rollbackgov

Rolling Back Government:

Lessons from New Zealand

by Maurice P. McTigue, excerpted

(Mr. McTigue is a Distinguished Visiting Scholar at George Mason University, where he directs the U.S. government accountability project. Previously, he was a member of the New Zealand Parliament and a former Cabinet Minister, in addition to a long list of other influential positions. The following is excerpted and adapted from a lecture delivered on the Hillsdale College campus.

In the speech, Mr. McTigue notes that growth in government is a modern phenomenon, beginning in the 1920s and 1930s. He details how New Zealand dropped from number three in per capita income in the world in the late 1950s to number 27 (the level of Portugal and Turkey} by 1984 because of its increased government spending, taxes, and micromanagement, including price controls, wage controls, import controls, foreign exchange controls, and massive levels of subsidies. The restrictions and the resulting economy were causing young people to leave New Zealand in droves. -Ed.)

A reform government elected in 1984 identified three problems: too much spending, too much taxing, and too much government. Well, the first thing 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 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.

We rewrote the environmental laws, reducing

a law that was 25 inches thick to 348 pages.

As we started to work through this process, we also asked some fundamental questions of the agencies:

“What are you doing?” “What should you be doing?” 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?” 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. The Forest Service went from 17,000 employees to 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% 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. In the main, when we sold those things off (to private businesses), 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% in the size of government, measured by the number of employees. The government’s share of GDP dropped from 44 to 27%. 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% down to 17% 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%. Yes, Ronald Reagan was right: lower tax rates do produce more revenue.

Subsidies and Education

What about subsidies? First, we need to recognize that the main problem with subsidies is that they make people dependent; and when you make people dependent, they lose their innovation and their creativity and become even more dependent.

By 1984, New Zealand sheep farming was receiving about 44% of its income from government subsidies. Its major product was lamb, and lamb in the international marketplace was selling for about $12.50 (with the government providing another $12.50) per carcass. Well, we did away with all sheep farming subsidies within one year. And of course the sheep farmers were unhappy. But once they accepted the fact that the subsidies weren’t coming back, they put together a team of people charged with figuring out how they could get $30 per lamb carcass. The team reported back that it required producing an entirely different product, processing it in a different way, and selling it in different markets. And within two years, by 1989, they had succeeded in converting their $12.50 product into something worth $30. By 1991, it was worth $42; by 1994 it was worth $74; and by 1999 it was worth $115. In other words, the New Zealand sheep industry went out into the marketplace and found people who would pay higher prices for its product. You can now go into the best restaurants in the U.S. and buy New Zealand lamb, and you’ll be paying somewhere between $35 and $60 per pound.

As we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises -- and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. Instead, corporate farming moved out and family farming expanded, probably because families are prepared to work for less than corporations. In the end, it was the best thing that possibly could have happened. And it demonstrated that if you give people no choice but to be creative and innovative, they will find solutions.

New Zealand had an education system that was failing as well. It was failing about 30% of its children -- especially those in lower socio-economic areas. We had put more and more money into education for 20 years, and achieved worse and worse results. It cost us twice as much to get a poorer result than we did 20 years previously. So we decided to rethink what we were doing here as well.

The first thing we did was to identify where the dollars were going. We hired international consultants (because we didn’t trust our own departments to do it), and they reported that for every dollar we were spending on education, 70 cents was being swallowed up by administration. Once we heard this, we immediately eliminated all of the Boards of Education in the country. Every single school came under the control of a board of trustees elected by the parents of the children at that school, and by nobody else. We gave schools a block of money based on the number of students that went to them, with no strings attached. We converted 4,500 schools to this new system all on the same day.

But we went even further: We made it possible for privately-owned schools to be funded in exactly the same way as publicly-owned schools, giving parents the ability to spend their education dollars wherever they chose. Again, everybody predicted that there would be a major exodus of students from the public to the private schools, because the private schools showed an academic advantage. It didn’t happen, however, because the differential between schools disappeared in about 18-24 months.

Why? Because all of a sudden teachers realized that if they lost their students, they would lose their funding; and if they lost their funding, they would lose their jobs. 85% of our students went to public schools at the beginning of this process. That fell slightly, but three years later, 87% of the students were going to public schools. More importantly, we moved from being below our international peers to being about 14 or 15% above our international peers in terms of educational attainment.

