This article is the second of a two-part Budget series. Part One can be seen HERE.
Policy Solutions
The problems associated with funding New Zealand’s social service delivery – especially health, education, welfare and super – fall into two main areas:
- ONE – New Zealand’s poor financial position, as highlighted by Treasury in its Long-Term Fiscal Projections (2021-2061)
- TWO – The poor performance of Government-owned institutions in delivering social services over the past 60 years.
What I said, (while Minister of Finance), in my book Toward Prosperity in 1987 is still relevant: “But something has gone terribly wrong with the system, and the institutions.”
They had gone wrong then and they are in an even worse position today.
Policies required to deal with New Zealand’s poor financial situation:
Step One
Get rid of New Zealand’s pay-as-you-go super and replace it with a saving-based system for all New Zealanders
This is the most important change we can make.
The benefits flowing from such a change would, over time, be spectacular for New Zealanders. Individual savings would be higher for everyone, especially lower income New Zealanders. Income in retirement would increase dramatically, and since the scheme would also cover other social services, better healthcare would be available to all.
A change of this nature would also increase economic growth and the number of jobs available. The Government’s liabilities for healthcare and pensions for the elderly would fall from 1.2 trillion dollars to zero over the next 50 years, with the pool of super fund savings to pay for these future liabilities growing to 8-9 trillion dollars, within 50 years.
Today, 80% of individual New Zealanders retire with zero or close to it in investment savings, but within 50 years, thanks to the impact of compound interest, they would all be retiring with at least 2 to 4 million dollars in their individual savings accounts.
Step Two
Determine what principles will be followed under the new regime of retirement savings
- All New Zealanders would establish their own savings account, to cover their income and health needs in retirement. The starting saving level for year one would be determined by the government and their advisors. (See step four below)
- Decision-making power under the new system, lies with the individual not the government. They decide who they save with, from an approved provider list.
- Every working New Zealander will enjoy personal income tax reductions, at least equal to the suggested yearly saving level required for their super scheme.
- Government expenditure privileges will be removed from wherever they exist, and the money saved used to finance the personal income tax reductions mentioned above.
- The reduction in government expenditure and the massive increase in New Zealand’s yearly savings will ensure New Zealand’s future is both fairer and fiscally sound.
Step Three
Creating the financial room to make the personal tax reductions possible
This step will involve a reduction in current government expenditure, or the different use of some government revenue of 16- 21 billion dollars a year. The savings will be used to lower personal income taxes, thereby enabling all working New Zealanders to save for their retirement.
Examples of where these reductions in government expenditures or use will come from are:
- Income earned from the super fund and Government-owned investments (100 billion dollars), which will earn on average $6 billion a year and be available for tax reductions.
- The removal of privileges, which currently go to affluent New Zealanders will save $4 billion a year (e.g. interest free student loans, power subsidies etc) and be available for tax reductions.
- The removal of privileges that go to business will save $5 billion a year (e.g. government grants, tax breaks, provincial growth fund, and other special allowances) and be available for tax reductions.
- The reform of the Government’s bureaucracy will save $6 billion a year (e.g. staff numbers and salary levels through institutional reform in areas such as healthcare, education, welfare and housing the closure of some unnecessary government departments).
Total savings of around 16-21 billion dollars would provide the financial headroom needed to make the changes required. After the first 10 years consideration could be given to redirecting some of the capital into helping savers.
The abolition of privilege is, in many ways, the essence of reform. Government is not there to protect vested interest groups at the expense of the public good. The Government’s role is to ensure that vested interest groups can only thrive by serving the public effectively.
Step Four
Savings for retirement via personal tax reductions
I settled on tax reductions of $6,000 a year indexed to inflation (health inflation of 4% and pension inflation of 3% – an average of 3.5%).
I then determined how the $6,000 a year could be saved by every working New Zealander aged 18 to 65 (2.75 million workers x $6,000 = $16.5 billion): $16.5 billion is needed to do so. That would leave $4.5 billion for other purposes (reduction in expenditure $21 billion less savings $16.5 billion).
I then decided on the best way for working New Zealanders to save the $6,000 a year was by way of a reduction in personal income taxes. I decided to make the first $52,000 tax free – giving a reduction in income tax of $8,620, $6,000 of which would go into individual New Zealanders’ retirement saving accounts, with the remaining balance of $2,620 being used to buy a catastrophic health insurance policy, with any balance left over used to increase disposable income. The government health vote would as a result be reduced by $6-7 billion dollars a year.
Benefits of this Approach
YEAR ONE:
Government spending on pensions and healthcare for the retired would be reduced in year one by the savings that retirees will make to their own retirement pensions and healthcare – around $200 million (60,000 x $3,250).
Savings of $16.5 billion + interest of $0.5 billion for year one would be around $17 billion.
