Monday, February 22, 2010

Getting Our Fiscal House Back in Order

We have just gone through the worst recession since WWII. Our unemployment rate is over 8%. We racked up a deficit of over $56bill. Now how to get our fiscal house back in order. How do we get rid of the deficit, pay down the debt, balance the budget and get back to surplus?
Minister Flaherty will bring down the budget on March 4. What should he do? Should he raise taxes, cut spending? Maybe we should take a look at New Zealand and learn a lesson from what they did.

New Zealand about 20 yrs. ago was in an economic conundrum. In desperation, they made big reforms.
"Prior to comprehensive reforms 20 years ago, New Zealand was an economic mess, suffering from debt, continual deficits, and a stagnating economy. Out of desperation, New Zealand’s political leaders reduced government spending and enacted fundamental, wide-ranging reform. Since then, New Zealand’s national government has seen a single deficit; it was this year and due to the worldwide recession." Goldwater Institute
Maurice P. McTigue, member of the New Zealand Parliament and New Zealand’s ambassador to Canada was instrumental in the reforms that turned that country around. Here is just some of what they did.

"Spending and Taxes
When a reform government was elected in 1984, it identified three problems: too much spending, too much taxing and too much government. The question was how to cut spending and taxes and diminish government’s role in the economy. Well, the first thing you have to do in this situation is to figure out what you’re getting for dollars spent. Towards this end, we implemented a new policy whereby money wouldn’t simply be allocated to government agencies; instead, there would be a purchase contract with the senior executives of those agencies that clearly delineated what was expected in return for the money. Those who headed up government agencies were now chosen on the basis of a worldwide search and received term contracts five years with a possible extension of another three years. The only ground for their removal was non-performance, so a newly elected government couldn’t simply throw them out as had happened with civil servants under the old system. And of course, with those kinds of incentives, agency heads "like CEOs in the private sector" made certain that the next tier of people had very clear objectives that they were expected to achieve as well.

The first purchase that we made from every agency was policy advice. That policy advice was meant to produce a vigorous debate between the government and the agency heads about how to achieve goals like reducing hunger and homelessness. This didn’t mean, by the way, how government could feed or house more people, that’s not important. What’s important is the extent to which hunger and homelessness are actually reduced. In other words, we made it clear that what’s important is not how many people are on welfare, but how many people get off welfare and into independent living.

As we started to work through this process, we also asked some fundamental questions of the agencies. The first question was, "What are you doing"? The second question was, "What should you be doing"? Based on the answers, we then said, "Eliminate what you shouldn’t be doing", that is, if you are doing something that clearly is not a responsibility of the government, stop doing it. Then we asked the final question: "Who should be paying?, the taxpayer, the user, the consumer, or the industry?" We asked this because, in many instances, the taxpayers were subsidizing things that did not benefit them. And if you take the cost of services away from actual consumers and users, you promote overuse and devalue whatever it is that you’re doing.

When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. In the latter case, most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement. And if you say to me, "But you killed all those jobs!", well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn, on top of which, they were surprised to learn that they could do about 60 percent more than they used to! The same lesson applies to the other jobs I mentioned.

Some of the things that government was doing simply didn’t belong in the government. So we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

We achieved an overall reduction of 66 percent in the size of government, measured by the number of employees. The government’s share of GDP dropped from 44 to 27 percent. We were now running surpluses, and we established a policy never to leave dollars on the table: We knew that if we didn’t get rid of this money, some clown would spend it. So we used most of the surplus to pay off debt, and debt went from 63 percent down to 17 percent of GDP. We used the remainder of the surplus each year for tax relief. We reduced income tax rates by half and eliminated incidental taxes. As a result of these policies, revenue increased by 20 percent. Yes, Ronald Reagan was right: lower tax rates do produce more revenue.

What about regulations? The regulatory power is customarily delegated to non-elected officials who then constrain the people’s liberties with little or no accountability. These regulations are extremely difficult to eliminate once they are in place. But we found a way: We simply rewrote the statutes on which they were based. For instance, we rewrote the environmental laws, transforming them into the Resource Management Act, reducing a law that was 25 inches thick to 348 pages. We rewrote the tax code, all of the farm acts, and the occupational safety and health acts. To do this, we brought our brightest brains together and told them to pretend that there was no pre-existing law and that they should create for us the best possible environment for industry to thrive. We then marketed it in terms of what it would save in taxes. These new laws, in effect, repealed the old, which meant that all existing regulations died , the whole lot, every single one."
I think we should take bold steps and make major reforms like they did. I can hear the howls from the opposition and their cheerleader MSM now if we took such steps. "The mean spirited, Harper Conservatives" and other such statements. Yada, yada, yada!
The fact is we have to take bold measures that will be short term pain for long term gain.

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