elect to defer NZS, fiscal saving $124 million
  • the three year fiscal cost is 3 x $632m - 3 x $155m - 2 x $124m - $124m = $1,059 million.

Estimating the fiscal cost of the NZ Power proposal

Michael Dunn

In 2013, the NZ Labour Party and the Green Party of Aotearoa New Zealand jointly announced a policy proposing intervention in the New Zealand electricity market. The core component of their proposal is to create a single buyer to purchase electricity from generators and to onsell electricity to retailers for sale to end consumers. By this means they hope to achieve electricity cost savings of around $300 per year for each of the nearly 1.7 million households in New Zealand, as well as for small business and industrial consumers.

In the fiscal impact statement for this policy that is included in the Labour policy documents, the base assumption is that electricity generators will suffer a collective revenue reduction of between $500 million and $700 million a year. We assume a $600 million average reduction.

Given this reduced revenue, the Crown will lose corporate income tax at 28%, or $168 million. That leaves $432 million of after-tax income reductions across the major generators. Following the sell-down, the Crown now owns half of their previous 75%, or 37.5% of the generators by value. Assuming that 67% (2/3) of the foregone revenue would have been paid out in dividends, with the rest retained for future investment, the dividend reduction for the Crown would be 2/3 of 37.5% (25%) of the $432 million, or $108 million.  Our estimate of the total direct reduction in Crown revenue (fiscal cost) is therefore $276 million per year.  

The Labour Party fiscal impact document assumes an even higher dividend reduction (mid-range $135 million) with no retained earnings, but their estimated fiscal impact is lower. That is because they claim that the Crown will benefit by around $238 million from wider economic impacts of the electricity price reductions to household and business consumers. However, they conveniently forget the potential wider economic effects of the loss of revenue to the other 62.5% owners of the electricity generators, who will suffer dividend reductions of around $180 million per year. Those owners might otherwise be able to invest that foregone income to produce more revenue for themselves and for the Crown over time. The generators will also lose around $144 million of earnings otherwise retained for investment. It is not credible that the savings to energy consumers will produce a substantially greater overall fiscal benefit.

Therefore, we set aside Labour's $90 million and the Green Party's $80 million estimate of the fiscal cost for implementing this policy in 2017/18, and apply our estimate of $276 million. 

 

 

Political party policy costings updated today

Michael Dunn

Today we have provided updated estimates of the spending (or cost saving) amounts for the announced policy proposals for six political parties contesting the General Election on 20 September, including all policy announcements made up to 28 August.  

These spending and saving estimates have been published on the Taxpayers' Union website: http://www.taxpayers.org.nz/bribe_o_meter along with some brief commentary. National have quantified their post-budget new spending proposals, and Labour and the Greens have published their Alternative Budget and Fiscal Costings. We have generally accepted their estimates as fair and reasonable.  However, we have treated new tax credits (in the social policy area) and tax concessions (such as accelerated depreciation and R&D deductibility) as spending as these are classified as "tax expenditures" in Government financial measures. There are some areas where our estimates differ from the party costings, and we cover these in other posts. We are excluding proposed tax cuts and new taxes from our estimates.

All new spending must be funded in the short term by raising more revenue or by increasing debt, while that debt must be covered by raising revenue in the longer term.  Spending therefore drives the need for revenues. As National, Labour and the Green Party all propose to maintain fiscal surpluses throughout the term of the next Parliament, which will determine budgets for 2015/16, 2016/17 and 2017/18, their new spending promises (including any tax cuts) will have to be covered from provisions and allowances included in their fiscal plans, or from tax increases. We note that Labour and the Greens propose to increase taxes.

National and Labour have included provisions for new spending in future budgets in their fiscal plans, while the Greens have made provisions to maintain the real value of spending in the Health, Education, Welfare and Environmental areas. Beyond this, the Greens have no allowance for future budget spending, claiming instead that they will run larger surpluses.

ACT propose to make huge cuts in government spending, cutting back on individual, family and corporate welfare, trimming government administration costs, and abolishing some entire agencies and programs. The other parties have not provided costed policy proposals, and we have made our own estimates independently. The Conservative Party propose to get tough on criminals, increasing prisoner numbers, which imposes a fiscal cost. United Future have several priority policies, but one (income sharing for families with dependent children) involves tax cuts, so we have excluded it from the posted information. Our basis for costing their other policies is given in another post in this series.

Finally, we have not been able to quantify the extensive list of proposals made by New Zealand First, as these are mostly policy intention statements rather than specific implementable proposals. We do note that they propose to remove GST on food ($9 billion) and on local authority rates ($2.16 billion). That means they will need to raise $3.75 billion a year from other sources before they can provide for new spending.   We have yet to estimate policy proposal costs for the Internet-Mana Party and for the Maori Party. We do not plan to cover any other parties.

Coverage on CTV News

Michael Dunn

CTV ran a story on their evening news on Thursday 14 August, the day after the launch of the Bribe-o-meter. See the story at https://www.youtube.com/watch?v=hBfRpgBEqDM CTV had interviewed me over the phone and also contacted Jordan Williams of the Taxpayers Union. They focussed their story on what National and Labour were proposing as extra support for Christchurch and the Canterbury region. On current announced policies, Labour promise to deliver more, but the flip-side is that will require every household in New Zealand to contribute more to fund that spending, whether that is raised from taxes or by a reduction in other benefits.

