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.

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.

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.

The Government owns some assets on behalf of citizens, manages others and regulates still others.

© Knighton & Associates NZ Ltd