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Insights 22 : 19 June 2020
NZ Herald: Bryce Wilkinson discusses the impact of rising public debt and artificially low interest rates.
Podcast: Eric Crampton on how to build a real quarantine system
Report: Borrowing to Save: Retirement Income Policy after Covid-19

Safety first
Dr Eric Crampton | Chief Economist |
New Zealand’s border is its first line of defence against Covid-19. The gross failures exhibited this week cannot be repeated and require a complete reversal of the Government’s border procedures.

Since the border was closed in March, entry by anyone other than returning Kiwis and residents has been at the discretion of the Minister. If a visitor’s entry is sufficiently important on compassionate or economic grounds, then the visitor can access one of the scarce quarantine spaces secured by the Government.

That kind of approach was necessary during Alert Level 4 lockdown when critical workers needed a way in to fix things like Wellington’s wastewater pipes. Now it is entirely backward.

When entry is allowed because it is the Minister’s priority, it is far too easy to let procedures slip. If the Minister said a film crew is vital, officials can let one member run back through a crowd to get a misplaced bit of luggage. If letting someone in to see a dying relative is pressing, it is hard not to extend further concessions when the case becomes even more heartrending.

Safety, under that approach, is too easily compromised. Obvious measures have not been taken and the entire country is now at risk.

Entirely closing the border might feel like the correct response, but when up to a million Kiwis live overseas with a right to return, safe procedures operating at scale are absolutely crucial.  

The Government must reverse its policy. Rather than requiring Ministerial exemptions, visitors should be admitted whenever their entry is safe, or can be made safe – on a user-pays basis for non-citizens and non-residents.

Under a safety-first system, the Government would not manage quarantine. Instead, it would certify that private quarantine facilities and their procedures are safe, with rigorous audit processes strictly overseen. The Auditor General’s Office may be well placed for process auditing and compliance.

Providers breaching protocols without rapidly notifying officials would be subject to liability. And visitors breaching their obligations would be deported. It is easier for Government to hold private providers accountable when accountability in the public sector is weak.

Perhaps paradoxically, beginning with a principle of safety on a user-pays basis would strengthen safety while also allowing more visitors. Obviously, visitors from the Covid-free Pacific Islands and Taiwan would be allowed entry without quarantine as those places are safe. And more spaces in safer quarantine facilities could become available as necessary in response to demand in a user-pays system. It is a process that can safely scale as needed.

Safety first. It’s long past time.

Dangerous Forestry Bill untroubled by Select Committee
Roger Partridge | Chairman |
On Tuesday afternoon, the Environment Select Committee published its report on Shane Jones’ Forests (Regulation of Log Traders and Forestry Advisers) Bill in Parliament ahead of its second reading.

Despite its many flaws – and an unprecedented chorus of disapproval (including full page advertisements in the media) – the Bill has emerged from the Select Committee largely unscathed.

Of course, this outcome was well choreographed by Jones. By diverting the Bill to the Environment Select Committee, rather than the better-qualified but National-chaired Primary Production Select Committee, the Bill was always going to have an easy ride.

Yet, anyone interested in the forestry industry, the wider economy, or the principles of good government, should be deeply troubled by the Bill.

Introduced under faux-urgency, the Bill’s purported purpose is to create an occupational licensing regime for log traders and forestry advisers. This, Jones proclaims, will ensure mum-and-dad forestry owners get reliable advice about when to harvest their trees and where to sell them.

But the regime is a Trojan Horse for invasive regulation. The Bill deems all forest owners to be “log traders” and subjects them to the registration and regulatory oversight of a new “Forestry Authority.”

The Bill’s purpose statement includes ensuring “equity of access” and the “continuous and predictable supply” of timber for domestic processing, paving the way for the Forestry Authority to control when, to whom and even whether forest owners can sell their trees.

Jones’ goal is to promote grandiose plans for a “revitalised” wood processing industry that will “create jobs” and “add value” beyond what the apparently myopic log exporters have done. In regulating forest owners, Jones doubtless has at least one eye on his Northland electorate (he is reportedly concerned about two Northland sawmills struggling with log supply).

But if wood processors want a secure supply of logs, they should solve it either by planting trees or entering long term contracts with forest owners. The answer is not subjecting suppliers to ex post regulation.

Nowhere in the Cabinet Papers or supporting documents does Jones present an assessment of how forest owners might be economically impacted by all this. Nor is there even an attempt at defining the problem. These omissions show a remarkable contempt for decades-old principles of good government.

More concerningly, Jones’ protectionist approach will have a chilling effect on forestry investment. It will also jeopardise both overseas investment in New Zealand and the country’s reputation (and obligations) as an exporting nation. Unfortunately, the extent of the potential damage is uncertain, as Ministry of Foreign Affairs and Trade officials were blocked from briefing MPs on the Select Committee about the Bill’s potential consequences.

Parliament should pull the pin on the Bill before it blows the legs off the forestry industry. The country cannot afford this meddling when the economy is struggling to get back on its feet.

Letís not borrow to save
David Law | Research Fellow |
The Government’s plan to recover from the Covid-19 crisis has essentially been about finding new ways to spend.

As a result, public debt is expected to increase from 19% of GDP in 2019 a whopping 54% by 2024 and remain elevated for decades after.

Borrowing from the future to pay for a recovery today will come with big risks if another crisis hits – and there are plenty of natural disaster possibilities in this wonderful country. A better way to go would include an instalment plan, a little belt tightening, reprioritisation and some financial common sense.  

An obvious place to start is with New Zealand’s retirement income policy settings, the contributions to which are presently going on the countries credit card. 

The Government spends about $1 billion each year on KiwiSaver subsidies, yet it turns out rigorous evaluations of the scheme’s performance found it to be a complete flop. KiwiSaver has no effect on wealth accumulation on average and does not improve the expected retirement income outcomes of its members. That makes it a luxury we can’t afford right now. KiwiSaver subsidies should stop.

New Zealand Superannuation (NZS) is an even bigger ticket item, at $14.6 billion in 2019 and costs for this scheme will rise as the population ages.

According to modelling for Treasury’s long-term fiscal statements, even modest changes to NZS would likely yield significant expenditure savings. Lifting the age of eligibility by just two years, for instance (or the equivalent rise in average life expectancy since NZS settings were last changed), would reduce spending by approximately 0.75% of GDP per year. Some modest changes to the indexation of NZS payments would also help.

So, ending subsidies to KiwiSaver, increasing the age of eligibility for NZS by two years and slightly slowing the growth of individual NZS payments would drop government debt to about 25% of GDP in 2034 rather than 42% as currently projected.

Of course, forcing people to rapidly plan for an additional two years of work before retirement would be a tough ask. But phasing in the increases to the age of eligibility over a longer period could help to get to a similar place with less friction.

The Government’s mattress is also storing $44 billion in the New Zealand Superannuation Fund (NZSF) put away for a rainy day 40 years from today. It plans to extend the overdraft further and borrow another $10.4 billion for contributions to the NZSF over the next five years.

Yet, the rain is here and thunder and lightning if flashing on the horizon. Contributions to the NZSF should be suspended and serious consideration given to winding up the fund early – that would just about pay for the recovery. 

More details are available in the New Zealand Initiatives recent report “Borrowing to save: retirement income policy after Covid-19”.
On The Record
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