David Farrar: National's Super problem

Finance Minister Bill English during his presentation on the 2012 Budget to analysts and media at the Beehive. Photo / Mark Mitchell

The Government's policy for the last two Budgets is that any new spending above what they call the "baseline" has to come out of savings elsewhere. That is why they have made numerous small changes such as clamping down further on tax avoidance schemes to freezing early childhood funding per capita, restricting student allowance eligibility and the like.

This has allowed them to produce a budget which still shows a forecast surplus for the 2014/15 financial year. However the surplus is a miniscule $197 million. An online survey of newspaper readers (which is not necessarily a representative sample of all New Zealanders) showed that the majority of respondents said that getting back into surplus is the most important goal for the Government, so this provides a supportive political environment for its so called 'Zero Budgets'.

However a Zero budget only means no increased spending beyond the baseline. What many may not be aware of is that the baseline is not static. In fact total core Crown expenses are forecast to be $4.1 billion higher next year, compared to this year.

The single biggest contributor to this is the cost of national superannuation. Superannuation last year cost $8.8 billion and in four years time is forecast to be $12.3 billion. The actual increase just for this year is around $700 million.

It must be very depressing for Finance Minister Bill English that he has to spend months identifying and negotiating savings of $10 million here and $15 million there, and you have this one line item which effectively negates $700 million of savings.

The percentage increase is superannuation costs in 6.8 per cent over the next year. Unless the economy and tax revenues are growing at seven per cent a year, this is going to cause problems. The cost of superannuation over five years will increase a massive 40 per cent, and not even a Treasury staffer high on a dozen ecstasy pills is going to forecast that the economy will grow 40 per cent in five years.

Even worse, we are not yet in the period of even steeper cost increases when the baby boomers hit age 65 in ten to fifteen years.

One of the reasons National got re-elected is they were seen as more fiscally credible than the alternatives. As European governments crumble under the burden of excessive government spending, deficits and debt, voters at home place great stock on fiscal sanity.

However the stance on superannuation is the chink in National's armour. Labour will try and use this issue to portray National as going for the easy spending targets but unwilling to target the largest item of spending.

Labour's pledge to increase the age of entitlement from 65 to 67 is a tactical policy to try and position National as fiscally irresponsible, and National is locked into a five year old policy pledge that leaves it incapable of responding.

Prior to the 2008 election John Key made a pledge on superannuation. The context to the pledge was that Labour were highly skilled at taking any policy of National's and using very unsophisticated scare tactics around it. For example if National said that tenants in a state house who were now earning well above the average wage may not keep a life-time entitlement to a state house (as they no longer need it), Labour would send every state tenant in New Zealand a letter telling them that National plans to evict them. Such tactics are unsophisticated, yet effective.

So John Key didn't want an election campaign where Labour could say that if Key was elected Prime Minister, pensioners would be placed in poverty and forced to work until they drop dead of exhaustion. He pledged to maintain both the current level of superannuation (where it is indexed to the median wage) and the age of entitlement. As a pledge for the next term of Parliament, that would have been fine. When the pledge was made, the global financial crisis was yet to emerge.

But Key went further. He pledged that there would be no change not just if elected in 2008, but for the duration of his time as Prime Minister. He locked in the policy, and also said any breach of the pledge would lead to him resigning not just as Prime Minister, but as a Member of Parliament. This helps explain why Labour is so keen for him to reverse his position - he would either have to leave politics, or destroy his brand.

The lesson for both the current Prime Minister, and any future Prime Ministers, is to never ever make any pledge beyond the next term of Parliament. Doing so is both short-sighted and anti-democratic. Elections should be about choices. Policies should change as circumstances change. Our three year electoral cycle allows policies to gain mandates in a fairly timely manner.

National did the right thing with asset sales. They pledged in 2008 they wouldn't sell a single share of a single SOE if elected. They kept their word. Then in 2011 they said if elected for a second term we will sell up to 49% of five SOEs or crown companies, and got re-elected on that basis. The public got to have a vote on the policy platform.

The Prime Minister's pledge to never allow any changes to superannuation during his tenure will continue to grow as a problem for National. They are fortunate that at the last election the fiscal credibility of their opponents was weak, and a debate stumble by Phil Goff fatally crippled them. In 2014 David Shearer may have succeeded in portraying Labour as fiscally credible, and then the superannuation pledge could become a critical issue. It would be ironic is a pledge which helped National win the 2008 election became the reason they lost the 2014 election.