The role of government in the economy

As regulator
As tax-gatherer
As owner
As provider

The New Zealand government is involved in the economy in a range of different ways. The main ones are as a regulator, as a gatherer of taxes, as an owner of enterprises, and as a provider of services and income.

Governments can provide the environemnt for economic transformation, focusing on the needs such as an increase in productivity. Such transformation calls for access to capital, which current governments attack on several fronts. For example, during 2006 trans-Tasman agreements were made which will streamline investment flows across the Tasman by mutual recognition of securities offerings and alignment of business law and accounting standards. These measures will make it easier for New Zealand companies to access Australian capital markets.

The 2006 introduction of the KiwiSaver legislation into Parliament establishes a long-term savings scheme which, while it is not compulsory, tilts the playing field in favour of establishing a long term savings habit.

One of its side effects, of course, is that it will increase the pool of capital in New Zealand that is going searching for worthwhile investment opportunities. In the normal course of events, taking into account factors such as taxation, it is likely that more of that capital will be invested on-shore. This is what known as ‘home-bias’, and it will certainly lead to some degree of net increase in the investment capital available to New Zealand firms. That in turn should decrease our need to borrow off-shore, with all of the additional costs that brings.

A benefit of KiwiSaver is that a workforce with a higher savings rate and a greater general awareness of the need for financial planning and wealth management is a more productive workforce.

As regulator

Most economic activity in New Zealand is people and firms doing business with each other. The government’s role is to regulate those interactions. Some of this regulation is through general laws, like the law of contract, which brings people together to do business. Other regulation involves civil laws which are about outlining people’s rights and responsibilities in relation to each other, for example the laws regarding trespass. These laws are enforced through the judicial arm of government, the New Zealand court system.

Most regulation is in the form of laws passed by Parliament. These fall into two general classes. Generic regulations cover a wide range of activities, like the Fair Trading Act and the Companies Act, and there are also specific regulations covering individual markets (like regulations of the banking industry). Some specific regulations even cover a single firm, like the Dairy Industry Restructuring Act, which governs some of the operations of Fonterra.

Whatever their form or scope, regulations have the same purpose, which is to improve the operation of markets and make doing business easier and fairer for all parties concerned.

For details of the current government’s approach to regulation issues, see the Ministry of Economic Development’s website.

As tax-gatherer

The Government collects about $32 billion in taxes every year. The revenue is used to fund government programmes like health and education, to pay debts, and to build public infrastructure such as roads.

Taxes can be powerful instruments in how they affect people’s behaviour. Economic research has shown that how a government goes about imposing taxes can be a key factor in determining the amount of savings and investment in an economy, as well as how much people work, when and on what they spend their incomes, and on the structure of businesses.

New Zealand’s tax system has been rated by organisations like the Organization for Economic Co-operation and Development (OECD) as being one of the best in terms of reducing the impact that taxes have on the economy.

Infrastructure, skills, and savings are key elements in the government's productivity strategy; but they are by no means the end of the matter. In tax the 2005 Budget included announcements about changes to the rules around R&D and depreciation, and measures to attract overseas equity partners to start up New Zealand companies. Those changes will start to take effect in 2006.

The government is also reviewing business tax to ensure that it provides the right incentives for innovation and investment, without opening the door too wide for the tax planning industry. New Zealand governments also usually look closely at Australian reforms and consider what measures may be logical in light of changes there.

A discussion document on business tax was foreshadowed by finance minister Michael Cullen and revenue minister Peter Dunne to be issued mid-year, who were aiming to have any changes in place for the 2008 tax year.

For further information on the New Zealand tax system, see the websites of the Treasury and the Policy Advice Divisions of the Inland Revenue Department .

As owner

The New Zealand government owns assets valued in excess of $95 billion. Some of these are physical assets like schools and hospitals, military equipment and police stations. Other assets are businesses like New Zealand Post and a majority of the shares in Air New Zealand.

In some cases, the government operates the business it owns in a highly commercial manner. The State-owned Enterprises (SOEs) are, for example, expected to be as profitable as private firms operating in the same market.

Other operations, like schools and hospitals, serve social purposes and while the government expects them to be well run and efficient, it does not operate them for profit.

As provider

The converse to the government’s role as tax-gatherer is as the provider of goods and services to the public.

Major examples of the direct provision of services are education, health services and the police force. Services can be provided directly by government-owned bodies, like state schools and District Health Boards. Another option is for services to be provided indirectly through companies and organisations engaged by the Crown to provide services to the community, like Māori health services provided by iwi-based organisations.

The government spends about $12 billion each year in transfer payments, the direct provision of income to individuals. Major categories of transfers include New Zealand Superannuation ($5.6 billion), unemployment benefits, domestic purposes benefits and invalids benefits. These payments provide financial assistance to individuals who, for some reason, are unable to participate fully in the economy.

Updated 5 March 2006

Prime Minister Helen Clark with Australian Prime Minister John Howard - their regular talks aim to build on the Closer Economic Relations agreement that governments fashioned to help both countries.

Government owns some assets on behalf of citizens, manages others and regulates still others - but the way governments manage international economic and trade relations have significant implications for the domestic economy.