Sir Roger Douglas: Our rock-star economy faces the music

We are going to have to make choices in increasingly difficult economic circumstances and we need to put the country before politics.

COMMENT: The New Zealand economy under John Key was once described as a rock star. If that was ever right (and it wasn't), then the rock star is tottering around on stage and in danger of falling off it altogether.

Government debt to the retired and existing workforce exceeds $700 billion for income and health. The real cost of healthcare is expected to rise from today's $18b a year to $108b in 40 years. As well, retirement pensions are likely to increase from $14b today to more than $50b.

Unless productivity growth increases at twice its present rate over the next 40 years (a nice thought but it's not going to happen), future governments will have to make massive reductions in other areas, including education, to avoid bankruptcy.

So what can we do? The answer is relatively simple but requires enormous courage.

A good starting point would be to reduce government expenditure by $8b-$10b. Achieve this, and we have the money necessary to reform the welfare system in New Zealand. All we have to do is get rid of the privileges and bribes our most recent leaders - Clark, Key and Ardern - have bestowed on affluent New Zealanders at the expense of low-income earners.

Among those privileges are corporate welfare (to Peter Jackson etc), tertiary education (interest-free loans, subsidies, free tuition), Shane Jones' slush fund, KiwiSaver subsidies and a NZ Super Fund that is no longer needed. Throw in an excessive emissions trading system and pensioners' power subsidies and we have unnecessary expenses in the region of $10b.

We can also adopt much better ways to allocate welfare spending in a number of significant areas, including $9b currently spent on health and unemployment, the $4.5b individuals put into KiwiSaver and health and the $10.5b employers have to spend on ACC, KiwiSaver and other super payments as well as taxes that are too high.

Make this spending available and we free up $32b-$34b for the kind of reform that would really make a difference. Here is a brief summary of what we can do, followed and assessment of social and economic outcomes.

Instead of the KiwiSaver scheme, it is proposed that 12c in every dollar of earned income up to $54,000 a year (indexed to inflation) goes into a retirement savings account. For someone entering the workforce aged 20 or below, this would produce $1m ($2m for a couple) at retirement.

This would deprive the Government of an estimated $11b, ie one third of the money available from doing away with those excessive expenses.

It would be interesting to see what voters would prefer - $1m plus today's pension for them on retirement, or stay with the bribes Clark, Key and Ardern have in place for the rich.

For health, a complete overhaul of existing policy is required. One approach would be for every working New Zealander to receive up to $8750 per annum (indexed). This money would be placed in a personal dedicated health account, out of which payments would be made for insurance covering health costs of up to $20,000 (indexed) a year and a contribution to a chronic illness fund.

This would cost the government budget $14b a year. New Zealanders who did not fall chronically ill could be expected to retire with $150,000 or more in their health and care account after 25 years in the workforce.

Healthcare productivity under that system would be likely to increase by 40 per cent over 20 years given Singapore's experience with a similar approach.

We should also set up individual out of work accounts, covering sickness, accident or unemployment, replacing existing benefits. Individuals could receive up to $4250 (indexed) a year. Any balance in their fund at the date of retirement would be transferred to their health and care fund. The cost to the government budget is estimated at $7b a year.

For eduction, we could issue a tax credit for every child equal to the current cost of public education. These could be spent at any approved public or private school, giving children and their families much greater choice. Schools would have a significant incentive to innovate, creating curriculums that not only meet the needs of their clientele but also the shifting demands of living in the 21st century.

We have to decide as a nation what we are going to do. What we have done before is not important. We are going to have to make choices in increasingly difficult economic circumstances and we need to put the country before politics.

Our overall objective should be to promote and protect the freedoms and welfare of all New Zealand citizens. I believe that with courage and an open mind we can do this.

• Sir Roger Douglas was a Labour MP and Finance Minister from 1984-88.