Super fund foolish says banker

By BRIAN FALLOW

The Government's planned superannuation fund means 30 years of fiscal belt-tightening and is the wrong way to go, says Deutsche Bank chief economist Ulf Schoefisch.

To feed the fund, which received cabinet approval yesterday, substantial fiscal surpluses will be required.

Mr Schoefisch predicts the results will be:

Company taxes too high to attract international companies.

Limited potential for tax writeoffs for research and development spending.

Less money for the urgently needed upgrade of tertiary education.

"Given that the New Zealand economy is in desperate need of a credible growth strategy, we do not believe this is the time to give equity considerations priority," Mr Schoefisch said.

"Fiscal strategy should be focused on measures which over time provide the best aggregate return to the economy in terms of growth and wealth creation. Thirty years of fiscal belt-tightening does not appear to be the right strategy to achieve that."

The architect of the scheme, Finance Minister Michael Cullen, argues that when the baby boom generation retires, starting in about 10 years, the costs of superannuation will mount - doubling to 8 per cent of gross domestic product by 2035.

If nothing were done, the options would be to reduce the level of the pension in relation to average incomes; or tighten eligibility (by raising the age or introducing income or asset tests); or increase average tax rates to cover the additional costs.

Better, Dr Cullen contends, to build up a fund of savings while the demographic going is good, to be used to ease the fiscal burden down the track.

Mr Schoefisch said the Government was proposing to achieve a rise in national savings by holding back growth in domestic demand through continued tight fiscal policy.

"We are sceptical about the merits of this approach. International evidence suggests there is likely to be some slippage as the private sector reduces its voluntary savings in response to forced savings through the Government," he said.

"More importantly, however, we would expect persistently tight fiscal policy to depress the trend growth rate of the economy, which would in turn hold back the generation of savings and slow the growth of the tax base."

Mr Schoefisch said it would be preferable to pursue policies encouraging the international competitiveness of the business sector, which would make for a stronger economy and faster-growing incomes.

"If the economy grew by, on average, 3.5 per cent a year instead of 3 per cent, it would be 16 per cent larger in real terms in 30 years. "Under the 3 per cent growth scenario, average tax rate would have to be raised by around 5 per cent to raise the same revenue as in the 3.5 per cent growth scenario."

Dr Cullen has argued that the country cannot grow itself out of the superannuation problem because of the relativity of wages and pensions. The rising tide of higher growth and average incomes would raise the boat of pension entitlement.

The Government had made that worse, Mr Schoefisch said, by reintroducing the limit that the pension (for a couple) must not fall below to 65 per cent of the average wage. The National Party has reversed itself and decided to support that policy too.

The issue illustrated the fundamental tradeoff between equality and efficiency, Mr Schoefisch said. "The stronger growth route implies reduced equality.

"Maintaining a higher degree of equality, on the other hand, requires pre-funding of future pensions through a savings scheme - at the cost of leaving the economy as a whole worse off in the future."