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Insights 24: 9 July 2021
NZ Herald: Oliver Hartwich on central bankers playing politicians
Podcast: David Law discusses changes to Kiwisaver
Newsroom: Eric Crampton on planning for the years ahead with Covid -19

Greek tragedy
Matt Burgess | Senior Economist |
Treasury’s report this week on long term fiscal position does not make easy reading.

Based on historical trends, the analysis shows government spending will consume 43% of GDP, up from 33% currently, by 2061. Healthcare and superannuation for an ageing population drive most of the new spending.

Higher costs lead to permanent deficits. By 2061, the government’s net worth will fall to negative $1.7 trillion. Public debt will reach $2.6 trillion.

That is more than $400,000 per person.

To put that in perspective, debt per person in Greece, the most indebted country in the world relative to income, is NZ$55,000. New Zealand will pass that figure in the early 2030s.

New Zealand’s Greek tragedy could be a little more than a decade away.

If anything, Treasury’s figures are optimistic. Interest payments on debt will consume more than 7% of GDP in 2061. But that is based on a generous-looking interest rate just above 4%.

At 6% interest, a rate more in line with past trends, interest payments will exceed spending on health.

Thankfully, these findings from Treasury are not realistic. They are not intended to be. They show what could happen if governments continue down the current path without correction.

And that is the point of the long-term fiscal report: to spark the correction.

We have options. The report shows debt can remain manageable at less than 50% of GDP if the government raises taxes or contains spending.

But the adjustment could be brutal. Tax revenues would need to rise from 29% of GDP currently to 38%.

Alternatively, spending on health care or superannuation would be capped at their current share of GDP. Which means roughly 40% less spending on one of those items by the 2060s compared with the forecast track.

Treasury’s analysis reminds us budgets are finite, even in a world awash with savings and zero interest rates. That should prompt the government to up its game on investment.

Is a new Auckland harbour bridge for a few thousand cyclists each day the best use of $685 million?

Is Auckland light rail worth its potential $10 billion price tag?

Do we really need to spend ten times more than necessary to achieve our ambitious emissions targets, as the Climate Change Commission says?

With limited budgets, bang for buck is vital. Yet, cost-benefit analysis has become a four-letter word under this government. That must change.

Decriminalisation and reducing harm
Dr Eric Crampton | Chief Economist |
Last year’s cannabis referendum failed by a 51% to 49% margin. Drug reform advocates have since suggested decriminalising drug possession as alternative.

The case has merit but would require a bit more clarity about employers’ positions.

Professor Michael Baker, recently appointed to the New Zealand Drug Foundation’s Board, told the New Zealand Herald that New Zealand’s drug classification regime is, in short, a mess. Possession of some drugs posing little risk of addition and with little risk to public health can draw fines, imprisonment, and criminal records.

He suggested decriminalising drug possession until more comprehensive drug reform can be on the table.

Former Prime Minister Helen Clark also suggested “removing criminal sanctions for minor drug offenses.” She noted more countries are shifting to legalise or decriminalise cannabis, and some are considering joining Portugal in decriminalising minor amounts of drug possession more generally.

During the cannabis reform debates, Sense Partners estimated the likely effects of several policy options, including decriminalising all drug use and possession.

Under that proposal, police would issue a caution notice to those found in possession. Cautions could lead to brief interventions, including treatment, rather than criminal prosecution. Portugal’s similar regime led to reduced harm, increased treatment, and low levels of drug use compared to other parts of Europe.

Sense estimated net social benefits between $34 million and $1 billion, depending on whether decriminalisation was accompanied by a robust treatment system.

It seems unlikely that drug policy will hit the legislative agenda. But even if decriminalisation does not much change overall drug use, it could still increase the costs employers face.

The Business Leaders’ Health & Safety Forum, in the leadup to the cannabis referendum, provided helpful guidance for businesses dealing with impairment risks. The advice would prove useful were decriminalisation under consideration. The Forum’s report also noted that Canadian cannabis legalisation increased employee cannabis use by one percentage point: from 7% to 8%.

Currently, on-the-job use of an illegal drug is considered severe misconduct. Some employers might find corrective or dismissal processes simpler when the threat of police action looms unstated in the background. Decriminalisation could make that harder if on-the-job impairment is not considered serious misconduct, or if establishing impairment for employment processes is too difficult.

Should drug legalisation make it onto the policy agenda, it should be accompanied by work ensuring employers can appropriately maintain health and safety at work.

Long live Helen Clark
Dr Oliver Hartwich | Executive Director |
We all wish Helen Clark a long life. At the same time, that prospect makes us nervous.

This week, the former Prime Minister was quoted in an interview with Rob Fyfe. “She was saying she does not expect life to be back to normal, as we previously knew it, in her lifetime,” Fyfe said.

Two things are scary. First, Clark knows what she is talking about. She co-chairs the World Health Organisation’s Independent Panel for Pandemic Preparedness and Response. And second, Clark is only 71.

According to a Statistics New Zealand calculator, a woman born in 1950 can expect to reach 90 on average.

That would mean no normality until at least 2040. So here is a run-through of our long path to normal.

2021: The final Pfizer vaccine shipment arrives on Boxing Day. The Covid response minister celebrates the delivery five days ahead of schedule.

2022: After the delta and epsilon variants of 2021, the ultra-contagious zeta mutation has experts worried. The border remains closed.

2023: The Ministry of Health secures planning permission for its own Managed Isolation and Quarantine (MIQ) facilities.

2024: The government is satisfied most border workers are now routinely tested after each quarantine breach.

2025: Delayed by workers and materials shortages, construction of the new MIQ buildings starts. After Australia lifted its last Covid restrictions, New Zealand suspends the travel bubble – too risky.

2026: New Zealanders learn the Greek alphabet as zeta, theta and iota variants circulate in the world outside. It remains too dangerous to open the border, and the new MIQ facilities are not ready anyway.

2027: The lambda variant requires a different vaccine. The health minister assures the public that New Zealand will be at the front of the queue once again.

2028: The sports minister decides not to send athletes to the Los Angeles Olympics. With millions of people gathering, L.A. is too dangerous a place for Kiwis.

2029: The MIQ facility opens and closes again immediately because of air conditioning problems. The omicron variant sends Auckland into a six-months lockdown.

2030: The new vaccine arrives, but it is only 98 percent effective against the new rho and sigma variants. New Zealand is not taking any risks. The army starts a rebuild of the abandoned MIQ facility.

2030s: The decade is a repeat of the 2020s. By the end of it, we reach chi, psi and omega. But where is the new upsilon vaccine?

2040: The border remains closed. The government considers saliva testing as the solution. The New York Times celebrates New Zealand’s zero Covid tradition.

Helen Clark turns 90. She is in good health and feels vindicated. Happy birthday!

On The Record
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