Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Govt investment stance doesn't add up

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English says focusing more on debt repayment would give future Governments more flexibility to respond to another economic shock. Photo / NZ Herald
English says focusing more on debt repayment would give future Governments more flexibility to respond to another economic shock. Photo / NZ Herald

The praise which Finance Minister Bill English heaped on the New Zealand Superannuation Fund on its 10th anniversary last week has a hollow ring to it.

Not because it is undeserved. On the contrary the guardians and management of the fund have done us proud.

But because the congratulations came from the minister who cut off its funding four years ago and in his last Budget pushed back the resumption of contributions until 2020/21.

Consider the numbers.

In the 10 years since its inception the Super Fund's annual return (after costs but before tax) has averaged 8.8 per cent per annum.

That is 1.1 percentage points per annum better than the reference portfolio its performance is benchmarked against and a hefty 3.9 percentage points above the Government's cost of borrowing.

The Government has paid $14.8 billion into the fund but received $3.6 billion back in tax on its earnings.

Despite four years of contribution holiday the fund has grown to $23 billion. Taxpayers have doubled their money.

According to Treasury projections, if contributions had resumed this year the fund would grow to $51 billion by mid-2020.

As it is, with contributions not now forecast to resume until 2020 the fund by then will be $17 billion smaller than that.

The Government will have clawed back half of its contributions in tax.

And, crucially, the fund's ability to fulfil its purpose of reducing the burden on future taxpayers of New Zealand Superannuation payments will be correspondingly delayed and diminished.

"The Government suspended contributions in 2009 because, with fiscal deficits and government debt already increasing, it was imprudent to borrow more to invest in global financial markets," English said.

Even if that policy made sense in the depths of the global financial crisis, by last year it had passed its use-by date.

In the year ended June 2013 the Super Fund's return was 25.8 per cent before tax, more than 10 times Treasury bill yields. Admittedly it was a pretty good year on equity markets, but the fund's return was still 7.4 percentage points above benchmark.

So you might think that when the Government's books return to surplus next year (on an operating balance excluding gains and losses basis) it will reinforce success and resume contributions to the fund.

But no.

It says it will still be running a cash deficit, and therefore still be a net borrower, until 2017/18.

So you might think it will resume contributions then.

But no.

"It remains our intention that contributions to the fund will resume once net debt has reduced to 20 per cent of GDP which is forecast for 2020," English said.

He justifies putting a higher priority on debt repayment than building up the Super Fund on the grounds that it would give future Governments more flexibility to respond to another economic shock.

"Debt has run up rapidly and we need to get New Zealand back into a position where we can run up debt again if we need to," he said.

"The consequences of too much government debt are all too clear in Europe and the United States, where we have seen cuts to public services and pensions, and higher taxes."

Well, let's calibrate the scale here.

The Budget forecast net government debt to stay below 30 per cent of GDP and to be 27 per cent of GDP by mid-2017.

Granted, that is up from just 7 per cent of GDP in 2007.

But over the same 10 years among 30 advanced economies general government net debt is forecast to have climbed from 46 per cent of GDP to 78 per cent, according to the International Monetary Fund. By 2017 it is expected to be 90 per cent in the United States and 73 per cent in the euro area.

New Zealand, by contrast, ranks with the Swiss.

It strains credulity to contend that in the event of another shock the markets would be wreathed in welcoming smiles at in increase in government debt from 20 per cent of GDP but baulk if the starting point was 27 per cent.

The counter-argument to that is that the Government's books might look good by international standards but the country's do not.

New Zealand's net international liabilities are $151 billion or the equivalent of 71 per cent of GDP - a conspicuously high level. That includes a net $108 billion of offshore borrowing by the banks which has enabled us to bid up house prices to socially destructive and economically perilous levels.

Observers like the IMF argue that the reason we have such high house prices, relative to incomes, and such high levels of household and foreign debt is that housing is the only tax-preferred form of saving in New Zealand.

A genuinely prudent and risk-averse government would address that, in particular the longstanding distortion in the tax system which treats retirement savings by way of superannuation schemes harshly but investment property generously.

The signal from the tax system is clear: the best way to provide for your old age is not to save money but to borrow money and engage in highly leveraged plays in the housing market.

The savings industry's national body, the Financial Services Council, last week proposed a fiscally neutral way of doing something about that.

It proposes replacing the tax credit of 50c in the dollar for the first $1042 of KiwiSaver savings each year with substantially lower tax rates on the investment earnings the savings generate as they accrue.

English's response was dismissive.

The existing incentive is of most value to those on low incomes with a limited ability to save, he said, and proponents of the change would have to show why changing that would be a good thing.

Well, the object of the exercise, after all, is to increase retirement savings overall. Surely that is a good thing.

And the proposal would maintain a progressive tax scale, with 4.3 per cent for those on low incomes, 8 per cent as the middle rate and 15 per cent as the top rate.

The counter-challenge to the Government is: What's your plan then?

It has shunted the Super Fund into a siding, forgoing the opportunity to bolster pay-as-you-go New Zealand Superannuation with a bit of save-as-you-go while at least some of the baby boomers are still in the workforce.

It is not as if it is moving to reduce the future cost of New Zealand Superannuation by adjusting entitlement parameters like the age of eligibility or indexation to the average wage, on the grounds that a cynical undertaking by the prime minister years ago is sacrosanct.

And now it is at best tepid in its response to a plan to boost private provision.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

Brian Fallow is the New Zealand Herald's economics editor. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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