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Cullen investment fund runs against global trends

By David van Schaardenburg

Friday 7th April 2000

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The message is clear - "it's back to the 1970s."

The country's new socialist coalition has discovered what the rest of the world never found - central governments do know how to allocate capital rationally and efficiently.

Unfortunately for New Zealand, this "back to the future" experiment flies in the face of global practice trends and economic orthodoxy.

As a member of the private savings industry, I am appalled with the direction of two legislative projects.

The first is the initial, yet likely, design of the "national investment fund" (NIF). The second is the contrast between words and actions concerning the encouragement of private savings via superannuation funds.

Like the rest of the developed world, New Zealand is facing a demographic time bomb. Increasingly, more pensioners will be supported by fewer taxpaying workers.

However, unlike many western world nations, New Zealand's political leadership to date has yet to seriously confront and develop solutions for this major future taxpayer liability.

It is pleasing Finance Minister Michael Cullen is focusing on this issue but it is less enamouring, in fact frightening, to see the option being offered.

The NIF is being funded from government revenues, which means it is paid by taxes that would not otherwise be required. As you would expect in a socialist paradise, people pay excess elements of personal compensation in proportion to varying incomes and get back uncertain, though supposedly equal, outcomes.

The uncertainty outcome in this instance derives from the unknown level of actual future benefit as well as vagary of the NIF's quality of investing. Past experience has not indicated politicians and government bureaucrats are successful investors.

Already talk abounds of having a fixed allocation to or the favouring of New Zealand-based investments.

This brings into question the prime objectives of the NIF - is it to provide capital to develop New Zealand's economic capability (Think Big, DFC, etc) or to maximise the return to the taxpayer for the purpose of minimising the extent of the contingent liability to fund future state retirement benefits? In the hands of politicians, who knows?

The list of questions relating to the NIF is long but more concerning is such a scheme should be proposed when the rest of the developed world is moving toward significantly different long-term savings options. In addition, centralised investment fund concepts have been shown to have numerous flaws. Is it arrogance or stupidity?

Despite seeking to crowd out private savings via higher income taxes and the pending creation of the NIF, Dr Cullen has ironically stated a desire to stimulate private savings via employer-sponsored superannuation funds.

The problem is one of his other hats, minister of revenue, appears to have precedence with almost daily indications of how new regulations and taxes will be applied to ensure revenue targets are achieved. Naturally new taxes and regulations specifically applied to pooled savings will ensure people do not save or save in alternate ways, some of which may be less efficient than superannuation funds.

The reasonable question to ask is: when will the politicians grasp not just the need to stimulate savings but to do so in a form that is politically sustainable and individually equitable?

Don't hold your breath for a high-quality resolution in our socialist's paradise.

David van Schaardenburg is general manager of IPAC, the investment strategy and funds management research company

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