He believed it would be difficult for governments to keep taxing a shrinking pool of working people (as a proportion of the population) more to pay for the country’s rising health and superannuation costs.
“We know very clearly that taxing flows of income has some weaknesses because the working-age share of the population is declining and the number of old-age dependents is rising,” Yetsenga said.
“We also know many economies are more prosperous than they’ve ever been before.”
Yetsenga acknowledged this was “complicated political territory” but believed the “fiscal reality” was that there would be a gap between what the tax system funded and what people expected it to fund.
The Herald asked Yetsenga whether the New Zealand Government had missed the boat, capturing some of the wealth accumulated by Baby Boomers and those in Generation X, who invested at a time when asset prices shot up.
Would changing the tax system now not hurt younger people, funding superannuation entitlements for others they’re unlikely to receive themselves?
“It is a question I think about a lot,” Yetsenga said.
“I do think about the moral imperative of people my age and the degree to which they benefited from a fortuitous set of circumstances.
“History, of course, is not smooth. We can’t iron out all the strategic fluctuations, but I think we can be honest and say property prices are not going to increase another 400% for the next generation, and so that does put a very different lens on things … I don’t think there’s anything wrong with looking backwards and saying, with hindsight, would we have made different choices? Because if we decide that yes, we would, the best time to plant a tree was 20 years ago, but the second-best time is today.”
Yetsenga believed that as the population aged, getting the most out of each worker was also going to become increasingly important.
“The labour input to the economy is going be in much shorter supply and that’s going to make productivity much more pressing.”
Yetsenga didn’t have a silver-bullet solution to the enormous question: how do we make New Zealand more productive?
He acknowledged that a lack of productivity had seen the Reserve Bank left with little choice but to lift interest rates to suppress economic demand when it overtook supply, in order to keep inflation in check.
If the economy was more productive, supply would be able to ramp up to meet demand without this creating inflation.
Going back to the issue of fiscal sustainability, Yetsenga said the economy needed to be productive to grow, so the country had the means to support those who needed it.
“Without productivity growth, anything we want to redistribute in the economy very quickly becomes a zero-sum discussion, and we know they quickly become fractious and quite difficult.”
The Herald asked Yetsenga whether New Zealand needed to adopt more of an American approach, where companies hire and fire staff with less friction, so that human resources can more easily shift to where they’re most needed. Are we too fixated on preserving businesses or jobs that are unproductive, when that capital could be put to better use elsewhere?
Yetsenga didn’t want to pass judgment on what the right balance was and whether New Zealand was striking it.
However, he did acknowledge that the process of creating productivity could be uncomfortable and disruptive.
“Businesses releasing resources so that more productive businesses can have access to them and can grow is something which brings people uncertainty.”
Yetsenga couldn’t see any way around this.
“As economies age, I think you can see a pattern where governance tends to get a bit more conservative, where people tend to make different choices – maybe more choices about preserving, and fewer choices about growing.
“I don’t know that we can change that reality, but we can continue to point out that these choices have consequences and ultimately, it’s productivity that pays for the new and the extra. We need to keep that as a core part of the economic discussion.”
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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