New Zealand faces a financial storm without radical policy change, writes Matthew Hooton. Could KiwiSaver subsidies be the next target for cuts?
In ordinary times, Act deputy leader Brooke van Velden’s pay-equity legislation would be an outrage.
The amendments remove rights previously recognised by Parliament and retrospectively scuttle existing legal claims.
Worse, they were rushed through under urgency without the unions and others affected being heard by a select committee and their arguments assessed.
And who can argue against the principle of pay equity?
But these are not ordinary times. Some suggest the Ardern Government’s well-intentioned changes five years ago risked costing taxpayers up to $17 billion over the next four years.
If Labour highlighted that cost in 2020, I must have missed it.
The current Government argues the cost exploded after the legislation was highjacked by union bosses and Wellington lobbyists and applied in areas for which it was never intended.
That wouldn’t be the only example of the Ardern Government delivering unintended consequences, usually biased towards higher costs than promised.
Labour and the unions are now keen to inflate the numbers as high as possible, calling it cash that women workers will miss out on.
But the higher the number, the stronger the Beehive’s case that van Velden’s move was necessary.
When Treasury began formally warning in 2006 about the looming fiscal challenges after 2030, it expected future governments would follow the responsible fiscal management of the Bolger-Shipley and Clark Governments – maintaining surpluses, paying back the last remaining debt and putting aside cash for a rainy day.
We were meant to be 15% of GDP in the black this year. Even with that buffer, things still looked alarming over the next 20 years.
Instead, the Key-English and Ardern-Hipkins Governments went on a 15-year spending spree, putting us 23% of GDP in the red, despite the Super Fund’s returns on investment exceeding expectations.
The Key-English and Ardern-Hipkins legacy is that we’re nearly 40% of GDP or more than $170b behind where Helen Clark, Winston Peters and Sir Michael Cullen planned back in 2006, even taking into account the Super Fund – and just as the Baby Boomers retire and health costs also start to explode.
Did you get good value for your share of the $170b?
Without radical policy change, there is no plausible scenario that doesn’t lead to eventual financial and social collapse.
Van Velden’s constitutionally dubious and deeply unpopular legislation – and more bold moves like it – are now unavoidable, whether they take the form of massive spending cuts, much higher taxes, or, most likely, both.
Even if van Velden’s legislation only saves half the amount being thrown around, it’s cash Finance Minister Nicola Willis desperately needs for New Zealand to remain a viable first-world society through the next two decades.
Speculation is rampant the next big target is KiwiSaver subsidies, which Cullen originally included in 2007 to strongly incentivise participation in what was a new and voluntary scheme.
As with pay equity, if we weren’t now $170b behind what was planned, Willis would never think about touching a scheme that has helped build a savings culture in New Zealand, now with well over $100b in our accounts.
But Willis is now borrowing more than $1b a year on your behalf to give you a guaranteed 50% return on the first $1042 you put into KiwiSaver each year.
That annual cost keeps creeping up, so Willis must borrow $4.6b over the next four years to keep Cullen’s unorthodox deal going.
Given the times, she ought to abolish the subsidy at the end this financial year, and put the $4.6b towards reducing her borrowing requirement. With KiwiSaver near universal, she ought then make it compulsory. Peters has long argued for some kind of compulsory savings scheme, even if not this one.
As large as these numbers are, they’re dwarfed by superannuation and healthcare as the population ages and more advanced but horrendously expensive treatments become available.
This year alone, superannuation will cost more than $23b, then keep rising by about $1.5b a year.
With no policy change, Willis will be forking out more than $100b in superannuation over the next four years, putting the $4.6b for KiwiSaver and even the $17b for pay equity into perspective.
As the Herald‘s Fran O’Sullivan argued last week, no fiscal strategy should be taken seriously unless it begins cutting into that number immediately, or at least slows the rate of increase starting from July 1.
Gen X and Millennials simply won’t accept cuts to their superannuation in the future unless the Baby Boomers, who caused the problem by not having enough kids, bear at least some cost themselves.
Once again, had the Key-English and Ardern-Hipkins Governments stuck to the plan, we might be able to afford a universal pension from age 65 – but they didn’t, so we can’t.
To be fair, even most Boomers understand this, working and paying tax for longer than was picked back in 2006.
The outlook for health is as bad. It will cost $31b this year and Willis has already budgeted to keep it increasing by over $1b a year. But, no one, including Willis and Treasury, thinks that’s enough.
When tertiary education evolved from being a low-cost area for a small elite in the 1970s to become necessary for almost everyone by the late 1980s, Labour’s Phil Goff introduced fees and National’s Lockwood Smith a student loans scheme to pay for it. Cullen made the loans interest-free.
The loans scheme has kept the costs to taxpayers down, while hugely expanding participation in tertiary education and ensuring no one misses out because they don’t have the cash.
Faced with a similar explosion of costs in the even more expensive area of tertiary healthcare, Willis and Health Minister Simeon Brown could apply the same model.
All tertiary healthcare would always be available to everyone doctors said might benefit from it, but the cost would be paid by each of us having an interest-free loan account with the Government. The Government would then focus on properly funding primary healthcare.
Unlike student loans, there would be no obligation to pay back any of this while we were alive. But also unlike student loans, big chunks would be paid back in the same financial year, with between 11% and 25% of healthcare costs being spent on heroic but doomed efforts to keep people alive in their last few months, and other end-of-life care.
Who knows? A tertiary-healthcare loans scheme might save Willis somewhere between $14b and $33b over the next four years. Maybe we could have pay equity, KiwiSaver subsidies and universal superannuation at 65 after all. Or at least not all go broke together.
Disclosure: Matthew Hooton has over 30 years’ experience in political and corporate communications and strategy for clients in Australasia, Asia, Europe and North America, including the National and Act parties and the Mayor of Auckland.
Contact is buying 2.8 petajoules of gas from Methanex over eight weeks.