Stopping NZ's slide to Third World status

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PLUGGING SPENDING: Overcoming social welfare crutch the biggest challenge as nation bites the bullet

Lee Yoke HarTHE average Kiwi should be so worried. New Zealand's current account balance has been swimming in the red since 1973. Simply put, the current account balance tells a country how much it is saving against what it is paying out or investing.

The other not-so-comforting fact is the country is forecast to run its largest ever budget deficit tomorrow, estimated at around eight or nine per cent of gross domestic product of around NZ$16.7 billion (RM39.8 billion) for the year ending June 2012.

Going by the Organisation for Economic Cooperation and Development's (OECD) yardstick, New Zealand's budget deficit puts it at near the bottom of the class with countries such as Ireland (-12.2 per cent of GDP), United Kingdom (-13.3 per cent) and the United States (-10.7 per cent).

Granted Christchurch's post-earthquake reconstruction costs have derailed the government's expenditure containment plans. The magnitude of this expenditure is large by recent standards: estimated at NZ$15 billion or about 7.5 per cent of GDP.

In comparison, Chile's 2010 earthquake rebuilding cost was about 6.5 per cent of GDP and Kobe's 1995 quake about two per cent of GDP. No amount of fiscal prudence can remedy such bad luck in timing.

What does a government do when it runs into a financial mess? In New Zealand's case, John Key's government is looking to sell the family's jewels -- significant chunks of several state-owned power generating companies -- to raise about NZ$6 billion to help clear some debt. It is a highly unpopular move which may come to haunt him in the future.

What New Zealand needs to do better to prevent this slippery slide from a First World country into Third World position is to plug spending in some sectors. The biggest bleeder of the government coffers is social welfare expenditure which has risen to NZ$22 billion as at last year from NZ$16 billion in 2000.

There are about 320,954 people on benefits of whom 170,000 have made this a lifestyle choice for the last 10 years. Key's government is going to spend over NZ$500 million over the next few years to help break this cycle of multiple generations of a family being unemployed.

Is this additional expenditure efficient use of funds for a financially stretched government? Key has had the last three years to institute drastic reforms for social welfare. Instead, he has left the hard decisions till now, having mostly skirted around this political minefield.

Sometimes throwing more money is never the solution. In fact, International Monetary Fund researchers have found statistical models that suggest sinking more money on healthcare and education may actually reduce efficiency in those sectors. The message is simple, work your investments harder, smarter -- not waste more big money.

In case the world starts to think New Zealand is a basket case country like Greece, it is not.

It has a pantheon of enviable world-class companies doing very smart things. It has a highly competitive dairy industry. It has a good education system with its universities producing research to rival the best institutions in the world. Its healthcare for those critically ill is beyond good.

According to a World Gallup poll, New Zealand sits at sixth place in the world (equal to Australia and Canada) on an index measuring a society's "well-being". This is not to be mistaken for Bhutan-like Happiness Index.

The "well-being" measure, according to some quarters, has a close co-relation to income inequalities and how they are being addressed. In short, it implies New Zealand isn't doing too badly in terms of addressing income inequality issues.

Yet some segments of society don't feel too well. Male and youth suicide rates are high by OECD standards. Obesity is a problem among the Pacific Island and Maori population. Unemployment rate sits around six per cent, but is well below OECD's average of about eight per cent.

Key's ex-Merrill Lynch pedigree did give him financial savvy when he took over the job in 2008. But it didn't prepare him for dealing with larger-than-financial market issues of how to change entrenched bad habits of society's less privileged and the underclass.

His biggest headache, way more than the current account deficit, remains on how to get nearly 300,000 people to be productive; to coerce generations of benefit dependents to see welfare as a last resort, not a lifestyle choice.

Rescue workers looking for victims in the collapsed Pyne Gould Guinness building after an earthquake hit Christchurch on Feb 22 this year. Post-earthquake reconstruction costs have worsened New Zealand’s woes.


Writer is an Auckland-based business writer

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