This would result in a large net improvement in the country’s fiscal position over what it would be under the current ‘pay as you go’ system.
In terms of savings and fiscal outcomes, the position outlined above for year one would improve every year for the next 50 years, as the cost to government of pensions and healthcare for the retired drops year on year, until it reached the following position in year 50.
YEAR FIFTY:
Individual working New Zealanders would on average retire with around three million dollars in their retirement savings account (couples five to six million dollars) – more than enough to be able to look after themselves in retirement. Today 80% of New Zealanders retire with nothing much at all in the way of investment savings.
Total savings held by New Zealanders for future expenditure in retirement would exceed eight thousand billion dollars.
Government expenditure on the healthcare and pensions of the retired would be around 300 billion dollars lower than it will be if we keep a pay-as-you-go scheme going.
As a result of this $300 billion dollar reduction in government expenditure, personal income tax, company income tax and the goods and services tax would all be lower at a rate of 12.5% or less.
New Zealand Government-owned social service institutions
Most politicians are tribal, they support their political party right or wrong, often in the hope of getting a ministerial job down the line. I never fitted into that category of politicians. For me, policy always came first – that is policy I believed to be in the best interests of New Zealand.
I got sacked from the Labour Party front bench in the early 1980’s for writing an alternative budget.
Today, I still find it impossible to stay silent and always support the party I generally vote for – for example ACT’s tax policy as explained by David Seymour leaves me both annoyed and cold.
I make this point, because the policy I lay out in the rest of this paper, will be opposed by every existing political party in New Zealand. However, I believe very strongly, that the policy points I will make in the rest of this paper and the papers to follow need to be made, in order to get those policy ideas discussed, and there-by give New Zealand a chance to move forward in a positive way.
In this part of the paper, I look at the 17% of GDP (57 billion dollars) the government currently spends on healthcare, education, welfare, and superannuation (NZS), which Treasury estimates in ‘their historical trends scenario’, will cost 24.7% of GDP (365 billion dollars) by 2061.
Before looking at why this expenditure is sending New Zealand broke, and what we can do about it – including introducing a far better tax policy to start with – I will outline what I had to say about the issue of the poor performance of government institutions in 1987, while I was still Minister of Finance (see Towards Prosperity Chapter 20 pages 241-245):
“Fifty years ago (1937) we recognized that there were people amongst us who needed extra help and we made a decision, as a nation, that those needs should be met. Even if we have a perfect economic system, there would still be some who fall out of it for a variety of reasons and for varying periods of time.
“At the end of the 1930’s we established a welfare system to act as a safety net and a base from which people could re-enter productive society. Part of that system was a number of institutions whose role was to act as conduits for aid given by the community, through the government, to those who were to receive it.
“But something has gone terribly wrong with the system, and the institutions, as society has changed around them”.
What in my opinion had gone terribly wrong? I quote again from Toward Prosperity:
“Over the last 10-12 years there has been close to a four-fold increase in government spending on social services – health, education and social welfare. By and large that increase in funding seems to have done little to deliver better services or better access to services.
“A large part of the growth in funding has not gone directly to benefit pupils, parents or other consumers, but rather, much of that extra money has gone to benefit the providers of social services.
“The present system puts institutions ahead of people far too much.
“We have to turn that around, we have to put people ahead of institutions, rather than leaving the institutions to take on a life of their own, quite independent of the needs and wishes of those they are meant to serve. The system was not designed with that result in mind and what worked in the past does not automatically work in the future.
“There is one more reason for change in the social welfare system which is much more subtle. The system itself, over the years, has had an effect on society: it has changed people’s attitudes, partly because it tended to create poverty traps. The institutions were set up originally to free people, and move them away from dependence. Now they actually make many of those who use them more dependent. The means took away some of the chances of achieving the ends – the social objectives. The benefit system should support without taking away the incentive to work from those capable of it.”
I finished on page 245 of my book “Toward Prosperity” in this way:
“What we have to concentrate on as we move into the 1990’s are the fundamental social objectives. What we have to decide, as a nation, is how to achieve them. What we did in that respect is not important. What we do now, for the future, is. We are going to have to make those choices in difficult economic circumstances which cannot be ignored and which we will have to attend to simultaneously. It is a balancing act which will require a continued determination to put the country before politics. If we do, I believe success is within our reach and the rewards will be immensely satisfying. This is our time, and we must provide answers to those problems that are right for it. The objectives are to promote and protect both the freedoms and welfare of all New Zealand citizens. I believe that with courage and an open mind we can achieve them.”
Unfortunately, David Lange egged on by Helen Clark, Michael Cullen and some of his staff led by Margaret Pope, would not have a bar, of any major social welfare policy changes to education, healthcare or welfare. I was simply unable to convince David, that constructive personal choice was basic to human dignity, and further, that the removal of dependency within the welfare system would be a huge step in the right direction.
