Douglas’s Orewa speech

Note: this post originally appeared on ‘Douglas to Dancing’, a blog I maintained from 2007-9 on the ACT New Zealand political party. The blog was an extension of the thesis I wrote about the Act Party in 2007, From Douglas to Dancing: explaining the lack of success of ACT New Zealand and evaluating its future prospects (PDF).

Having been selected by Don Brash as the “greatest living New Zealander”, Sir Roger Douglas has made his way to the former’s favoured speaker’s corner: the Orewa Rotary Club. He brought with him a “new” tax plan – essentially yet another reworking of the ideas which have circulated since the publication of Unfinished Business in 1993. Reading the report in today’s New Zealand Herald, under the new plan, the first $30,000 of income would be “tax free” in return for paying for one’s own health insurance, retirement and welfare costs. Above the $30,000, a flat tax rate of 15% would apply. But the new catch is that this proposal would be optional – people would be free to stay with the default system of public provision.

First, some comments on the plan itself. Well, dropping the “compulsory” nature of the plan may look fair enough at first glance, but it makes little sense overall. As Brian Fallow – a commentator far better placed to analyse these issues than myself – notes, a flight by the rich to the new individual system would create a sizeable fiscal hole to the government’s spending, because only 10% of taxpayers contribute 50% of tax revenue. Moreover, it was always my understanding that a compulsory, uniform insurance model was necessary to keep premium costs to a reasonable level. Insurance works on the basis of risk – as long as everyone, including the healthy types, is insured, the premiums from healthy people balance out the costs generated by the chronically ill.

A compulsory system is certainly how the German system operates – a model which in other respects has always been very similar to what Douglas has proposed. All residents in Germany are required to purchase health and unemployment insurance, pay into a pension fund AND pay taxes on top of this. Although the quality of care is very high (waiting lists do not exist as the nature of insurance means you have a right to care when necessary) this doesn’t mean what you pay is much lower overall. This is despite a tax-free allowance of 7,664 Euros (about $20,000 NZD) per person. However you calculate it, health care in particular costs a lot of money.

Still, a compulsory insurance-based system such as Germany operates has definite merit over both public-provision systems (such as New Zealand and the United Kingdom) and mixed systems (such as the United States, where insurance is also not compulsory, leading to relatively high premiums). It is more transparent, you have a choice of health insurers (i.e. competition) and a compulsory pension scheme leads to a high level of national savings, the lack of which is a perennial New Zealand problem.

The problem with Douglas’s ideas is that it is really a half-hearted solution. If implemented, I wouldn’t expect either the public provision system (caring mostly for the less well-off) or the insurance-based model to work particularly well. Neither would have the numbers to bring costs down via economies of scale. Why not stick with the compulsory model? A radical idea does not become less radical by chipping at the edges.

But whatever the merits of Douglas’s proposed scheme, I’m not sure whether this is the issue in 2009. For me, the real story is that Douglas, an ACT MP, is strolling around giving Opposition-style speeches to the Orewa Rotary Club. Hello?! ACT is in GOVERNMENT! While Opposiiton politicans do not have access to the corridors of power and can be expected to give speeches setting out what they “would do”, ACT is not in this position anymore. Why doesn’t Douglas just tell Rodney Hide about his ideas? As a minister, I’m sure Hide would be only too happy to take these to Prime Minister Key. If they are any good, they’ll end up on an order paper.

Of course, Douglas’s plans would never be seriously considered by National. A reinvention of the tax system is not about to be undertaken by a party of the status quo, especially not at the behest of a 4% co-operation (not even coalition) partner. A reminder: this is what is written in the National-ACT co-operation agreement:

National and ACT note that United Future favours reducing and aligning personal, trust and company taxes at a maximum rate of 30%. They agree that such a tax structure is a desirable medium-term goal.

If this is the medium-term goal, perhaps National would be happy to consider Douglas’s ideas as a long-term goal – as in Never-never land. Frankly, Douglas is wasting his breath giving speeches like this in 2009. We know his philosophy and what he would implement if ACT won 50% of the vote. ACT does not have and will never have this opportunity. But now his party finally has a voice in government, Douglas could turn himself to “small-picture”, achievable goals. There are plenty of reforms which National might contemplate. An optional insurance system with a flat tax is not one of them.

Are there tactical reasons for giving such a speech? It has been suggested to me that it is part of an attempt by ACT to retain its individual identity – previously a difficulty for small parties which have helped to form the government since MMP was introduced in New Zealand. I’m doubtful of this for three reasons – 1) the election is three years away and there is plenty of time for raising the party profile once some policy wins have been recorded, 2) it has been proven that Douglas’s ideas have never really driven broader support for ACT anyway and 3) I simply don’t believe Douglas thinks in this tactical fashion.

Indeed, recall that ACT was given its best dose of oxygen in a good while when National openly announced its intention to form a government with the smaller party in the last month of the election campaign in the spring. In this regard, a deepening of co-operation might not be helped by criticism by Douglas of National’s “lack of vision” – also in his Orewa speech.

Perhaps. The other reading could be that Douglas is now irrelevant. He is free to spout off about what he likes, but without a ministerial warrant he has little real clout and National is free to ignore him. Instead, the Tories work with Hide and his more workable proposals.

And perhaps this sums up Douglas’s role as an MP – some noise now and then to generate media coverage, some idealistic proposals – but little real impact on the legislative process.