The Post: Labour needs to be prepared to say the n-word

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If I asked you to think of a lightbulb, what would you picture? Probably an old-style incandescent number – a twisted wire in a thin glass orb – even though most newspaper readers have, I suspect, long since switched to LEDs. The latter are highly efficient, whereas incandescent bulbs are a study in waste: a lot of energy for not much light – but plenty of excess heat.

Thursday’s Budget recognised this truth in one limited way: its extension of the Warmer Kiwi Homes programme to include subsidies for LEDs, as well as home insulation. But it missed a far deeper point about waste.

Ever since the pro-market revolution of the 1980s, New Zealand politicians have become warier of the state delivering services itself, which is supposed to be terribly inefficient, and have often sought to subsidise the private sector to do the job instead. Because, in theory, firms will compete to offer top value, this will be a wonderful use of public money. And sometimes it is.

More often, though, it is terribly wasteful, in part because markets never work as well in practice as they do in theory, and it is hard to ensure a firm’s profit motive actually lines up with the public interest. So state funds get poured into semi-privatised services, for meagre returns: lots of heat, little light.

KiwiSaver is one classic case. When Michael Cullen was setting it up in 2007, some experts argued it should be run by a government investment agency. But Labour wanted to support local financial services firms, and gave them the job instead.

The result, as shown by research by my father Geoff Rashbrooke, a former government actuary, is colossal waste. There are of course some good KiwiSaver providers. But overall their investment managers get returns 2-4 percentage points lower than do the bureaucrats managing the New Zealand Superannuation Fund and the ACC Fund. (This is true even after accounting for the different kinds of assets they manage.)

A typical 25-year-old KiwiSaver member will likely hit 65 with about half – yes, that’s right, half – the savings they’d have if the public sector had managed their investment. And the administrative costs of the Super Fund and ACC, as a percentage of the funds invested, are less than half those of KiwiSaver managers.

As Rashbrooke senior concluded: “Well-governed public sector entities, with a focus on service rather than their owners’ bottom lines, are quite capable of doing a better job for us than the private sector.”

All this suggests we should be thinking about the politically toxic n-word. No, not that one. I mean nationalisation – the taking back of public services into the public sector.

No government, of course, is going to nationalise KiwiSaver providers wholesale, and nor should it. But a sensible government would consider part-nationalisation. It would, for instance, recognise that a lot of KiwiSaver members are in a default scheme, doing nothing intelligent with their savings while incurring large administration fees from their private providers.

Instead, everyone could be placed initially in a no-frills, low-fees government-run scheme that invests like the Super Fund. That way the disengaged aren’t ripped off, but everyone has the choice of switching to a snazzier, more sophisticated private scheme if they so desire.

Where else would a little light nationalisation be useful? Housing is an obvious contender. Between the accommodation supplement and emergency housing grants, the Government will soon be spending $2.5 billion a year subsidising people in private homes.

While it is untrue to claim that any accommodation supplement increase just goes straight into your landlord’s back pocket, clearly a decent amount is captured this way. And for what? Damp, cold, unhealthy, actively dangerous homes, in too many cases. It would be far more efficient – not to mention humane – to build more social housing, as we did pre-1990. (The current stock also needs to be upgraded, as this Government is now doing.)

Early childhood education (ECE) – the recipient of a massive Budget boost – is another sector ripe for incremental change. Some centres are small NGOs or private outfits delivering good services and making minimal profits. But other centres, like the Best Start empire owned by the rich-lister Wright family, have been structured so that $200m a year of state funding goes into a foundation that doesn’t even pay tax.

Again, an incremental return to public provision would make sense: the Government should at least open state-run ECE centres in the desperately under-serviced, low-decile areas where no-one else will set up shop.

Beyond that, who knows? Each sector will need a slightly different approach. But we’ll only find the right answers if we’re willing to ask the right question. Which is this: how much, in the interests of spending public money wisely, should we be taking back into state control?