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Reinventing New Zealand's welfare state

3 Apr 2007


Government in New Zealand keeps expanding. The main driver has been the inexorable increase in spending on the welfare state.

New Zealanders are much richer than when the welfare state was founded. People’s incomes should therefore be sufficient for them to buy many of the services earlier generations could not afford. This means reliance on government assistance should be declining, but it is escalating.

The main explanation why welfare state expenditure is still growing is tax-welfare ‘churning’. Many people pay high taxes only to get much or all of their money back in the form of government payments and services. At least half of all welfare state expenditure in New Zealand is churned in this way.

There are good economic reasons for reducing tax-welfare churning—it is inefficient, it creates work disincentives and it will generate unsustainable levels of government spending in the future. But the strongest reasons are sociological—it disempowers people, undermines social cohesion and politicises civil society.

Reducing tax-welfare churning while still ensuring that everyone is guaranteed a decent, basic level of provision requires three major policy changes:
• Reform of income tax so nobody pays tax until they have earned enough to cover their own basic subsistence needs. This can be done by introducing a tax-free earnings threshold equivalent to the welfare minimum income—about $11,500 for a single person and $19,000 for couples opting for joint taxation.
• All workers should make tax-deductible annual contributions into special personal savings accounts so they do not have to rely on government assistance when their employment is temporarily interrupted by unemployment or sickness. To start them off, the government should denationalise its Superannuation Fund and redistribute the money into these personal accounts, giving every New Zealander an initial $3,000 deposit.
• All those whose tax is currently being churned back to them in welfare state benefits and services should be given the right to opt out of the government health and/or superannuation systems in return for tax reductions, which would be paid directly into their personal savings accounts. They would then be required to build up savings for their retirement and to buy a catastrophic health insurance policy to complement their routine medical purchases.

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