Save now - spend later. Finance Minister Michael Cullen's eighth Budget has turned an economic necessity into a political gamble, with a promise of sweeteners to workers if they save for their retirement and the hint of a carrot next year in the form of tax cuts.
But employers will have to carry some of the weight. The Government rushed legislation into Parliament last night to force businesses to contribute to workers' KiwiSaver accounts. Those contributions start at 1 per cent of each worker's wage next year, rising to 4 per cent by 2011.
The KiwiSaver pill will be sugared by a 3 per cent cut in the corporate tax rate and a Government subsidy to business of $20 for every worker who signs up to the savings scheme.
It will be matched by a $20 top-up from the Government, straight into workers' accounts, more than doubling the retirement nest eggs of those who make the minimum contribution - and doubling what they can expect to get from the state pension now.
The changes will deliver about an extra $60 a week to someone on a salary of $50,000 and about $100 a week to someone on $100,000.
But the stick is that workers will have to forgo income now to become eligible for the subsidies.
They also face local government petrol levies to fund road and rail projects in Auckland and Wellington, and pressure from the Government and employers to limit wage demands as a tradeoff.
Dr Cullen has raised the stakes even further by whipping away his 2005 "chewing gum" tax cuts - which were to be worth between 67c and $10 a week and were pencilled in for next year.
Senior Labour ministers are touting the Budget as the Government's boldest yet. But it is a huge political gamble that fixing the country's savings crisis will not spark a backlash over the Government's failure for the eighth consecutive year to deliver tax-rate cuts.
The last attempt to legislate for compulsory savings was roundly rejected by voters in 1998.
But Dr Cullen has laid the groundwork for an announcement on tax cuts before the next election. He has admitted that the long run of large government surpluses - worth an estimated $22 billion over the next four years - is unsustainable.
He said tax cuts now would only stoke an overheated domestic economy and housing market.
Meanwhile, bold action was needed to reverse New Zealand's dismal savings record. "In my view, the choice was not a difficult one. Every dollar saved today is worth more in the future. A small tax cut now would be spent and then gone."
Dr Cullen today told Radio New Zealand there did not need to be a "huge tradeoff" between wage bargaining and employers' compulsory contributions to Kiwisaver.
He said the Government expected to contribute about 2 per cent of the 4 per cent compulsory contribution employers would make to their workers' Kiwisaver schemes after four years.
A "fairly ambitious" 50 per cent take-up rate would mean an employer's "total wage and salary bill would be 1 per cent higher after four years than it otherwise would be".
So, if there was just 0.5 per cent foregoing a total wage increase over that period, that would halve again the net cost to employers, Dr Cullen said. "So we're not talking about dramatic foregoing of wage increases and I think there's some sort of hysteria around industrial confrontation that's just getting a little bit silly."
Employers would get a lot out of Kiwisaver, Dr Cullen said. "Employers get structurally lower interest rates, they get stronger capital markets in New Zealand, they get greater employee loyalty and I think they'll also get a great tendency for New Zealanders to stay in New Zealand once they're saving into Kiwisaver and locked into savings," he said.
"Even a small trade off at the margin will mean that this is a fairly small net cost to employers and out of that they get a great deal over the long term."
Dr Cullen said it was likely that few low income would opt in to Kiwisaver but when someone took on a new job, their Kiwisaver contributions would be automatically deducted.
"The question at that point is whether they can stay in that position and continue to forego that income, not having had it in the first place, given now the enormous advantages. "Because for a person on a low income their savings effectively can be trebled by means of the change in Kiwisaver."
National Party leader John Key said the Budget was a cruel hoax on business and a blow to those on the breadline. "Fifty per cent of New Zealanders will not take this up and I'll tell you who (they) are - they are the people who can't afford to, who don't earn enough," he said.
"And ... they're now being told, `Don't ask for a pay rise'. The lower-paid workers of New Zealand have to give up their pay rise so higher-paid workers can get a cut from KiwiSaver."
- With NZPA
