A response to Sir Roger Douglas on Budget 2024 challenges

Dr Bryce Wilkinson
NZ Herald
13 June, 2024

Eminent New Zealander, Sir Roger Douglas has renewed his case for radical changes to fiscal policy in the last three weeks. The issues are relevant to Budget 2024.

His voice should be heard. As minister of finance in 1984, he faced a major financial and economic mess. It took him and the next four ministers of finance to deal with that mess, but he set the path. His party took many tough decisions. They worked.

He likely thinks, along with many others, that Budget 2024 does not get to grips with the scale of the fiscal problems the country faces. It proposes a long war of attrition against head-in-the-sand spending pressures; a war it could well lose.

To be fair, Budget 2024 is work in progress, a first step.  The government is focused on the broader task – facilitating greater prosperity. The results remain to be seen.

Sir Roger’s starting propositions are that people should be able to make their own choices, that everyone should have the same chance to do well, and that a strong economy helps everyone.

 Many would agree.

Sir Roger highlights the fiscal bankruptcy of New Zealand’s welfare state, which Treasury’s projections to 2060 make crystal clear.

He espouses the following principles for remedies: First, each generation should pay for itself; second, everyone should provide for themselves, as much as possible (self-reliance); third, choice and competition empower consumers.

Philosophically, this aligns well with ACT’s liberal vision, the party Sir Roger founded.

Sir Roger’s principles are a long way from the utopian concept of a cradle-to-grave welfare state, which at its best, is a socially supportive doctrine. But at its worst, it could turn New Zealand into a bludgers’ paradise. Attitudes to the expansive welfare state depend in part on one’s view of human nature.

Sir Roger’s most important remedy would replace the current national superannuation scheme with a mandatory individual savings scheme for all New Zealanders.

Government spending cuts would fund “tax reductions” of $8,620. Of that, $6,000 would go into people’s individual retirement savings accounts. The rest would buy health insurance. 

Sir Roger estimates that within 50 years, 80% of New Zealanders retiring would each have $2-4 million in their individual accounts. That is the carrot.

(The number needs to be checked.  It is not clear what is being assumed about future supplementary contributions, interest rates, inflation, and tax. Ignore that for now.)

The proposal does not appear to require New Zealanders to cut back on household consumption, either during their working lives or in retirement. No belt-tightening then, except for government spending. Nor does it require governments to run fiscal deficits.

The $8,620 per person is to be funded by cutting annual government spending.  The proposal seems to assume that households will not materially increase their out-of-pocket spending on the cut items.

It is as if the cut spending did not benefit households. That will certainly be true for some of the cuts, but for what proportion?

The proposal also assumes $2,620 a year for health insurance will suffice. It might not for people with pre-existing conditions and predispositions.

To dig deeper, how does the scheme stack up against Sir Roger’s principles?

Surely the first generation to pay for its own retirement must also pay for the retirement of the preceding generation? That transitional problem is a tough one. It temporarily violates Sir Roger’s principle that each generation should pay for itself.

The proposal is also at odds with his self-reliance principle. The flat $8,620 represents a large within-generation subsidy for those who pay little or no income tax.

In defence of the proposal, all realistic alternatives probably also do the same. Sir Roger’s proposal has the virtue that people would feel greater ownership of their retirement provision.

Governments would have to regulate the individual retirement savings accounts, watching what is taken out and where the funds are invested.  What if they are invested in a family “business”?

Net taxpayers might feel frustrated. Their taxes fund their own $8,620 per year plus the amounts paid to those who are not net taxpayers. And they get regulated to boot - they lose choice over the compulsory element of their retirement saving.

There are other worries. What would stop the next big spending government from restoring the cut spending programmes, and more?  Might a future government mandate where retirement accounts are to be invested?  What would prevent the $6,000 amount from being a political football every general election? What happens to those who squander their retirement savings?

At a deeper level, the scheme would entrench future cross-subsidisation at around current levels. Why do this? Surely, as productivity growth lifts incomes, the need for future cross-subsidisation to alleviate poverty should fall?

Debate over this issue should not be at the expense of the elephant in the room when it comes to a better future for New Zealanders – productivity growth.

New Zealanders who are clamouring daily for more government spending are clamouring for a higher standard of living.

Faster productivity growth is the most sustainable way of meeting their demands.

To read the full article on the NZ Herald website, click here.

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