National is ignoring the looming threat of rising superannuation costs and a changing climate. Thomas Coughlan argues its new leaders should look to the party’s history for solutions.
COMMENT: Edmund Burke is considered by many to be the philosophical father of modern conservatism and wrote that society is “a partnership… not only between those who are living, but between those who are dead, and those who are to be born."
The sentence has been interpreted by modern conservatives as a reminder that it is immoral for Governments to spend lavishly and blow out the national debt only for future generations to pick up the bill.
It’s a fair comment. However much we may want it, there would be something immoral about the Government acceding to every spending demand, knowing that children and citizens not yet born would eventually pick up the tab.
And Government debt can blow out quite large. In 2014 the UK finally repaid debt it accrued during the South Sea Bubble of 1720, nine years before Edmund Burke was even born.
Reducing the debt burden on future generations is noble and fair. Even the most red-blooded Labour voter will be able to recall some public spending which it would be profoundly unfair to expect future generations to pay for. The infamous hip-hop tours paid for by the fifth Labour Government are still cursed in the corridors of power as a powerful symbol of wasteful public spending.
But National finance spokeswoman Amy Adams showed this week it is not Labour but National that is struggling to turn public debt into political capital.
Adams was giving a stand-up news conference shortly after The Tax Working Group outlined the burden an ageing population would place on public finances.
As well as finding tax revenue would need to increase dramatically to maintain current levels of superannuation and healthcare, the report also talked of the need to protect the environment. It is becoming increasingly clear just how much it will cost to meet New Zealand’s Paris commitments. As much as $36 billion will be wiped off the value of the economy by 2030. Worse still, taxpayers of the future will be purchasing foreign carbon credits because present Governments are too greedy and short-sighted to be bothered to reduce emissions or plant forests of our own.
There is a crisis in contemporary conservatism and it comes not from an exploding public debt, but an expansion in our understanding of what form that debt will take. The national debt is no longer the most pressing issue. It is the looming cost of climate change or the pension bill. Like greedy Governments hated by Burkean conservatives, we have decided to delay making any serious contributions to these costs. We pollute freely and pay little attention to our retirement, insisting taxpayers of the future will pick up the tab. It hardly seems very responsible or conservative.
Tax only what you need
In that news conference, Adams struggled with questions on the issue of the demographic burden.
She told reporters that, because the economy is growing and revenue from taxation is growing with it, the Government could and should cut taxes rather than simply pocket the added revenue.
“The tax take that should be taken is a reflection of what is needed to run the country, not simply saying the economy is growing so therefore we should continue to take from you,” she said.
So would National hike taxes in the in the 2030s to pay for Government services?
“Our position is that we should tax what we need to run Government services well,” Adams said.
And that is exactly what a National Government would have to do.
Adams' argument is that taxation should not be based on a percentage of the economy's size, measured by GDP, but on what is immediately required to run Government services. If the economy grows to the point where the Government only needs to take ten percent of GDP to run services, ten percent is the amount that should be taxed. But if the economy shrinks or the amount of services people requires increases, a greater share of GDP should be taxed to pay for it.
Unfortunately for the taxpayers of 2045, this second scenario is exactly what will happen. The revenue required to keep services operating at current levels will increase at a far greater rate than the economy. Currently, the Government can get away with spending roughly 30 percent of GDP and still post a surplus. By 2045 33.8 percent of GDP will need to be spent to maintain these services at current levels.
Adams is wrong. Conservatism isn’t just about what you tax to run services well. According to Burke, it’s about who you tax to run them. It is profoundly un-conservative for baby-boomers to enjoy low taxes during their working lives only to burden generations that follow with much higher taxes to pay for the boomers' superannuation and health costs.
An economically focused Government?
National has so far failed to lead on this issue. John Key was asked by Kathryn Ryan when he stepped down why he did not expend some of his overflowing political capital on forging ahead with necessary changes to the retirement age to relieve some of the burden. He told her that to do so would cause people to lose faith.
“We have been an economically focused government," he said. "We believe that when the economy and the books are right you get choices and future generations get choices”.
But future generations don't have any choice but to pay for what contemporary Governments refused to pay for.
Bill English stuck his head above the parapet in 2017 when he announced a very gentle increase in the retirement age in 20 years time and worked hard to justify the move to the electorate.
National’s strong finish in the 2017 election shows that it is possible to justify this politically difficult position to the electorate. Justifying it to Gold Card wielding Winston Peters in coalition talks was probably more difficult.
To her credit, Adams reaffirmed her party’s commitment to raising the retirement age. She also gestured to some ideas which might turn into a properly post-Key taxation policy of her own. She said she supported tax policy that encouraged people to save for their own retirement, for example.
But this position does not line up with the current tax system Labour inherited from National. The current system does little to incentivise saving. The Tax Working Group paper showed that common forms of savings (bank accounts, PIE, shares) had effective 47.2 percent and 55.7 percent effective marginal tax rates, while equity in a property was taxed at just 11.3 percent for owner-occupied property and 29.4 percent on rental property.
Adams is half right. We have a system that encourages people to save, but only for property, which most young people can’t afford.
Labour shouldn’t get a free ride here.They will not increase the retirement age as they know they probably should. They restarted contributions to the Cullen Fund, but they are not nearly enough to make up the ground lost by the contributions freeze National initiated in 2009.
Bridges: Challenge some of what we have thought over time.
Simon Bridges and Adams are both quick to insist the party is still ruminating on policies for the 2020 election. Bridges has signalled he would like to look more at housing and the environment than the previous government did. He singled out the party’s new conservation spokeswoman Sarah Dowie when he announced his reshuffle, saying she would “challenge some of what we have thought over time”. Perhaps these new MPs will challenge the Key orthodoxy.
There are only ever a handful of MPs in a party capable of the rigours of the finance portfolio and Adams is clearly one of them. She answered Lisa Owen’s quickfire questions on the state of the economy with ease. At midday on the day the 60-page Working Group paper was released, she dexterously rolled out detailed examples and interpretation without difficulty. She only struggled when pressed on the issue of the demographic burden: she knows that the costs are massive and the current tax system does little to encourage anyone who can’t afford a home to save for their retirement.
Adams won’t have to go full Cullen to solve the problem. There will be a conservative solution and National should look to Burke to find it. There will be way to marry the party’s preference for solutions that highlight individual accountability. It could be means-testing superannuation, or perhaps a hypothecated social security tax that collects money for social services alongside normal PAYE tax. Perhaps, just perhaps, it might even be the dreaded capital gains tax.
On its current course, National risks becoming the 'spend now, pay later' party it has always opposed being. Change could open up new voting blocks to National if it made a strong case it was the party that properly cared about reducing the demographic burden being placed on the young.
Niall Ferguson, a conservative historian, said of America’s pension woes: “If young Americans knew what was good for them, they would all be in the Tea Party."
As its new leadership looks to formulate policy for the future, it should remember its philosophical roots to find its own solution to our pressing problems. There is only so long a party can neglect a problem before it starts to bite.