Green party costings

I kindly received an email via the Green party yesterday pointing me to the costings on their website.  I see that the costings (here) were looked at by two independent economic consultancies – BERL and Infometrics (which is my workplace).

I haven’t been involved with any of it, or talked to any of the people involved.  So I’m going to give my views.  This is independent of any affiliations I have of course – on this blog I prefer to call a spade a spade rather than worry too much about what other economists think of me 😉

One thing I will point out, after reading the Infometrics report for the first time, is that they don’t say the things in the Green’s summary – but if you do a costing for a party, that is the way they will sell it.  The BERL tables on the other hand do imply what the Greens take from them – and that is very disappointing as they are misleading.

Still I’m getting ahead of myself.  Remember what this blog is like – it isn’t that policies are “bad” or “good”, those statements largely require value judgments.  Instead, there are trade-offs, and also for certain policy aims different policies may be a more direct way of getting to those aims.  Those are the types of constructs we’ll work over when looking at all party policies, and as a result the tone will sound critical irrespective of whether I like the policy or not – as almost all policies do have losers, which politicians understandably don’t want to talk about.

Something else I’ll note – if any other party does something like this, could someone send it to me.  I am very busy at this moment and struggle to keep up with political news on top of the types of things I am focusing on for work 🙂

The policies mentioned:

  1. Run surpluses $2.2 billion larger than National by 2017/18;
  2. Gross Government Debt will be $6.6 billion lower than National by 2017/18;
  3. Investing $3.8 billion over the next three years to maintain real levels of spending in health, education, and environmental protection to reverse National’s major cuts to these areas;
  4. Use new savings and revenues to address growing inequality and lift hundreds of thousands of children out of poverty by 2017 with a $3.4 billion package of new social policies;
  5. Use new savings and revenues to make rivers and lakes clean enough to swim in again with a $218 million package of new environment policies;
  6. Use new savings and revenues to invest $1.4 billion into kick-starting the transition to a smarter greener innovation economy;
  7. Deliver modest income tax cuts to 97 percent of all New Zealand taxpayers through a climate tax cut, by making the first $2,000 of income tax free;
  8. Cut the company tax rate from 28 percent to 27 percent;
  9. Increase the top marginal income tax rate to 40 percent for all income over $140,000, with a matching increase in the trust tax rate;
  10. A further $2 billion worth of initiatives over three years to be announced before September 20.

Ok, let us do this guys and gals!

Run surpluses $2.2bn larger than National by 2017/18

This is politicking, pure and simple.  Exactly the same politicking that National and Labour are doing to be fair – and done because is sounds “responsible” and no doubt polls well.  I have had many people say to me “if we are tightening our belts, why isn’t the government!” – so this sentiment sells.

Now there are two areas where thinking about deficits, or more appropriately the stock of government debt, may be appropriate:

  • Short term policy:  Automatic stabilizers (which work through deficits and surpluses) help to smooth out economic activity – and aid the RBNZ with monetary policy.
  • Long term policy:  The stock of debt can be seen as an intergenerational equity issue, by shifting the burden of spending (which includes capital expenditure that provides future services once purchased).

The Greens discussion says nothing about these – the long term changes being discussed are not long-term significant enough, or clearly long-term costed enough. In this context so the comments are all politics.

Instead they should be congratulated on pushing for their package to be fiscally neutral and costed.  Sure it likely isn’t fiscally neutral – but most suggested packages by parties aren’t.  We’ll get onto how this is the case later on 😉

Investing to maintain real spending

This one is genuinely disappointing as it seems to be an almost explicit misinterpretation of Budget forecast figures.

The numbers for claiming falling real expenditure come straight from the Treasury forecasts here, but are then deflated.  This sounds good on the face of it, and people do this all the time.  However, it ignores that there is both unallocated spending, and allowances for additional spending in future Budgets – both which largely get allocated to Health and Education on the day.

It is an “open” secret that the Health and Education numbers work this way – as both Labour and National want to announce increases in spending on these items on the day. [Note: It is just like “tax cuts to get rid of fiscal drag” – political marketing all the parties do].

In that context, saying that the real value of spending is going to fall on these items is empty rhetoric.

However, there is another point here.  We may not necessarily want “real” spending to be unchanged in a category – we may in fact mean that we consider real spending per person/service to be unchanged!  As our population ages, it may be the case that we need to spend more on health and less on education – this is something we need to keep in mind, rather than targeting these aggregates without reference to the population they need to serve!

A sidenote – the health inflation figure is a hard one, and I think BERL did the right thing with this.  It is hard to tell what will happen to costs there – will aged care drive up costs, or will automation save us.  Exciting!

Top tax rate and revenue

I have already said that I am skeptical of these revenue figures – and if the revenue isn’t there, then the fiscal neutrality also slips away.