With Lange opposed to any major changes to the social services area of the economy, nothing meaningful was done to it between 1987 and 1990, nor I might add in the years since then.
So, 34 years later, in 2024 New Zealand’s performance in social services is far worse than it was in 1987 – bad as it was then, when I wrote my book “Towards Prosperity”.
Why do we find ourselves in this dreadful situation in 2024?
Answer: Because both National and Labour, during the periods they have been in office during the last 36 years, have, at the end of the day, done nothing of great significance to change the system.
NATIONAL 1991-1999:
Improved efficiency within the government health and education sectors to some extent, but not in a way that would withstand the advent of a socialist-led Clark government. National essentially left the health and education sectors as they were in terms of the big issues of incentives, organizational structure, and a lack of competition within the sectors.
LABOUR 2000-2008:
Immediately undid any good work National had done in the areas of health and education. Their policies lowered productivity in the health sector (dramatically) and the education sector (significantly). In particular, they allowed special interest groups like the teachers’ unions to rob taxpayers and consumers blind, hence in return teachers overwhelmingly support Labour.
The Labour Party’s superannuation policy during this period Illustrates very clearly the changes that took place in the 1990’s as a result of a change in leader from Mike Moore to Helen Clark. Mike Moore was a keen advocate of individual superannuation for everyone. Helen Clark and Michael Cullen on the other hand were opposed to it. They wanted a centralized monopoly super fund that they could control, instead of individual superannuation accounts in the names of individual New Zealanders.
This was a major change in the Labour Party’s policy approach to superannuation.
In 1972 when I introduced my Private Members Superannuation Bill to the House, every Labour Party caucus member supported it. Why? Because they wanted their voters to have what Members of Parliament had – a superannuation account in their own name. They were aspirational for their voters.
Clark and Cullen on the other hand wanted a centralized fund which they could control, and there-by make as many voters as possible dependent upon them.
How do I know that? Michael Cullen told me so, when I asked him at an ACT caucus meeting, why he did not have individual accounts instead of the one huge centralized fund he was proposing.
NATIONAL 2008-2017:
John Key’s largely do-as-little-as-possible government, driven by polling, aimed at telling him, what voters wanted to hear, rather than what they should hear.
LABOUR 2017-2023:
The worst government, with the worst Prime Minister and Minister of Finance New Zealand has had in 100 years. I say no more.
Institutional Reform: by way of Competition and Choice
Fundamental to the reform of the New Zealand Government’s social service institutions is the introduction of competition to all social service areas including education, healthcare, welfare and housing.
Competition is just as important in government as it is in private sector markets. The lack of competition, over the past 80 years in government-owned social service institutions, is why they are doing so badly today, when compared to say Singapore’s institutions.
Competition between government-owned schools, and between government-owned hospitals, and private sector organizations in those sectors, would help to promote efficiency, and as a result economic prosperity, thereby increasing New Zealanders’ wealth.
In the private sector competition is a disciplinary force that requires businesses to compete for the loyalty of their customers. Government-owned social service institutions need to get better in this regard. Competition provides consumers with protection against poor service, high prices, and poor products. The need for competition is generally not recognized in New Zealand’s public sector areas, such as education and healthcare. In fact, the opposition to competition within the public sector, particularly in the education sector, is already very strong. You can see this in the teacher unions’ reaction to charter schools – a minor incursion into their existing monopoly position.
The reality is that performance will be enhanced if private firms were permitted to compete on a level playing field with government enterprises. Competition would improve performance, reduce costs, and introduce new innovations. As a result, consumers and taxpayers would get more for their money.
Competition is the force that encourages providers to operate efficiently and cater for their customers’ needs – as well as to improve products they produce on a continuous basis.
Footnote: First Step to Institutional Reform
Prior to moving ahead with any reform program, we would need to appoint advisory committees in at least the following areas, education, health, welfare, housing, immigration and taxation.
These committees would be similar to the Advisory Committees the 1984 Labour Government set up before they reformed the government state owned business sector.
The committees would be small, they would advise the government on how competition, choice and the private sector could best be introduced into the social services areas they are advising the government on.
The government, as a guide, would advise the various committees on their thinking on each issue. It would be made clear that this advice was not intended in any way limit the thinking and recommendations the Advisory Committees might provide.
Postscript: Next Steps
The reform ideas outlined in these two Budget Papers are powerful, and, as they have done in other countries around the world, would help give New Zealand a prosperous future.
If you would like to join us in developing our Reform Project into a movement for transformational change, then please sign up below – if you haven’t already done so. For those who have already signed up, we will be back in touch shortly, asking how you would like to help and indicating a number of possibilities.
Thank you for your interest and support.
Roger and Muriel
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