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Thinking Short Term

Two weeks ago the Kaikoura earthquake caused billions of dollars of damage to buildings and infrastructure. Last week the Treasury’s long term fiscal forecast predicted that health and super spending will continue to rise, taking debt to 200% of GDP (Gross Domestic Product) by 2060. 

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Incredibly, neither of these facts has dampened the Government’s talk of offering up tax cuts at the next election. At least they have moderated their talk to a ‘family package’.

When will the Establishment Parties start focusing on the legacy they are leaving for our children and grandchildren, rather than feathering their own nests by targeting the voter’s hip pocket?

Long-term fiscal projections

The Treasury’s long-term fiscal projections are released every 3 years, and are intended to show the long-term impact of current policies. This is a legacy of our difficult economic times in the 1980s and 1990s where unsustainable policies led to a crisis. The fallout from that crisis is still being felt by some of our poorest citizens and regional communities.

The long-term fiscal position is not pretty reading. While the projections of health spending have come down a little since 2013, Treasury is still predicting that health spending will get near to 10% of GDP in 2060. Meanwhile New Zealand Superannuation is predicted to top 8% of GDP by the same date. That will mean around 18 cents of every dollar we earn largely being spent on our ageing population. At current taxation levels we won’t be able to pay for this, and without tax rises future taxpayers would have to steadily rack up a mighty debt.

Government reaction

Prime Minister John Key laughed off Treasury’s projections, saying that they struggled to forecast 44 days ahead let alone 44 years. Of course, such a comment is a pivot from him in attempt to avoid the message. The projection is not a forecast, it is simply saying what current fiscal settings imply given demographics and reasonable assumptions on economic growth. For sure though, it sucked the journos right in – well done John, good choice of distraction baiting. Of course the projection won’t happen, because it can’t. Something has to change because it is clear the current path for superannuation and health isn’t sustainable. The issue is what; by throwing out a false scent to naïve journos, the Prime Minister adroitly deflected that question for another day at least.

The Prime Minister is confident that reform of NZ Superannuation isn’t needed; New Zealand can avoid this situation by growing the economy. While this approach may work for health spending, it can’t work for Super. Rates are linked to wages; if the economy prospers so will the pensioners.

Will growth be the savior? Growing incomes will certainly help, as long as it doesn’t come at the expense of our wellbeing (for example by degrading our environment, or smashing buildings and rebuilding them). At the moment growth is mostly coming from earthquake rebuilds and immigration, neither of which make people a lot better off – per capita incomes don’t rise much at all.

The kind of growth that makes us richer is productivity – working smarter rather than harder. On this measure New Zealand’s record has been very poor in recent years. But again on this count the Prime Minister doesn’t believe what the evidence is telling us.

So there you have it. While the Government toys with tax cuts and family packages – purely as a response to what’s called fiscal drag, the tendency over time for inflation to push our wages all into higher tax brackets, Treasury is recommending tax rises for the good of our long-term fiscal position.

It looks like a contradiction. But the politician and the advisor are addressing different issues. As is their wont, the politician wants an election-year goodie to buy his way back into office. The adviser is asking – yet again – when are we going to do something about the debt deadweight we’re leaving our children?

Meanwhile the real challenge – that of raising productivity, so future tax flows are up to the looming bill – lies dormant. That of course makes the likelihood of a future PM having to swallow a poison pill from the legacy of past Establishment governments, more and more certain.

Showing 8 reactions

  • Charles Goodwin
    commented 2016-11-30 15:03:23 +1300
    “When will the Establishment Parties start focusing on the legacy they are leaving for our children and grandchildren, rather than feathering their own nests by targeting the voter’s hip pocket?”

    Well, quite – but you don’t appear to have mentioned the main way in which they’re doing this, or only in passing. The Green party is addressing this.

    As for tax cuts, when the choice is between infrastructure, health services, education, the environment OR tax cuts that will particularly benefit John Key and his rich mates, I can guess which most Kiwis would go for.