I was interested in seeing why my work colleagues disagreed with me, and I found that they said this in their report:

We have briefly reviewed the estimate for the top tax rate change and this appears to be based on ready reckoner information provided by Treasury (see http://www.treasury.govt.nz/government/revenue/estimatesrevenueeffects). Although the calculations made for the Green Party appear consistent with the information provided by Treasury we think that on balance the estimates provided are likely to overstate the revenue impacts of the proposed tax changes. Our first minor concern is that we think that the estimates are overly optimistic about the implementation time of the proposed tax changes. The estimates presume that following a 20 September election that the tax changes will be fully implemented by 1 January. Although this is certainly feasible, it may be more prudent to presume some delay in the revenue calculations.

Our second more substantial concern is that the estimates make no allowance for behavioural responses to the tax change.

Ahh, the same concerns that this is a “maximum” revenue assumption.

Without the revenue, the social policy programs can’t be funded – this changes the nature of the trade-off, and is worth keeping in mind.

The carbon tax and tax cut

I have already discussed this here – I am pro a carbon tax, I am less enamored with the suggested form of the tax cut but I’m all for having it analysed if they get into government.  For what the Greens appear to be trying to do (giving people back some “social dividend” from the carbon tax) I think a straight payment to each individual would do the trick – doing it through a tax-free threshold puts an arbitrary band on who “deserves” the payment (as for everyone earning income above the band, it is just a flat payment – for those below it is not), which I didn’t take as their intention with it.

Whether this type of payment from a carbon tax is appropriate in of itself is a whole other questions.  However, thinking about it in a revenue neutral sense like this is something they should be applauded for.

I would note their “97%” figure is codswallop though – the carbon tax isn’t a free-lunch, its payment is a transfer that is subject to “tax incidence” … it’ll put up some consumer prices, and make some of this “97%” worse off.

The Green Investment Bank

I’ve written about this already.  Wow, I’ve given the Green’s a lot of coverage over here – I guess they’ve just been releasing policy in a way that I’ve seen it.

The clear thing here is that to justify the policy we need an externality (there isn’t one – if anyone argues environmental impact I’d note that there is a carbon tax as a direct mechanism, why do we need an additional indirect one) or financial market failure – namely some reason why finance is biased against Green investment, or inappropriately risk averse.

Without these, the policy looks a lot like giving money to capital owners – which for a left-wing party must be an unintended consequence 😉

Many other social issue and environmental issue policies

I’m not going to talk about other policies – as I haven’t looked in detail, and have little time sadly.  However, I thought I’d note they exist here, so that if you are interested you’ll go have a look.

I was encouraged to see greater spending on those with disabilities – tbh, one of my subjective little value judgments is that I’d significantly increase funding for both income transfers and treatment for those with mental and physical disabilities.  As a disability can reduce opportunity, and trying to work with organisations to overcome entrenched disadvantage “should” be one of the key aims of social policy IMO.

 

  • MrBarrington

    ‘makes no assessment of behavioural changes’… that pretty much sums up all these types of costing exercises… they are spreadsheet driven and as we know, spreadsheets are deterministic… frankly I don’t see the point in arguing over costings as it is all political theatre. And even when we get into policy it seems that costings can be way off….

    I fully support debate around trade-offs, however, the sort of ‘we’ve done the numbers’ claims that the Greens are using are explicitly based on not assessing the trade-offs…

    • This is true in a large part – however, using these costings at least show some restraint and recognition of costs. It is better that parties at least do that, than purely making things up!

  • Robert

    How do you forecast second and third-round behavioural
    changes to a new top tax rate without making a whole lot of assumptions? Isn’t it better to use static, up-front Treasury numbers and footnote that they’re likely to be overestimates?

    • There are three ways that we could forecast behavioural effects which I mentioned in a prior post (I’d avoid language like second and third round effects, as it isn’t simply a matter of timing).

      The least informative, but least costly is to admit that such numbers are a “maximum” expected revenue. This is fair, but this isn’t what was done. Instead the static numbers were taken and “spent”. The Treasury documentation notes this, the Infometrics report notes this, I noted this – but the Greens didn’t note this. As a result, there is nothing wrong with me pointing out that this is missing 😉

      The next two take two forms “structural” and “reduced form”. A structural one says ” there is a form of behavioural response, and we will use data about individuals/households to estimate it – eg for a “labour supply” estimate you may look towards this type of modeling http://www.tvhe.co.nz/2014/02/05/conceptual-introduction-to-tax-benefit-microsimulation/ .

      Now this is all well and good, but it comes with its own flaws that we have to be aware of, and we know there are “multiple types” of behavioural responses – which means needing many structural models, and a way of aggregating between them!

      So we can go to a reduced form type model, and estimate the “elasticity of taxable income”. These estimates for NZ indicate that the introduction of a top tax rate at this level would raise little to no revenue (as I note in the prior post) – however, given how small NZ is, this is only based on one study, so once again I wouldn’t treat it like bible.

      None of these methods suggest ignoring it, simply using the ready reckoner, and then saying “we can spend all the money on these things” – even without a point estimate of behavioural effects, we have enough evidence and theory here to indicate that the trade-offs involved are different than the Greens pointed out in their policy documentation, which is exactly the point I was getting at.

    • Are you willing to are you willing to make the same assumptions about the carbon tax – its revenue and behavioural effects?

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