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Former Finance Minister of New Zealand: Ukraine should not look up to Europe

Author : Halyna Kalachova

Respondent : Gosta Esping-Andersen

23:27, 15 December 2016
Former Finance Minister of New Zealand: Ukraine should not look up to Europe

Author : Halyna Kalachova

Respondent : Gosta Esping-Andersen

Gosta Esping-Andersen told how to form an effective team of reformers, repair public spending system, and why Ukraine should avoid subsidizing agricultural sector

23:27, 15 December 2016

Read the original text at eurointegration.com.ua.

RRNZ.CO.NZ

Danish sociologist Gosta Esping-Andersen defined New Zealand as a welfare state, economy of which is dominated by the liberal and market-based mechanisms.

In the ranking of Doing Business 2017, New Zealand has “ousted” Singapore from the first place. The first steps towards this country was made over 30 years ago. In the years 1984-1988, Finance Minister Roger Douglas spent the first wave of economic reforms in New Zealand. He focused on the deregulation of financial markets, reducing trade tariffs and the transition to a floating exchange rate.

In 1990, Ruth Richardson became the Minister of Finance, who continued the plan of Douglas. Richardson has reformed social security, labor, and health. As a result, many social benefits have been canceled, and those that remained were targeted. Another brainchild of Richardson was the law on fiscal responsibility, the government was obliged to carry out clear fiscal policy.

In Ukraine, the reformist experience of New Zealand is not very well known. In making any decisions or justify their plans of Ukrainian officials are accustomed to rely on the European experience, the United States practice or recommendations of the International Monetary Fund. Ruth Richardson recently visited Ukraine for the first time. She met with the Minister of Finance Olexander Danylyuk, Prime Minister Groisman, the students of the Ukrainian academy of leadership, participated in public events dedicated to the course of reforms in Ukraine.

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She was preparing for this first visit. Before the interview, Ruth showed articles from foreign magazines and printouts from the Internet on the latest developments in Ukraine. Some of them are about President Petro Poroshenko and former economy minister Aivaras Abromavičius.

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According to your observations, is there a difference between written articles and reality?

You have a very real marketplace opportunities for radical reforms. There is a general understanding that the people are not happy with what they have. They do not believe that the government can change their lives. Politicians are not trusted. They do everything in words only.

However, unlike the Greeks, who are not interested in the changes, the Ukrainians have an appetite for the reforms. In addition, Ukraine is under pressure of Europe and Russia. Radical reforms may give an incredible effect! You have recently had a revolution, but now you need to spend a second.

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What do you mean?

We need a revolution in political reform of politics, the government, the courts, the business environment, education. People understand that the reforms taking place only in words.

To carry out radical reforms we appointed expats for top positions in the government. However, instead of radical reforms in the best case received point changes. Why, in your opinion, this practice did not work?

If you need a reform and invite to its implementation a foreign top manager, relying on a guaranteed success, you rely on false illusions. Foreigners can identify some of the status quo by making superficial changes. However, in this case, you must complete the destruction of the current flawed system and building a new one.

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How to form a team of reformers?

The most important criterion is a team of common understanding of what a country should be. This understanding should not be declarative. It must be expressed in concrete terms of economic development, which is planned to come out in some time with the help of certain actions. We need a complete overhaul of the state's role. It is necessary to reduce the state's share in the economy. The state should set the rules of the game, rather than manual control economy. Business conditions have to be extremely competitive: no preferences, no protectionism. Foreign investment will not come into the country as long as it will not create conditions for fair competition and free movement of capital.

From year to year, Ukraine abolished the various tax incentives and subsidies for industries in order to save money. Now we take one of the most painful decisions: under pressure from the IMF, we refuse the agricultural sector, which is considered the engine of our economy, tax breaks, but introducing, in the smaller sizes, a system of subsidies from the state budget. What do you think about it?

It is unacceptable. Everyone must produce, sell and innovate on an equal footing. No subsidies and grants. The agricultural sector is a huge part of your economy. Farmers can be productive in foreign markets. If they do not want to give up subsidies, the government's task to show them that there is another way to be successful. It is necessary to allow them to compete on equal terms.

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The worst thing is when the government does not believe in the success of the farmers according to the laws of free economy! New Zealand says: the more economic freedom, the better economic results.

The state should move away from state support of the priority sectors or to some form of state support?

There is no state support, because you cannot afford it. You have a high level of government spending. The state uses the money, which it does not have, to help those who do not need help.

