Friday 1st June 2001 |
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The government has earmarked $600 million to begin the fund. Thereafter, billions are intended to be siphoned off from future taxation revenues to finance a self-liquidating scheme that will provide a low proportion of welfare relief for ageing baby boomers.
The Cullen fund will not solve the baby-boomer pensions problem. It is not a serious fix for the superannuation burden on the state of rising numbers of elderly. It does not even promise to pay for most of the cost.
So far as the other justification of committing future governments to maintain Budget surpluses is concerned, the fund is unnecessary considering Budget surpluses have become regarded as orthodox practice internationally, imposing a discipline on what any New Zealand government would do.
As a solution to the pension funding crisis and worries over government fiscal prudence, the fund is a poor answer. So the key question must be what the fund is really aimed at achieving beyond its professed intentions. What is its ulterior motive?
The fund will most likely be instrumental in creating Scandinavian-style social demo-
cracy in New Zealand. Considering polls show Kiwis like Sweden most of all foreign countries as development models, Finance Minister Michael Cullen is right on target.
The country is poised to be quasi-nationalised by over-taxation. Despite pretensions to fiscal probity, the government has not retracted Prime Minister Helen Clark's claim that its primary function is redistribution. The fund will compound it.
The Cullen fund will act as a taxation surcharge on the economy. It is a tax ratchet. To the rest of the cost of government will be added monies allocated to the fund. These monies could come from current taxation or deferred taxation (government borrowing). To every cent the government spends will be added the tax drag of the fund.
The government will have to budget for current needs plus some extra for the fund every year. As current needs will rise in key Budget items such as health, welfare and education, the fund will consistently superadd a premium to rising state expenditure. The effect will be to lock in a high-taxation, high- redistribution economy. The notion that government spending will fall as a percentage of GDP is contradicted by loss of productivity that excessive taxation and redistribution will induce.
Not only will baby boomers need pensions but they will also want increased health care. Present general public opinion supports more state health services over tax cuts. If the Cullen fund can slice an estimated 14% off pension costs, the savings can be transferred to the health budget for capture by the elderly. Tax cuts get lost in the dust and greying boomers are kept happy with steady pension levels and more money for health care. The effect will be akin to a Grey Power takeover of the state.
The flaw in the logic of the fund is that private sector productivity - the source of the nation's wealth - will suffer in a high taxation/high redistribution state, especially as New Zealand has so many working-aged welfare beneficiaries and a chronic shortage of skilled workers. Businesses will struggle to create internationally competitive risk-adjusted return on capital. Their problems will be multiplied if government borrowing rises to feed the fund, driving up interest rates.
Their compensation may arise from equity provided by the fund, but if the fund is permitted to invest overseas, that equity will be diminished and its cost increased by diversion of it to rival foreign alternatives.
Competition from abroad for the largesse of the fund will plunder equity available for local businesses, particularly if that equity is financed from taxation and not private capital that has been boosted by lower tax rates. One result will be weaker revenues from a diminished tax base.
The government will need to extract ever more tax just to keep its place on the redistributionist treadmill. Taxpayers will assume a tax-aggravated investment risk.
New Zealand will finance foreign competitor businesses through the fund and will not be able to afford so much domestic investment. Just as well the government has budgeted $100 million for local business development as a separate item to top up whatever the fund throws its way.
Business is welfarised as is the rest of society. Troubled Air New Zealand, for example, would get taxpayer investment from the fund. Under WTO rules there might be objection to state-funded equity as a form of subsidy that the fund represents.
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