Honesty is the best policy

Lifethrows up many surprises.   Increases in our taxes or cuts in our publicservices are not surprises we particularly welcome.   We like to have areasonable idea about what we can expect from the government so we know howmuch to put on our credit card or mortgage, how much to put into our retirementfund, when to retire, and how much insurance to take out.   Of course nogovernment can give guarantees about what it and its successors will and won’tprovide in the future.   But it can set realistic hopes about what we might getand what we have to give up getting it.   This helps us plan for expected andunexpected events in our lives.

It isimportant for the government to reduce uncertainty by being honest about thestate of the public finances and the reasons for the decisions it makes aboutpublic spending and taxes.   It is also important to talk openly about whatpublic benefits and services it will be possible to provide in the future.

BillEnglish is following the lead of his predecessors by publicly foreshadowing thebig decisions in his May Budget.   It will be an austere affair.   Health andeducation will apparently get a little extra funding, but most other areas ofpublic spending will not.   Payments to the New Zealand Superannuation Fund willbe suspended for a time.   Further tax cuts are likely to be deferred until wecan afford them.   English and John Key will no doubt hope these measures willslow racing public debt and mollify the credit rating agencies.   Despite thesemeasures it is likely we will still see public debt rise precipitously over thenext decade or more.

Yet thereis an important area that this Government has been decidedly vague – thechoices governments face to deal with the vast hole in public finances thatwill emerge as the rump of the Baby Boomers retire.     The Treasury’s 2006report on the long-term fiscal outlook suggested that as a result of ourgreying population and rapid spending growth New Zealand Superannuation andpublic health costs as a share of our economy will double by 2050.   MaintainingSuper, health and other public services at levels we have become used to is notfeasible unless taxes rise a lot.   Higher taxes can be avoided, but only if weaccept lower benefits or services in some areas.   These are difficult choices.  

To hiscredit, Michael Cullen went some way to recognising future pressures on thepublic finances when he established the New Zealand Superannuation Fund, whichwas designed to help meet future Super costs.   Some would argue that it is aluxury we can’t afford.   Tax cuts are a better solution to get our economygrowing and allow us to sustain first-world public services in the future.  Others consider the Super Fund gives people a false sense of security about Superand government services in the future when the large size of our aging problemsuggests changes are necessary.   But, whether you agree with the Super Fund ornot, it was part of a plan with the long-term in mind.  

In the UK and Australia governments have had a different approach to help deal with their agingpopulations.   These countries have signaled future rises in the age for publicpension eligibility and other reforms to their pension schemes, which will helpease pressures on public finances.   In its Budget this week the Australian Governmentannounced the age of eligibility for pensions would gradually rise from 65 to67 in 2023.   It also announced pensions would be more targeted.   People are workingand living longer.   Keeping the retirement age fixed indefinitely doesn’treflect the changing circumstances of our older people.   By being open andsignaling these changes a decade or more in advance the UK and Australian governmentshave given a bit more certainty around retirement support for people that stillhave many working years ahead and the chance to plan for the changes.

The signsso far are that the current Government is refusing to face up to thesignificant challenges our public finances will face as New Zealand’s population ages.   The Government’s ambivalence toward the Superannuation Fund,its closing down of debate on Superannuation, and its lack of a coherent planto prepare the public accounts for the oldy onslaught is not doing future retireesor workers any favours.   They are bound to be disappointed at some stage.   Theywill find they have not budgeted enough for life’s eventualities.   The Budgetis an opportunity for the Government to signal what its plan is for addressingour long term challenges and give people a chance to plan for the futurerealities for Super and public services.

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