Opinion: Budget gives English chance to outline Baby-Boomer strategy

By Infometrics economist John Carran Life throws up many surprises. Increases in our taxes or cuts in our public services are not surprises we particularly welcome. We like to have a reasonable idea about what we can expect from the government so we know how much to put on our credit card or mortgage, how much to put into our retirement fund, when to retire, and how much insurance to take out. Of course no government can give guarantees about what it and its successors will and won't provide in the future. But it can set realistic hopes about what we might get and what we have to give up getting it. This helps us plan for expected and unexpected events in our lives. It is important for the government to reduce uncertainty by being honest about the state of the public finances and the reasons for the decisions it makes about public spending and taxes. It is also important to talk openly about what public benefits and services it will be possible to provide in the future. Bill English is following the lead of his predecessors by publicly foreshadowing the big decisions in his May Budget. It will be an austere affair. Health and education will apparently get a little extra funding, but most other areas of public spending will not. Payments to the New Zealand Superannuation Fund will be suspended for a time. Further tax cuts are likely to be deferred until we can afford them. English and John Key will no doubt hope these measures will slow racing public debt and mollify the credit rating agencies. Despite these measures it is likely we will still see public debt rise precipitously over the next decade or more. Yet there is an important area that this Government has been decidedly vague "“ the choices governments face to deal with the vast hole in public finances that will emerge as the rump of the Baby Boomers retire. The Treasury's 2006 report on the long-term fiscal outlook suggested that as a result of our greying population and rapid spending growth New Zealand Superannuation and public health costs as a share of our economy will double by 2050. Maintaining Super, health and other public services at levels we have become used to is not feasible unless taxes rise a lot. Higher taxes can be avoided, but only if we accept lower benefits or services in some areas. These are difficult choices. To his credit, Michael Cullen went some way to recognising future pressures on the public finances when he established the New Zealand Superannuation Fund, which was designed to help meet future Super costs. Some would argue that it is a luxury we can't afford. Tax cuts are a better solution to get our economy growing and allow us to sustain first-world public services in the future. Others consider the Super Fund gives people a false sense of security about Super and government services in the future when the large size of our aging problem suggests changes are necessary. But, whether you agree with the Super Fund or not, it was part of a plan with the long-term in mind. In the UK and Australia governments have had a different approach to help deal with their aging populations. These countries have signaled future rises in the age for public pension eligibility and other reforms to their pension schemes, which will help ease pressures on public finances. In its Budget this week the Australian Government announced the age of eligibility for pensions would gradually rise from 65 to 67 in 2023. It also announced pensions would be more targeted. People are working and living longer. Keeping the retirement age fixed indefinitely doesn't reflect the changing circumstances of our older people. By being open and signaling these changes a decade or more in advance the UK and Australian governments have given a bit more certainty around retirement support for people that still have many working years ahead and the chance to plan for the changes. The signs so far are that the current Government is refusing to face up to the significant challenges our public finances will face as New Zealand's population ages. The Government's ambivalence toward the Superannuation Fund, its closing down of debate on Superannuation, and its lack of a coherent plan to prepare the public accounts for the oldy onslaught is not doing future retirees or workers any favours. They are bound to be disappointed at some stage. They will find they have not budgeted enough for life's eventualities. The Budget is an opportunity for the Government to signal what its plan is for addressing our long term challenges and give people a chance to plan for the future realities for Super and public services. ________________ * Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website here. This piece first appeared in the Dominion Post on May 16, 2009.

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