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Dr Muriel Newman

Old Problems, New Solutions

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18 March 07

Old Problems, New Solutions

A new report by the Centre for Independent Studies, New Zealand’s Spending Binge by Phil Rennie, highlights the fact that core government spending is now almost $20 billion higher than it was in 2000. In spite of that, the social benefits being delivered “have shown negligible improvements”.

Part of the reason he gives is the “churning” or loss of value that occurs when taxes are taken off people in order to be recycled back in the form of social subsidies for health, education, welfare, and pensions. A significant percentage of the tax taken is ‘wasted’ on the bureaucracy as it churns its way through the IRD and a maze of other government departments.

Phil suggests that, “If this extra $20 billion spending was allocated to tax cuts, nearly all income tax could be abolished. All the remaining public services could be solely funded by GST and a low corporate tax rate”. (To read the full report click here )

The notion that taxes in New Zealand are too high and that the country would do far better if they were significantly lowered is now widely supported. What is not so clear, however, is how much public support there is for better ways of funding and delivering social services.

This year the government will spend a total of $54 billion, with nearly three quarters going into social services: health, education, welfare, and superannuation.

Health consumes 21% of all government spending, yet the system remains in crisis – there is widespread industrial unrest, a chronic shortage of specialists, and sick and dying patients struggle to even get onto hospital waiting lists.

In Switzerland, a country with low taxes, everyone is given a private health insurance. There are no hospital waiting lists and citizens are assured of excellent health care when they need it. Germany and France have compulsory health insurance systems, including a mix of private insurance and social insurance. In Singapore, health insurance is part of a broader compulsory savings program, which has delivered high standards of health care at a very low cost.

So, if France, Germany, Switzerland and Singapore – as well as many other countries – can give citizens a health insurance that eliminates hospital waiting lists and provides efficient and cost-effective health care, then why can’t we?

Education consumes 17% of government spending, yet student achievement lags behind our trading partners, and truancy rates are up to 45,000 a week.

If we look more closely at the way education funding operates in New Zealand, we see that there are two different systems. The preschool and tertiary sectors use a voucher system: parents and students choose a provider from an approved range, and the funding then follows to that provider of choice. In comparison, primary and secondary schools operate largely as state monopolies, with parents having little choice of where they can send their child – unless they are able to pay for a private education.

Countries like the Netherlands and Sweden, which have very high educational standards, operate a voucher system like our pre-school and tertiary sectors: parents are given a voucher and they are free to decide which is the best school for their child. The state monopoly in education in Holland ended in 1917, creating a vibrant private school sector, and Sweden now has a thirty-year track record of school choice.

If vouchers produce dynamic and flexible systems that have made education in Sweden and Holland so successful, then surely it would make sense to extend our pre-school and tertiary voucher system to cover primary and secondary schools as well?

When we look at state welfare, which now consumes 21% of all government spending, we see that as well as funding social welfare benefits, the largest proportion of the budget is now spent on ‘middle-class welfare’: working for families, paid parental leave, the accommodation supplement, child support, and the like. Surely, if taxes were lower and families kept more of what they earned, the need for supplementary payments would fall?

The cost of superannuation, presently at 13% of government expenditure, is set to explode. Within thirty years the number of retirees will rise from fewer than 500,000 to more than 1 million. There are dire predictions about the country’s ability to pay.

Faced with the rising cost of an aging population, and a desire to ensure that the elderly retire in comfort and dignity, many countries are now introducing personal superannuation schemes, which allow workers to privately invest their social security taxes into their own retirement savings accounts. In Galveston, Texas, where such a scheme has been in place for some 20 years, the annual returns have fluctuated from 50 to 200 percent higher than the national pension system.

Singapore, of course, has been the torchbearer in this area. They established the Central Provident Fund, based on private individually owned social security accounts, in 1955. As a result of these accounts, Singapore has the highest rate of personalised savings in the world.

When Dr Cullen established the new Super Fund, it was done in such a way that it could be divided into personal savings accounts. This week’s NZCPD guest commentator, Professor Peter Saunders, the Social Research Director of the Centre for Independent Studies, looks at the potential to use that fund to establish personal savings accounts in an article entitled The future of the welfare state in New Zealand (click to read ).

In his article he suggests: “As a starting point, personal savings accounts could be created for every New Zealander using the money the government is currently hoarding in its Superannuation Fund. This money has been collected from New Zealand taxpayers. If it were redistributed back to the population, every adult and child in the country would get about $3000 to start their own personal savings fund. They could then supplement this over time with regular contributions from earnings”.

[If you are interesting in learning more, Peter Saunders, along with special guest, Sir Roger Douglas, will be holding a free seminar in Wellington on Wednesday 28th February. Details can be found by clicking here .]

If research shows that social service delivery in New Zealand is not improving in spite of significant funding increases, surely it is time to investigate alternative ways of providing social services. Maybe we need a new set of goals: to ensure citizens have excellent health care by providing a universal health insurance similar to the one in Switzerland; to lift educational standards and increase school choice by extending our voucher system to include the primary and secondary sectors; and to ensure comfort and dignity in retirement by divvying up the Cullen fund to create personal super savings accounts. What is your view?

The poll this week asks do you agree that the delivery of social services in New Zealanders needs to improve? If so, do you support the concept of a universal health insurance, education vouchers, and personal super savings accounts? Take part in poll

Reader’s comments will be posted on the NZCPD Forum page click to view .