    (By the way, we spell “saviour” with a ‘U’ here in the non-USA.)
  • Oliver Krollmann
    commented 2016-11-30 12:48:48 +1300
    I’m happy with my tax burden in New Zealand, and I don’t need another tax cut to make me happier. I pay a lot less tax and get a lot more for it in NZ than I did in the country I was born and grew up, before I moved to NZ.
    I think a shift away from an economic model based on endless growth to a model based on sustainability and renewable and recyclable resources would go a long way. Mundane jobs we lost to automation (if that was actually still a problem in NZ, not sure …) could be replaced with more qualified jobs in technology, research and development, and service industries, if we invested in education and accepted the fact that all of us would have to keep learning and upskilling for the rest of our lives, to allow us to actually work smarter rather than harder. I agree that our record is quite poor in that regard, and during my work life in NZ I haven’t seen a lot of managers or people in so-called “leadership” positions who would encourage and support their staff to adopt this principle, so there’s a bit of work to do in that area as well.
  • Oliver Krollmann
    followed this page 2016-11-30 12:06:25 +1300
  • Owen Carter
    commented 2016-11-30 11:57:47 +1300
    My thoughts on this are that productivity is not a guaranteed source of prosperity. The global economy has resulted in increased corporate profits (if wallstreet’s continued new highs are any judge..), but also resulted in a squeeze for workers. Everyone is already being more and more productive, but these profits haven’t made thier way into most people’s pockets (unless you count kiwi saver investments…). Projections are for ‘increased productivity’ (automation) to also result in mass unemployment (‘the robots are coming!’).
    Income and consumer tax are major govt revenue streams. Both would drop significantly if a large % of the population had no jobs. At the same time the demands for welfare would increase dramatically (not even allowing for pensions). This would be an unhappy place for govt in terms of income to debt ratio too….
    In my opinion, looking to the long term, NZ should be looking to ensure that the general population is resilient to a post-work environment, independent of govt support. To my mind, the best way to ensure that the basic needs of the majority are facilitated is to ensure debt free (freehold) landownership.
    We have abundant rural land. Ensuring that each household had a 1/4 acre or so would facilitate shelter, and potential for basic subsistence food supply. Addition of local energy source (solar panels/woodburner?) would make most households close to self sufficient. At the least, it would reduce the requirement for gainful labour significantly.
    eg, if the labour market shrunk 50%, but the living costs of most households had also shrunk 50% due to reduction of the most significant expenses (mortgage/rent, groceries & powerbill), then it would facilitate long term sustainability.
    For govt, there would be a potential initial large outlay in terms of subsidies/land acquisition or similar, to facilitate such a major policy, but it would reduce the long term impacts on the budget significantly. The govt would also be placed in a good position to balance the accounts in a post work environment.
  • Ian Butcher
    commented 2016-11-30 07:34:40 +1300
    We could learn a lot from how Denmark sorts its taxes and welfare system. Despite very high taxes they are consistently voted happiest people and Copenhagen the worlds most liveable city. (Copenhagen also has worlds best restaurant). Danes seem happy to pay high taxes because in their country where the gap between rich and poor is small, they get so much for everyone paid for by the state. (They are also seen as the party animals by other Scandinavian countries ).
    I think our ultra conservatism in NZ will prevent us adopting policies of radical change to make us think we’re among the happiest people in the world.
  • Gordon Ngai
    commented 2016-11-30 06:02:04 +1300
    It is meaningless to talk about projected result or forecast without carefully examine the assumptions. I can build a model that gives you any figure you want by changing the assumptions. If we believe in an open government, all government forecast or projection spreadsheets should be published so that anyone can do a sensitivity analysis of the assumptions and then we can have a meaning discussion on the subject matters.
  • Trevor Mills
    commented 2016-11-29 15:02:10 +1300
    Our economy would have grown, if McCully hadn’t paid out a Saudi farmer, Hekia hadn’t paid out to charter schooling, Key hadn’t paid out to the Clinton Foundation, and hell knows what else this corrupt pack of corporate business wranglers has wasted our taxes on. And as per norm is for Key, he’ll worm his way out of the truth with another plastering of lies and election bribes, both resultant of nothing else but broken promises we’ve faced to date.
  • Richard Watts
    commented 2016-11-29 12:19:16 +1300
    You should consider an excellent talk by ccp grey about the keys to power on YouTube. You could target under served / taken for granted electorates from both national and labour to carve a niche in the centre.