That s the function of the bribe-o-meter - to point out that all spending proposals come with a cost to families across the country. Your dollars are being collected and redistributed to others. Some people will get more back than they contribute, others will get less, but overall there is a cost. The process is lossy - governments cost money to run - so the total costs to households, families and other taxpayers will exceed the total benefits that are distributed to households, and to central, regional and local government agencies to spend on behalf of households.

in general, the more a government intervenes to determine who gets what, the higher the cost, and the more it then needs to collect to provide for the same total level of welfare for all of its citizens. Of course, most people do care about providing support to those in greater need than themselves, but their tolerance for having their contribution swallowed by government is limited. 

Costing political party policy proposals

Michael Dunn

Yesterday, we published the first stage of our analysis of the comparative costs of political party policy proposals in the lead up to the 20 September election on the Taxpayers' Union website: http://taxpayers.org.nz/pages/bribe-o-meter We started with the a side-by-side comparison for National Party and Labour Party spending. In coming weeks, we will adjust the chart and tables to reflect new policy announcements, and add in our estimates of the cost of proposals by the Green Party, New Zealand First, ACT, and the other parties.

In constructing our comparison, we took some information on new spending from the 2014 Budget as representing new policy for National, who have yet to announce any substantial new spending in their formal election campaign. We have been crticised for taking this approach, as National will claim that whoever leads the Government in the next Parliament will very likely adopt the Budget spending as the starting point for their administration.

Our view is that there are certainly elements of policy in the Budget that are contentious, and that other parties have already proposed alternative policies in some areas. Where Labour have proposed different Education and Welfare policies, for instance, we have charged the full cost of those policies to Labour's new spending account, and believe we have adopted a consistent approach in allocating the cost of the corresponding Budget policies to National's spending account. There are other areas where we have included Budget proposals as part of National's new spending proposals. In most cases, these are where Labour have different spending proposals, either as part of their May 2014 Fiscal Plan, or as newly announced policy. However, there are some areas of spending that are not matched by alternatives.

As National and other parties unveil their new policy proposals we will review what should be treated as future baseline and what should be treated as new policy spending from the 2014 Budget. However, we need to recognise that in an election year, the incumbent government has an opportunity to include new policy measures in its Budget and have these incorporated into baselines, whereas opposition parties must state all of their proposals independently.

In some cases, parties will propose to re-allocate funding within current Budget allocations to fund alternative policies. That raise the question of how to measure the attributable cost for the new policies. If the current policy is reversible, then its cost may need to be treated as a policy proposal. On the other hand, to the extent that spending is in the baselines, some may consider that only incremental costs should be relevant - and that cost savings should be treated as negative spending.

These issues is open to debate.  We aim to establish a level playing-field.

 

The Fire Service Levy

Michael Dunn

Here is an example of how our work has influenced public policy this week.

The Insurance Council of New Zealand (ICNZ) have launched a campaign to have the Fire Service funded instead by means other than levies on insuarnce - advocating that this be funded by a mix of a charge on residential and commercial properties to be (collected along with territorial authority rates), a small charge (around $5) in the registration fees for motor vehicles, and increased Government funding for non-property non-vehicle related services.

The ICNZ case is based upon a series of reports produced by Michael Dunn and his colleagues Derek Gill and Killian Destremau at NZIER, now published on the ICNZ website: http://www.icnz.org.nz/urgent-change-required-to-unfair-insurance-based-fire-service-levy/ . Michael led the research and modelling of alternative funding mechanisms, and was the principal author of the first and second reports. The third report is a summary of findings and recommendations.

Insurance levies contributed more than $330 million of the approximately $360 million cost of funding fire services in New Zealand during the 2012/13 fiscal year.  More than half of the work of the fire services (the New Zealand Fire Service and the regional Rural Fire Services) is not directly related to fire prevention and fighting fires. They provide rescue services for vehicle and other accidents, emergency protection following storms and floods, and in many areas now provide a first-responder service for medical emergencies.

The link between insurance and the funding of fire services is largely historical, with insurance companies once having their own independent fire services, but that is no longer relevant today. Most Australian States have moved from insurance-levy funding to property-based funding of their fire and emergency servies in recent years. New Zealand should follow.

First Post

Michael Dunn

This is Michael Dunn, Managing Principal at Economics and Fiscal Consulting Limited, in Wellington, New Zealand.  Welcome to our web-site, which I started building on my birthday, 27 July, with the help and advice of Melissa Hartwick of Motif Agency.

The primary focus of "ecofisc" which is the trading name of this business is in providing expert analysis of government finances, including both revenue and expenditure, invesment in assets and their returns, and the fiscal balance - revenue less expenses. With our expertise in modelling and forecasting, we are also able to review the medium and longer term impact of fiscal policies and trends in the fiscal balance. We also estimate the social and economic impact of government spending and taxation proposals. We can also apply our skills to business analysis, estimating the impact of following varying strategies under different scenarios.  

The photographs on this site are my from my collection of personal work. I enjoy photography as a form of creative expression, with a penchant for interpreting landscapes and city-scapes. I occasionally shoot photographic assignments, even weddings, mostly as favours to friends.