We found our system of taxation extremely

complicated in a way that distorted business

as well as private decisions.

Now consider taxation and competitiveness: What many in the public sector today fail to recognize is that the challenge of competitiveness is worldwide. Capital and labor can move so freely and rapidly from place to place that the only way to stop business from leaving is to make certain that your business climate is better than anybody else’s. Two years ago, the European Union, led by France, was highly critical of Irish tax policy because the Irish had reduced their tax on corporations from 48% to 12% and business was flooding into Ireland. The European Union wanted to impose a penalty on Ireland in the form of a 17% corporate tax hike to bring them into line with other European countries. The Irish didn’t buy that. The European community responded by saying that what the Irish were doing was unfair and uncompetitive. The Irish Minister of Finance agreed: He pointed out that Ireland was charging corporations 12%, while charging its citizens only 10%. So Ireland reduced the tax rate to 10% for corporations as well. There’s another one the French lost!

When we in New Zealand looked at our revenue gathering process, we found the system extremely complicated in a way that distorted business as well as private decisions. So we asked ourselves: Was our tax system concerned with collecting revenue? Was it concerned with collecting revenue and also delivering social services? Or was it concerned with collecting revenue, delivering social services, and changing behavior, all three?

We decided that the social services and behavioral components didn’t have any place in a rational system of taxation. So we resolved that we would have only two mechanisms for gathering revenue -- a tax on income and a tax on consumption -- and that we would simplify those mechanisms and lower the rates as much as we possibly could. We lowered the high income tax rate from 66 to 33%, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19%, which became the flat rate for low-income earners. We then set a consumption tax rate of 10% and eliminated all other taxes -- capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20% more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance. If tax rates are low, taxpayers won’t employ high-priced lawyers and accountants to find loopholes. Indeed, every country that I’ve looked at has dramatically simplified and lowered its tax rates has ended up with more revenue, not less.

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.

Thinking Differently About Government

What I have been discussing is really just a new way of thinking about government. Let me tell you how we solved our deer problem: Our country had no large indigenous animals until the English imported deer for hunting. These deer proceeded to escape into the wild and become obnoxious pests. We then spent 120 years trying to eliminate them, until one day someone suggested that we just let people farm them. So we told the farming community that they could catch and farm the deer, as long as they would keep them inside eight-foot high fences. And we haven’t spent a dollar on deer eradication from that day onwards. Not one. And New Zealand now supplies 40% of the world market in venison.

By applying simple common sense, we turned a liability into an asset. Let me share with you one last story: The Department of Transportation came to us one day and said they needed to increase the fees for driver’s licenses because the cost of relicensing wasn’t being fully recovered. Then we asked why we should be doing this sort of thing at all. The transportation people clearly thought that was a very stupid question. “What is it about relicensing that in any way tests driver competency?” I asked. We gave them ten days to think this over. Finally they admitted that they could think of no good reason for what they were doing -- so we abolished the whole process! Now a driver’s license is good until a person is 74 years old, after which he must get an annual medical test to ensure he is still competent to drive. So not only did we not need new fees, we abolished a whole department. That’s what I mean by thinking differently.

There are some great things happening along these lines in the United States today. You might not know it, but back in 1993 Congress passed a law called the Government Performance and Results Act. This law orders government departments to identify in a strategic plan what it is that they intend to achieve, and to report each year what they actually did achieve in terms of public benefits. Two years ago President Bush brought to the table something called the President’s Management Agenda, which sifts through the information in these reports and decides how to respond. These mechanisms are promising if they are used properly.

Consider this: There are currently 178 federal programs designed to help people get back to work. They cost $8.4 billion, and 2.4 million people are employed as a result of them. But if we took the most effective three programs out of those 178 and put the $8.4 billion into them alone, the result would likely be that 14.7 million people would find jobs. The status quo costs America over 11 million jobs. The kind of new thinking I am talking about would build into the system a consequence for the administrator who is responsible for this failure of sound stewardship of taxpayer dollars. It is in this direction that the government needs to move.

(IMPRIMIS is mailed free to anyone who requests it. We highly recommend it. To subscribe, visit www.hillsdale.edu.

We wholeheartedly support reforms such as this, including government accountability. Press your delegation to enact such reforms. -Ed.)