Opinion: Sir Roger Douglas wrong to say Government should have a '$30 billion deficit'

  • 15/10/2019

Michael Littlewood 

OPINION: In an interview on The Nation about the government’s 30 June surplus, Sir Roger Douglas mischaracterised the accrual accounting issues with regard to the future cost to taxpayers of superannuation and health. 

He said, "If the private sector people kept their books like the Government, the directors would be in jail."

Not so fast, Sir Roger. 

Private employers are obliged by accounting standards to accrual-account pensions, for example, so that shareholders and the market have a good idea of what financial commitments the employer has made to employees in the current year and also in past years with respect to current employees. 

Employers then usually set aside financial assets that, with investment income, should meet those future costs.

They do that because the employer could disappear between now (when the pension promise is made) and then (when the benefit has to be paid).  

The separate pool of assets should be there to meet those costs, whether the employer survives or not.

The government is in an entirely different position. There is no commitment to continue today’s New Zealand Superannuation and that can be changed overnight. 

A private pension, by contrast, is a contractual commitment that, if broken, can be pursued through the courts.

Governments will never disappear in the same way that a private employer will. They will always have the right to reach into all our pockets by way of taxation to pay for whatever they decide to do. 

There is no need to have a separate fund set aside to meet tomorrow’s pensions. It makes no more sense to pre-fund pensions than it does to pre-fund the future costs of the police force, the army, roads or anything else we will expect governments to be doing 10, 20 or 40 years from now. 

Governments are in an entirely different position from private employers in that regard.  Pre-funding a public pension, like New Zealand Superannuation, just makes no fiscal or economic sense.

There is also no need to accrual-account expected pension payments in the government’s books, whether or not there is a pool of assets (in other words, run it on a pay-as-you-go basis but put the accounting liability on the government’s balance sheet). 

It might make Douglas feel justified to see his enormous contingent liability on the government’s books as representing some sort of accounting guess as to what the net present value of all those future pension payments might be. 

However, it makes no more sense to work out today what governments might spend on pensions over the next 40 years than it does to work out today what they might spend on the police, army, roads or anything else we expect governments will be doing over those years.

Today’s pension is paid by today’s taxpayers and tomorrow’s pension will be paid by tomorrow’s taxpayers.  That’s how governments always pay for all the things we expect them to do.

Roger Douglas’s so-called "$30 billion deficit" is alarmist, irrelevant nonsense.

Michael Littlewood is the principal editor, www.PensionReforms.com

 

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