The state should provide a stable policy of the central bank, quality management and create all the conditions for a competitive environment.

However, the EU has an extensive system of subsidies, especially in agriculture.

In Europe, there is a system of grants, subsidies and protectionism, but you should not take this from her example. This is the worst example that can be followed. This system is killing Europe its economy.

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In Europe, low economic growth and high unemployment. In Spain, the unemployment rate - 25% of young people can not find work. EU - an inefficient economy, which should not be an example for Ukraine.

How should it look like?

The point is not a particular country. The point is set of principles, which lead such exemplary economy. We are talking about countries with a higher level of economic freedom, the rule of law, open markets and labor policies that are trusted.

In the 1990s you had a reform of government spending, reducing government spending on social security, education and health. How do you decide which programs to fund and which not to fund?

It all started with a vision. We felt a need to achieve sustainable economic growth, which is not possible with a high level of government spending, budget deficits, high interest rates and, consequently, lack of investors' desire to invest in this economy.

We realized the need to control public spending and identify the core tasks of government. There was no point approach to medicine or education. It was an integrated approach.

How did you define the core?

First, we have identified the basic functions of the state: the high quality of public policy, protection, investment in human development. Within the framework of the protection of the state must ensure the rule of law.

Then we looked at the provision of access to education, health, social security and decide how you want to change their funding to reduce the level of public spending.

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What did you cut first?

After becoming minister, I immediately gave a signal to society that the government spending will be reduced. In six weeks, we have reduced the cost of one billion dollars. At that time in the history of New Zealand was not as radical reduction. It was a very big shock.

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In Ukraine, the government is constantly talking about the economy, but as soon as it comes to elections, state social spending grows.

Non-systemic approach to government spending is wrong. The results can be achieved only with the orientation of the long term. We are focused on the future and on what we want to get the economy growing.

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The principle of "first do, then explain" was painful "rake" for Ukraine. For example, the unpopular initiative of the Ukrainian government to change the scholarships charging mechanism without proper clarification has been perceived with aggression.

Before you adopt a law on fiscal responsibility, we are committed to announce and explain the changes. First of all, it concerns the budget. We have to explain to the public that we want to do with it and what are the results of these actions. In Ukraine the situation is different. You have a broken system of government spending, you try to make it better, to carry out repairs, but left with a broken system.

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And what is your understanding of the complete renovation?

First of all, a radical redefinition of the role of government. No need to pay the salaries of state employees, whose work would be better fulfilled by the private sector. You have to determine what the state can do itself, and as much as possible to upgrade these functions. Secondly, the reform of the public accounting system. I am not just talking about cash revenue registered in the pockets of citizens, and on account of all state-owned assets: stocks, accounts of all government cash flows. Thirdly, a strategic approach to the management of public debt and determination of fiscal rules that allow the government to discipline. In addition, these rules will help to understand and predict how the current tax regime will cover government spending in the future. When unpredictable public expenditure policy and constantly changing tax rules, no investors will come.

However, your law on financial responsibility leaves room for maneuver on the expenditure policy.

The law allows to absorb shocks, for example, to go to the extra costs in case of earthquakes. However, in such cases, the important thing was to depart, but to return to the claimed rate over time. After such shocks, we are always faced with the growth of the budget deficit, but economic growth is gradually resumed, and the deficit is reduced.

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At one time, you went to the decrease in tax rates, including VAT and income tax. How serious was the problem of fiscal deficit? How did you block it?

At that time we were very uneven taxes: somewhere very high and somewhere they did not exist. It was some sort of chaos. Our approach to fiscal policy is to increase and equalization of the tax base. We based on the fact that all should be taxed, but at low rates. First, the VAT rate is 8-8.5%. VAT Now we have 15% and no tax preferences. Another point was long-term planning in the fiscal policy. It should only be done with an eye to the future, and the government should be held accountable for their actions.

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In 2010, you raised the VAT rate to 15%. What was the reason?

We have increased the VAT to reduce the tax rate of the individual and encourage people to employment and the accumulation of taxable income. It worked. VAT is a high tax, there is always the temptation to improve it. 

 So, low taxes cannot operate for a long time?

No. In this case, it is a question of finding a balance; the total tax burden is not increased. We just changed the components: balanced reduction of the VAT increase individual taxes.

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For your predecessor Roger Douglas and his followers, and you, as payback for the reforms was the loss of political ratings. After leaving the government, didn’t you want to go back?

No. This opportunity may be one in life. I had my chance. For me being in politics was quite a sacrifice. I used my chance.

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