KEY POINTS:
The Government wants constructive suggestions on how New Zealand might face the coming economic crunch. The Prime Minister says he expects this week's jobs summit to produce concrete proposals.
Here are five suggestions - they aren't really about jobs but they are all things we should be talking about. Apart from the large sums of money involved, they go to the heart of what the Government should and should not be doing.
1. Review the need for the New Zealand Superannuation Fund
Even after the NZSF's recent losses - more than $2.5 billion in the last 12 months - there is still about $12 billion invested. The Government must also contribute about $2 billion a year - we taxpayers must now borrow every dollar of that. It makes no sense for citizens to borrow to invest in risky financial markets - the same applies to governments.
At the very least, the annual contribution should be stopped while we discuss whether we need or want the NZSF. Is it really the best use of taxpayers' money? Where is the evidence that it will help?
2. Change the NZSF's investment strategy
If the NZSF is to continue, we must discuss its investment strategy. It isn't a good idea (as National proposed in 2008) to require any minimum proportion to be invested in New Zealand.
The NZSF should first focus its attention on new job- and growth-creation opportunities in New Zealand. That means investing in new businesses or in the growth of existing businesses that, for example, have export potential.
All the rest should be invested (passively) in listed overseas shares.
That's the best way for the NZSF to enhance New Zealand's growth if it is to improve the chances of tomorrow's taxpayers meeting the cost of New Zealand Superannuation after 2020.
3. Stop pre-funding the ACC's liabilities
Each year's ACC premiums are designed to pay for all the liabilities that are expected to arise in respect of that year.
The ACC calculates these along the same lines as a private insurance company, including paying for past deficits, and that's okay.
That necessarily means the ACC collects more in the current year (about $600 million in 2008) than it actually needs in that year.
The ACC has set the excess aside and invested it in financial markets. There is about $9.5 billion in the ACC's accounts. We need to discuss why that money is there.
Private insurers must have reserves to meet unknown but expected liabilities because they may go out of business and disappear. That doesn't apply to the ACC because it is owned by the Government - that won't disappear.
Passing the ACC's reserves to the Government need not change anything of economic substance, including the way the annual premiums are currently worked out.
In the end, this year's claimants will still depend on taxpayers as their ultimate assurance for claims. If the ACC calculates premiums that fully reflect the liabilities it assumes, that doesn't mean it needs a specific pot of money as a provision against those liabilities.
The Government certainly shouldn't contemplate borrowing money to plug the "hole" recently uncovered in the Non-Earners' Account. That makes no sense.
4. Remove the rest of KiwiSaver tax breaks
Even after the changes already made by the new Government to reduce KiwiSaver's cost, taxpayers will still spend more than $1 billion a year - all of it now borrowed. We must discuss the economic wisdom of that.
Do we really need to convince New Zealanders to save for retirement? Should taxpayers' money be spent on encouraging them to put more money into superannuation schemes?
Let's now wonder whether we need KiwiSaver, and what the evidence for that might be.
5. Fix the income tax system
After all the upheavals of the last three to four years in the tax treatment of investments, what we have now is inconsistent, illogical and unfair.
We need to tax income but we must first agree what "income" is.
For example, is it fair that a couple can have as much as $120,000 a year of investment income taxed at only 19.5 per cent? Is it right that a highly paid employee can swap taxable pay for tax-favoured superannuation?
Should house-traders escape tax on the income they earn? Why shouldn't traders in New Zealand or Australian shares pay tax on the profits they set out to make? In each case, it's difficult to see why that should be so.
We now under-collect the tax that should apply if we had "natural" definitions of income. We also therefore pay higher income-tested benefits (like Working for Families and student allowances).
It's not possible to put a number on the subsidies now built into the tax system but it will be significant and will increase as people learn to adapt.
We need to discuss a simpler, fairer, more principled system that's easier to understand and cheaper to administer.
Space prevents a full explanation here, but
there is probably more than $21 billion in readily saleable assets and $4 billion a year in potential savings with these five suggestions.
Even if we did not face difficult economic times, we should discuss all five. But in the current environment, nothing should be off the agenda - there is too much at stake for us all.
