Saturday, June 2, 2012

Matthew Hooton: John Key’s cunning super plan?

Superannuation wouldn’t be John Key’s first broken promise. In 2008, the then opposition leader made solemn promises of three rounds of personal tax cuts, in 2009, 2010 and 2011.  He made no mention of increasing GST and said a worker on the average wage would be $47 a week better off.  The cost would be $1.3 billion in 2009/10, $1.8 billion in 2010/11 and $2.3 billion in 2011/12.

Upon election, Mr Key kept his promise, legislating for all three tax cuts, with the first effective from April 1, 2009.  By then, however, the fiscal truth was clear.  On usually government-aligned blogs, criticism emerged about the fiscally responsibility of two further rounds.

Before many people really were, National’s own pollster David Farrar, a close friend of Finance Minister Bill English, started saying publicly that “almost everyone” expected the tax cuts to be canned.

Right-leaning commentators and business lobbyists joined in. Mr English’s statements became elliptical. Finally, in his 2009 budget, Mr English “reluctantly” bowed to public pressure, scrapping the 2010 and 2011 tax cuts.

The management of the broken promise perfectly reflected Mr English’s beliefs about political strategy.

He argues that by constantly trying to lead public debate – whether on the Clyde Dam or welfare cuts – the Muldoon and Bolger National governments ironically ended up on the defensive, with voters crying out for the government to do less to them.

The English doctrine is that it is better to engineer a political environment where voters are urging the government to do more.  Ministers, as good democrats, can then be seen to respond.  This, he says, is the key to achieving sustainable policy change.

On superannuation, the doctrine appears in play.

Mr Key’s 2008 promise was remarkable for its extremity: “National will retain all the superannuation entitlements and eligibility rules that our senior citizens currently enjoy. We will keep this pledge and I will resign as prime minister, and as a member of our parliament, rather than break it.”

“What’s more,” Mr Key said, “as we cut taxes and grow average after-tax wages, we will progressively increase the amount of super paid to senior citizens.”

National strategists argue that such an unequivocal promise was essential to winning in 2008 and for the hair’s-breadth re-election of 2011 – but it was, and is, economic lunacy.

Left unchecked, by around 2020 superannuation alone will cost more than education.  By around 2030, superannuation costs will exceed health spending on the entire population.  Health and aged care costs will, of course, also both balloon.

The implications are terrifying.  According to the Treasury (see graph), failing to address the fiscal implications of an ageing population will cause government debt to pass 100% of GDP in the 2030s and 200% in the 2040s.

Treasury estimates of governemnt debt if aging population not addressed

For context, Eurostat reports that public debt in Greece is still only 160% of GDP, in Italy 120%, in Portugal 110% and in Ireland 105%.

National’s first small shift on superannuation came in its 2011 confidence and supply agreement with Peter Dunne’s UnitedFuture, requiring a discussion document to be developed on Mr Dunne’s “Flexi-Superannuation” proposal.

If that acts as a Trojan horse for change, Mr Dunne will have justified his 30 years in Parliament.

The Treasury has also appointed Victoria University dean of commerce Bob Buckle – surely only with the government’s agreement – to chair an independent panel on its next Statement on New Zealand’s Long-term Fiscal Position.

Then, in December, the Treasury and the university will host a conference on fiscal sustainability which Mr Key must know will make a mockery of his promise.

On the political front, Mr Farrar, seemingly without any concern for his commercial relationship with the National Party, has attacked the promise, calling it “short-sighted and anti-democratic.”  He says it will continue to grow as a problem and suggests it could be a reason National loses the 2014 election.

Just as with tax cuts, other commentators and business lobbyists are joining the clamour for change.
For his part, Mr Key has begun making elliptical statements of his own, saying National has “kicked the tyres” on whether to revisit the promise, hardly an indication it remains absolutely sacrosanct.

While National is formally sticking to the promise for now, government MPs and ministers no longer even bother to defend it and it is unthinkable that Mr Key is really as economically reckless as his public statements suggest.  More likely, we are seeing the first stages of a gradual climb down.

Matthew Hooton is a public affairs consultant and columnist for the NBR.


Allen said...
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Graphs are interesting things for should you increase the GDP which is what the government should be having as their prime goal then things look very different.

Jens said...
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What about amending the NZ Super Fund into a permanent institution of Personal Accounts (PAs), with contributions to them built into our taxation system - under the condition of their immediate investment in financing needed public works?
With the initial allocation based on the years of having been a NZ taxpayer,the PAs of all those aged 64 would cover more than 1 year of their NZ Super NOW, and increasingly more with each passing year - beyond the "baby boomer bulge".

Jens said...
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