The International Monetary Fund yesterday wound up the pressure on both National and Labour on big gaps in their economic policies.
On National, the Fund warned that it could not achieve its budget surpluses without harming public services unless it introduced new taxes.
And it warned Labour that a refusal to change the age of eligibility for New Zealand Superannuation would see other Government spending having to take big cuts.
There was nothing new in these warnings.
The IMF has been saying more or less the same thing for at least the last ten years.
It has carried out a sort of Chinese water torture on our politicians, reminding them each year of the need to change their ways.
And successive governments (of both stripes) have been rejecting the advice every year.
But yesterday, the language used in the IMF “Concluding Statement” on cutting spending was stronger than in the past.
“Achieving operating surpluses will require sustained discipline over successive budgets, particularly given building pressure from New Zealand Superannuation (NZS) payments and defence commitments,” the statement said.
“While continued expenditure discipline should remain central to the medium-term consolidation efforts, relying on expenditure restraint alone could increasingly weigh on the quality and delivery of public services, especially in the face of rising ageing-related spending pressures.
“An adjustment strategy that includes a broader set of expenditure and revenue measures would distribute the effort across fiscal instruments, strengthen the credibility of the fiscal anchor, and help reduce distortions in the tax system.”
In short, the Government won’t meet its fiscal target of a surplus in 2028/29 and for the net debt to GDP ratio to peak in 2027/28 without new taxes.
The alternative would be unacceptable cuts to public services.
The IMF Mission Chief, Yan Carrière-Swallow, in Wellington yesterday, was reluctant to specify what cuts to public services might result from the Government’s programme.
“I think the thrust of what we’re saying is that the size of the fiscal consolidation that’s contemplated in the fiscal strategy we’ve set is appropriate, but also ambitious,” he said.
“This is a fairly large amount of consolidation that needs to take place.
“And so relying on a narrow set of instruments does risk overloading those instruments and being more disruptive.
“And if that adjustment could be spread out over a broader set of instruments, we think it would be easier to avoid that type of situation.
“Now, I think I can’t be specific as to which elements of public service provision would be disrupted.
“We think under current plans, we don’t see the disruptions happening now, at least.
“I think a way to avoid this going forward is to ensure that there’s continual costing and cost-benefit analysis taking place on different lines of public spending to ensure that those situations don’t arise.”
As would have been expected by the Government, the IMF proposed either a capital gains or land tax as a solution, with the proviso that any surplus money gathered be used to repay debt.
“Potential measures could include a comprehensive capital gains tax and reforms to land value taxation,” the statement said.
“Any revenue overperformance should be saved to accelerate buffer rebuilding.”
Carrière-Swallow and his team have met with the Minister of Finance and the Labour spokesperson, so they are familiar with the politics of a capital gains tax.
“Of course, the different political parties have different degrees of appetite for proceeding with these kinds of measures,” he told the media yesterday.
“We think our advice is coming from a technical opinion based on cross-country evidence and our analysis of the tax structure in New Zealand.
“We think there are several advantages to this approach.
“One is that it would reduce distortions in the tax system.
“Currently, income from different sources in New Zealand is taxed very differently, and that creates a particular type of incentive to invest particularly in real estate assets.
“We think that leads to a set of undesirable consequences in the economy that affect all sorts of things, including productivity.
“So we think there are substantial gains that could be had from this approach. But for it to be effective, it does need to be comprehensive and to tax different types of assets in a similar way.”
But apart from the proposed cuts to spending, the other big fiscal force is the steadily increasing cost of New Zealand Superannuation.
On this, the current Government and the IMF would see eye to eye. Not so, Labour.
“Under current settings, New Zealand Superannuation (NZS) costs are projected to rise significantly over the long term, with additional pressures from health and elderly care,” the statement said.
“A gradual and balanced reform package should include changes to NZS settings and further strengthening of KiwiSaver, including further increases in contribution rates and measures to boost participation.
“Such reforms need to be signalled early and carefully designed to distribute the adjustment across generations, preserve retirement-income adequacy, and support capital market deepening by mobilizing long-term private savings.”
That reads more or less like an endorsement of National’s current policy of increasing contribution rates and its election manifesto promise to make NZS compulsory.
Carrière-Swallow said IMF modelling showed super costs would absorb eight per cent of GDP by 2050.
That would be more than healthcare, agriculture or construction as a share of the total economy.
“I think our message is that New Zealand society needs to start the conversation around a balanced set of gradual changes to NZS settings that would help address this problem over the longer term,” he said.
“We also think that a part of this balanced agenda should involve further strengthening the KiwiSaver program, which we see as an important additional source of retirement savings for New Zealanders.”
Overall, the IMF noted that the New Zealand economy was being buffeted by a series of shocks.
All the more reason to address the structural reforms it has been proposing for years.
“The New Zealand economy is being subjected to frequent shocks, underscoring the importance of the strong policy framework that underpins macroeconomic stability: a flexible exchange rate regime, strong fiscal buffers, and a credible central bank,” their statement said.
“Structural reforms remain critical to lift productivity and living standards, and to strengthen resilience.”
Privately, politicians concede that big structural economic reforms in New Zealand take time.
The “crash through” reforms of the 80s and early 90s and the political backlash they provoked are still frequently recalled around Parliament.
So it took nearly 30 years for National to move from opposition to compulsory super to support, which it has announced only this year.
And though both the current National Prime Minister and Finance Minister reject a capital gains tax, that is not to say that some time in the future the party won’t change its mind.
It is likely that they will have the IMF in town every year to remind them of the reasons to do so.
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