Govt failing in its core role

The recent Budget put small  Band-Aids over the big weeping sores in our economy, writes Peter Lyons.

I am looking forward to my $20 tax cut each week next year. I will use it to buy extra sirloin steak for my cat.

It was great to see some lower-income families are also getting a tax cut of $15 a week. There was a clip on telly of a young mother bundled up in warm clothing in a cold house saying how much this extra money will mean to her family. It was clear that a bit extra needed to be spent on heating.

The economic justification of these tax cuts is that people know best how to spend their own money rather than have it taken by government.

A progressive tax system means people on higher incomes pay a higher average tax rate. So tax cuts under this system usually mean higher income earners get a larger dollar amount back. So my cat will be fed sirloin, while poorer families can use their extra money to pay some bills such as heating or food for their children. It is all about freedom of choice.

There were several other aspects in the Budget that I found unsettling. Apparently there is no housing crisis. But the amount allocated to the accommodation supplement was substantially increased. This is effectively a giant subsidy to landlords.

I have always found the Working for Families scheme a little bit strange. This Budget has strengthened this package. There is something odd about the fact middle-income earners in this country are unable to earn enough take-home pay from their jobs to support their families, without a government top-up.

We are apparently living in a boom economy. Headline economic growth is around 3%. Yet the government still has to provide low-and middle-income earners with a top-up just to allow them to pay the bills. The Working for Families scheme could be viewed as a giant subsidy from taxpayers to employers allowing them to pay lower wages to people with families.

But my main unease relates to the state of mainstream politics. We are being managed, rather than led. We elect governments to address collective issues that we can't fix as individuals. The recent Budget put small Band-Aids over the big weeping sores in our economy. It failed to directly address the issues.

The cost of accommodation is central to the well being of our society. Housing is usually the major expense for any household. In recent years houses have become speculative assets rather than places for people to live in. It is little wonder there is a cost of living squeeze.

People need a place to live either by renting or buying. We can't control the prices we receive for our exports. Nor can a government legislate for higher wages for everyone. But it can address the distortions in our housing market if it has the political will.

The Government needs to address both the demand and supply side of the market.

It needs to gather hard data on who is actually buying the houses and target its policies based on this information. It needs to target immigration towards construction skills. It needs to cut through red tape to free up land and consent processes while ensuring quality constructions. It needs to ensure appropriate infrastructure to support housing development. It has become obvious the private sector and market forces cannot solve this issue alone.

This Government is absurd in its denial of a housing crisis. An economy is a dynamic complex system. There are limits to the ability of markets in directing such a system.

People elect governments to lead them and to step in when markets fail. They pay taxes to help fix the issues they can't fix as individuals.

A government that cuts taxes yet refuses to address crucial collective issues in our economy is failing in its core role.

Like many economists I don't actually own a cat. I would never feed it sirloin if I did.

-Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economic texts.