It's time to slash and earn

We have slipped from third-richest country in the world to 22nd. As SIMON COLLINS reports, some hard choices must be faced.

Auckland District Health Board chief executive Graeme Edmond voiced last month what many New Zealanders had been fearing.

New Zealanders, he said, "have to consider: 'Are we big enough and rich enough to say we can afford international excellence standards of services - First World, or are we, dare I say it, Second World?' "

The context was the Auckland board's alarming financial deficit: $72 million, or 9 per cent of its total Government grant of $773 million.

Despite a further boost to health spending late last year, the board faces hard decisions if it is to cut its spending to match its income: scrapping specialist heart surgery at Starship Children's Hospital, a tough line against pay increases for health staff and job cuts "likely to be in the hundreds".

Although the dollars are bigger in Auckland, other health boards face similar stark choices.

In education, the picture is almost as bad. Cash-strapped public schools have been under fire for asking parents to front up with cash before their children can attend some classes. Secondary teachers have been on strike, saying they are underpaid. University staff have been taking action, too.

What we spend on education is increasingly funded from borrowing. Student debt now exceeds $4 billion.

Our average household savings rate is the lowest in the Western world, with net savings by older households almost cancelled by borrowing in the family age groups - leaving businesses to borrow offshore.

With aspirations exceeding our ability to pay, we have three broad options.

First, we could cut our spending to match our income and simply accept that, as Edmond put it, we are slipping into the "Second World".

Already we have slipped from third-richest country in the world in 1950 to 22nd today. Countries such as Singapore, Hong Kong and Ireland have passed us, and we are down there with Spain, Portugal and Greece.

If we take seriously the threat to the global environment of excessive consumption and pollution, perhaps we should learn to live within the limits of our use of resources.

A second option is to ignore such limits and go all-out for economic growth. Simply lifting our economic output by the 29 per cent required to match Australia, and keeping health and education spending at the same share of the national income, would wipe out that Auckland health spending deficit three times over.

Or third, we could choose to spend more of what we do earn on health and education and less on other things - overseas trips or high-class restaurants.

We spend a higher share of our income on both health and education than the average of developed countries: 8.1 per cent on health compared with the average of 7.8 per cent, and 6.1 per cent on public education compared with an average of 5.1 per cent.

But we could choose to spend more on both if we wanted to. The United States spends 12.9 per cent of its national income on health.

Only Scandinavian countries spend a higher share of their national incomes on public education than New Zealand: between 6.3 and 6.8 per cent. They also pay the price for it in higher taxes: between 43 and 52 per cent of the national income, compared with 36 per cent in New Zealand.

On an individual basis, surveys suggest that most New Zealanders would be prepared to pay more to give their parents good healthcare and their children good education.

But that begs the question of what "good" healthcare and education means. With modern technology, spending on healthcare can be virtually limitless. Some patients cost more than $1 million a year for expensive drugs and organ transplants.

Even in the richest places, some kind of rationing of the most expensive medical interventions seems unavoidable. Wealth helps, but it cannot hide the hard choices that face us.