A tale of two countries

Published in The National Business Review (Auckland), 16 June 2017

Sometimes the biggest obstacle to reform is neither a lack of money nor a lack of problem awareness. It may simply be a dearth of imagination.

Having just returned to New Zealand from the Initiative’s trip to Switzerland, it is hard not to see our political debates through a Swiss prism. It shines a different light on some of New Zealand’s problems that we regard as intractable.

The truth is that New Zealand’s challenges are only intractable within our own, old paradigms. If we dare to think beyond them, we may find new ways of not only doing things differently but better.

Funding local government is the best example. For years, local and central government have been at loggerheads with each other. They are battling it out over planning, house building and infrastructure provision. The confrontation between Auckland Council and the Beehive has become a sad fixture in New Zealand politics.

Try discussing with a government minister how to better fund infrastructure to support local growth. Without a doubt, they will quickly point out that any such thoughts amount to asking Invercargill taxpayers to pay for Auckland transport.

It is easy to understand where they are coming from. Since New Zealand is one of the most highly centralised countries in the world for taxation, most tax revenues flow to the centre before being redistributed around the country. In this system, you cannot do anything for one place without implicitly harming every other place.

The only questions one could debate in such a zero-sum game are whether the regional distribution of central government funding is “fair.” Is it fair regarding the regional origins of tax revenues? Is it fair considering local needs? Is it fair considering other factors? The answers to these questions depend on your definition of fairness (and the availability of local data).

Even if we found satisfactory answers to these fairness questions, it would still remain a zero-sum game. It is a system that allocates a static amount of resources without even considering any dynamic effects.

How ironic, the very government which pioneered the social investment approach, the most innovative and dynamic way of thinking about social expenditure, is stuck in such static thinking about the local-central relationship. If only it applied the same dynamic perspective to local government. Instead, it is clinging to old centralist habits.

This is where Switzerland comes into the picture because the Swiss have the antidote to New Zealand’s zero-sum thinking.

When we visited Switzerland, we saw first-hand what dynamic incentives a devolved system of public finance can unleash. Of all the factors contributing to Switzerland’s economic success (their per capita GDP is twice ours), this is probably the single most important. Everyone we talked to pointed out how powerful an incentive localised tax powers are.

To just give one example, we spent a day touring the picture-postcard region around Lake Lucerne with a senior executive of Switzerland Tourism. He pointed out a new resort development at the peak of Mt Bürgenstock.

There, a Middle Eastern investor is building three luxurious hotels with a total of 400 rooms. The project volume is $700 million and annual turnover is expected to reach $190 million over the coming years, creating 800 jobs.

When I asked how difficult it was to obtain permissions for this project, I was told that it all went smoothly. The local community’s specific environmental concerns were readily addressed by the investors. Crucially, the commune and the canton were keen to see the investment go ahead. Little wonder: Each will receive a share of the tax revenues generated by the resort through direct taxes.

Now imagine that a similar development had been considered not in Switzerland but in New Zealand.

The problems would have started with the Overseas Investment Act. The NIMBYs would have come out to protest against the development because they would not have benefited financially from it.

Local and central government would have been haggling over the provision of infrastructure to connect the new resort. And the prospect of all of that would have driven many potential investors away from the outset.

We have a choice in New Zealand if we are satisfied with our status quo and content to keep fighting the same old political battles for the next decades. Alternatively, we could break out of our old ways and try something radically new.

The government has shown its courage to move on from old habits in the social investment approach. Now is the time to be equally bold and break free from New Zealand’s centralist history. And if any further inspiration is needed, a trip to Switzerland might well deliver it.

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