Why light rail before a new harbour bridge? Each decision comes with an "opportunity cost", writes David Schnauer. Photo / Sylvie Whinray
Why light rail before a new harbour bridge? Each decision comes with an "opportunity cost", writes David Schnauer. Photo / Sylvie Whinray
OPINION:
A cynic once described economics as "common sense made complicated".
This description is apt for the economic concept called "opportunity cost". Simply put, the concept means if you have $5 and choose ice cream over a drink, the opportunity cost of buying the ice cream is loss of theability to quench your thirst. It is common sense: choice of one option means foregoing benefits offered by alternatives.
Has New Zealand ignored this concept, in recent expenditure decisions? The airport light rail project and the plan to help the jobless, both recently announced, are proposed expenditures where opportunity costs appear overlooked.
Consider investment into Auckland infrastructure. Three major projects were proposed. A new harbour crossing, duplicating the harbour bridge. Moving the port out of the harbour. Light rail to the airport. Each comes with a price tag exceeding $10 billion.
Funding is limited to paying for one project. Choice of one project necessitates the two alternative projects being shelved for years.
Yes, light rail offers benefits. But did the Government, in approving this project, acknowledge that as a result, the port will not be moved, and the harbour bridge will remain the sole harbour crossing?
It would be surprising if a proper balancing of all three projects found light rail provides greater benefits than a second harbour crossing. The apparently disregarded opportunity cost of choosing light rail is that traffic will remain choked on the bridge for years. It is a high cost for Auckland to bear, which follows directly from selecting light rail.
The same comparative approach is needed when considering new annual expenditure programmes, such as a safety net for the jobless, costing $3 billion annually. Yes, there is a benefit in helping people who lose their jobs. But these proposed benefits come at a major new cost- 2.8 per cent of worker incomes. Employers and employees will each pay half.
Are there other alternative programmes, to which 2.8 per cent of worker incomes could be applied? Would those alternative programmes deliver greater social benefit, than the jobless plan? Unfortunately, analysis suggests there are, and the new jobless assistance programme is not a good expenditure decision.
Since the Muldoon government abolished compulsory superannuation saving in 1975, New Zealand has seriously lacked institutional saving. KiwiSaver has been a belated introduction to address this major omission, but it is voluntary; at a low rate of income (usually 6 per cent); and not supported with tax concessions. Australia established compulsory superannuation savings decades ago. It is currently moving to 12.5 per cent of incomes- twice our voluntary rate. Australia has more than $3 trillion in its super funds. NZ has about 3 per cent of Australia's total. Our super funds are currently minnows.
This lack of NZ superannuation savings causes three major detriments. First, retirees with minimal savings must be supported by taxpayers. With a rapidly ageing population, the cost of that taxpayer support is rising steeply. One Retirement Commissioner described the projected future increases as "terrifying". Increased compulsory super savings will help offset this future cost to taxpayers of supporting retirees.
Secondly, NZ's economy has been seriously damaged by having minimal institutional savings. Fund managers invest saved funds into local businesses. Without large savings, NZ has lacked funding for its business sector, which has therefore looked offshore for capital. Result: major swathes of NZ business have passed into overseas ownership in the last 50 years. The transfer overseas of NZ corporate wealth continues apace. This loss of ownership of much of our business sector is a continuing tragedy for the country. Increased super savings will begin to reverse it.
David Schnauer. Photo / File
Finally, without compulsory saving, Kiwis have instead used their money to buy houses - pushing house prices to dangerous levels. More superannuation savings will limit funds driving house inflation.
These are three critical problems for NZ. They would begin to be addressed if we introduced compulsory super at 9 per cent and progressively raised the rate to 12.5 per cent. KiwiSaver is voluntary, and currently around 6 per cent. Adding 3 per cent to that figure (being the estimated cost of the new jobless scheme) would have been a major improvement. Introducing compulsory super at 9 per cent offers far greater societal benefit at no extra cost than introducing the new jobless scheme.
Kiwis will need time to embrace 12.5 per cent superannuation contributions. A contribution of 15.5 per cent, if the new scheme is added on top, will surely be resisted. The opportunity cost of the new jobless scheme is it seriously impedes badly needed future reform of NZ superannuation.
