Compulsory super a cure for deficit

By Brian Fallow

WELLINGTON - The current account deficit is New Zealand's Achilles heel and correcting it will probably require some form of compulsory superannuation, the Institute of Economic Research says in its latest Quarterly Predictions.

The institute is forecasting the current account deficit - the difference between what we earn overseas and what we pay - to blow out to 7.4 per cent of gross domestic product by March next year and to only come back below 5 per cent of GDP four years later.

Deficits of that magnitude leave New Zealand vulnerable to rough treatment in the money markets in the event of another major external shock such as the Asian crisis, and that risk in turn builds a higher "risk premium" into interest rates.

The current account deficit can also be seen as the extent to which saving in New Zealand falls short of funding investment.

"We are increasingly coming to the view that personal savings will not be lifted without some form of compulsion," NZIER says. In hindsight it thinks it was too negative about the compulsory scheme proposed by former Treasurer Winston Peters.

It is not in favour, however, of Labour's plan to partially pre-fund the future costs of New Zealand Superannuation through a dedicated tax taken from existing taxation.

"Unfortunately this fund will not have individual accounts, as did the Labour scheme of the 1970s and Winston Peters' proposal. There are inherent dangers in having a large centralised fund under the direct control of Government."

Institute director Alex Sundakov said that however it was done the move from a pay-as-you-go to a funded national superannuation scheme imposed costs on the transitional generation. Given that, political temptations to raid the fund would arise along the way.

Labour's finance spokesman Dr Michael Cullen said Labour had no intention of taking the institute's advice and redesigning the scheme to include individual accounts and private sector participation.

"We reject it for the same reason we rejected Winston Peters' compulsory super model: because it would lead to increased costs and would be less equitable."

Labour's fund would be run by an independent board and there would be a legal requirement it could only be used for superannuation payments, Dr Cullen said.

The institute's view of the economic outlook is little changed from three months ago.

Despite the current "flat patch" it sees growth of 3 per cent in the current March year rising to 4 per cent next year and 3.8 per cent the year after.

It sees unemployment slowly declining from its current 7 per cent to 6 per cent in three years' time.

It expects a rise in interest rates which has already begun to gather momentum until a stronger dollar in 2001 and 2002 takes the pressure off.