Ignoring Treasury's advice

It is the season of briefings from government departments to incoming ministers, with many providing helpful background, advice and recommendations.

Given the fundamental place of economic policy in the prosperity of the nation and in generating the income required for government programmes, the briefing from Treasury is among the most significant of advice. It is also likely the recommendations are largely ignored.

Prime Minister John Key has established himself as a political pragmatist who is reluctant to make bold economic moves if they will be unpopular, even if such measures are required.

His government was assertive enough to raise GST while lowering income tax rates, a measure which goes some way towards encouraging savings ahead of spending, but has failed to tackle three big issues which undermine this country's long-term fiscal sustainability.

Each are canvassed in the Treasury's briefing, and each will be particularly hard to adopt for a government alert to populist sentiment.

A change of course is made even more difficult because two of the three, albeit one in a markedly watered down form, became Labour Party policy for last year's election.

National has a potential head start on Labour on prudent economic management because of underlying views about smaller government.

It also had the advantage of not being linked with union interests. But it was Labour that made the play on two of the big issues confronting New Zealand.

Treasury made a strong case for lifting the superannuation eligibility age, a step Mr Key emphatically rejected, but the need was accepted by Labour.

Treasury pointed out that New Zealand's 65-and-over population is projected to grow nearly four times more quickly than the total population during the next 15 years, causing a rapid rise in health, aged-care and superannuation costs.

Treasury said that when the age for super rose from 60 to 65 in the decade to 2001, costs were reduced because people stayed longer in the workforce. Meanwhile, ages were rising in Britain, the United States and Australia.

The Department of Labour's briefing paper also recommended the Government consider amending the superannuation age because it encouraged older people to stay in the workforce. It noted that in 2061, a quarter of the population will be 65 or older, compared with 13% last year.

Treasury also reported on "tax distortions" and supports some sort of capital gains tax. Labour, of course, campaigned on a capital gains tax. It would have been at 15%, with the family home exempted.

Neither National nor Labour are willing to tackle the ever-growing burden of student interest-free loans, introduced by Labour just before the 2005 election.

The electoral issue is that the loans are spread across many tens of thousands of families, and usually the types of families most likely to vote. While National has trimmed the scheme around the edges, the lure of "free" money still creates distortions, encourages debt and discourages saving for tertiary studies.

The nominal value of the loans passed $12 billion by June 30 last year and the cost to Government in 2010-11 was $1.564 billion.

Although returning to a realistic market interest rate of several percent would be crippling for current and future students, it would be fair for borrowers to pay interest at the inflation rate.

While the cost to Government would remain substantial, unpaid loans would not escalate in real terms, and, at least, there would be stronger incentives for students to borrow less and pay back loans faster. As it is, inflation steadily erodes student loans, with the taxpayer picking up the tab.

The world's economic instability and the threats of European defaults make it all the more important that New Zealand Government be prepared to make difficult decisions. To prosper and to earn sufficient money for health, education and other vital programmes, this country must be run efficiency and effectively.

While it must always be prerogative of elected politicians to ignore the advice of unelected officials, Treasury has outlined solid, sensible positions which should be pursued.

The politicians and the people of New Zealand, however, look likely to muddle along and avoid these hard truths, to the long-term cost of us all.

 

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