Treasury on long-term fiscal challenges

December 12th, 2012 at 7:00 am by David Farrar

Girol Karacaoglu’s, Chief Economist to The , speech at the Affording Our Future Conference is a good and useful read.

So, assuming that the Crown’s tax revenue is kept as a stable ratio to GDP from 2020, and assuming existing legislative entitlements are kept unchanged, what this indicates is that the Crown would run growing budget deficits (negative operating balances) from 2030, increasingly driven by rising debt-financing costs (to pay the interest on the growing Crown debt levels that all these figures imply).

We know in reality that the above will never happen. Crown debt levels won’t be permitted to rise to above 100% or 200% of GDP.

Unless like the Greens you think you can just print money.

But it is interesting that it is around 2030, that things start to get tight.

As you can see, healthcare costs and retirement income policy are two significant drivers of the fiscal gap through the projection period. As indicated, two implications of Treasury’s projections are:

  • Publicly-financed health costs could rise from around 7% of national income or GDP in 2012, to around 11% by 2060;
  • Gross NZ Superannuation costs could rise from over 4% to 8% of GDP.

Another 8% of GDP would mean huge increases in taxation.

What do the numbers mean?

They mean there is no cause for panic.

They mean there is no crisis.

They mean that we have challenges ahead and they are manageable.

Future governments will manage them, just as governments have successfully managed the challenges of the last 20 years.

Treasury’s advice is that the most important and appropriate responses in the first instance is to have a strong and credible fiscal strategy for the short and medium-term.

Returning the Crown’s accounts to surplus and, reducing the Crown’s net debt levels down to a low level as a ratio to GDP over the next decade, is the prudent and sensible approach to protect the interests of New Zealanders now and in the future. The current Government is doing this.

From the mid to late 2020s, there will be many potential options that will be available to address the challenge. And these will be discussed over the next day and a half.

I agree we must get net debt down and that has to be the focus for the next decade. Just getting back into surplus by 2015 is only the beginning.

In terms of policy changes for the long-term challenges, I’d rather these started before the mid 2020s, as the longer lead in time we can give people, the more that can be done.

 

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12 Responses to “Treasury on long-term fiscal challenges”

  1. Nigel Kearney (1,013 comments) says:

    The focus on debt is just wrong. Many families are doing fine with debt equal to 200-300% of their income. The focus should be on spending.

    If the government is spending carefully and investing wisely, either earning returns or building capacity to generate future returns, there is really no limit to how much this can be funded by borrowing. If the government continues to spend wastefully, then even complete elimination of debt will not be sufficient to make NZ a good place to live.

    In any case, the real problem is not figuring out what needs to be done, but finding a way that a government can do it and stay elected when their opponents are promising to do the opposite. Assuming there exists a possible government that even wants to, unlike the present one.

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  2. AG (1,827 comments) says:

    So, remind me again … what is the value of Treasury reports as evidence for a particular policy prescription? And, if they are good evidence for a policy you like, then why don’t we accept OECD reports that show universal child welfare payments are the best way to reduce child poverty? (http://www.kiwiblog.co.nz/2012/12/they_want_welfare_for_millionaires.html#comment-1059666)

    [DPF: You're getting tiresome. I have never claimed we should do everything Treasury says. Or everything the OECD says. Both bodies have views which I sometimes agree with. But in the area of economics, there are very few areas in which all economists agree. Free trade being good is one of the few]

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  3. rouppe (971 comments) says:

    1) Increase the 30% rate to 31%
    2) Increase the 33% rate to 35 or 36%
    3) Eliminate WFF for any family earning over $50,000 or $60,000
    4) Put CPI interest rate on all student loans
    5) Quit Kyoto (done) and the ETS
    6) Put all the money and energy from 5) into clean water and water supply/management
    7) Make Kiwisaver compulsory
    8) Review in 2015

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  4. tvb (4,424 comments) says:

    I would like to know what assumptions have been made in real terms the size of GDP

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  5. davidp (3,581 comments) says:

    Rouppe… You are most of the way there. Also liberalise the economy so it can grow, because a growing economy over the last 100 years has allowed us to manage a vast increase in the number of retired people and transform health care at the same time.

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  6. seanmaitland (500 comments) says:

    Rouppe – I wouldn’t touch KiwiSaver with a bargepole. I would alter what you said about it being compulsory, to saying if you don’t sign up for KiwiSaver you don’t get any superannuation or you get a reduced amount.

    I’d much rather save and plan for my own retirement than leave it to bloated fund managers.

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  7. AG (1,827 comments) says:

    “[DPF: You're getting tiresome. I have never claimed we should do everything Treasury says. Or everything the OECD says. Both bodies have views which I sometimes agree with. But in the area of economics, there are very few areas in which all economists agree. Free trade being good is one of the few]“

    Possibly true – but if you are going to have a comments section in a blog where you post upwards of 10 opinions a day, then you are going to get tiresome comments questioning whether the opinion you express on one issue is consistent with the opinion you have expressed on another. And it’s perfectly fine to simply say “I display confirmation bias, wherein when people say things that accord with my pre-existing beliefs, I tend to see what they say as good evidence for my beliefs. But when people say things that don’t accord with my pre-existing beliefs, I’ll find reasons to reject it”. We all do it, so there’s no shame involved.

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  8. hinamanu (2,352 comments) says:

    The Greens won’t need to print money. Water meters are another debt policy lumped on our heads which will lead to privatisation, already so obvious, and the road to financial slavery. But you will keep voting for privatisation govts and bemoan your visionless fates on this blog in time.

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  9. krazykiwi (9,186 comments) says:

    Publicly-financed health costs could rise from around 7% of national income or GDP in 2012, to around 11% by 2060

    OECD’s latest figures disagree:

    New Zealand ranks below the OECD average in terms of health spending per capita, with spending of 3022 USD in 2010 (adjusted for purchasing power parity), compared with an OECD average of 3268 USD.
    :::
    Between 2000 and 2009, total health spending in New Zealand increased in real terms by 5.8% per year on average, a faster rate than the OECD average of 4.7%. The growth rate slowed to 3.4% in 2010, but this was much more than the OECD average of zero growth.

    It’s that growth in spending that’s the worry. NZ has, on average over the last 30 years, increased spending on healthcare at ~2% more than YoY GDP growth. With a highly socialised healthcare system that means there is a crisis, and we’re not managing it. I believe that healthcare levies related to lifestyle-related factors are inevitable in the next 10-20 years.

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  10. SPC (5,619 comments) says:

    Kiwi Saver is not the solution to the cost of a future 7 to 11% rise in health spending or a 4 to 8% increase in tax paid super cost.

    In fact the compulsory payment required is 4% from each employee and 4% from each employer into the Cullen Fund. Then this Fund can better meet some of the cost of future tax paid super. Clearly we are not going to have the budget surpluses required to grow this fund and this alternative has to be applied.

    The other option is a similar health fund – a charge to assist in the funding of health costs – say 1% from the worker and 1% from the employer.

    In the immediate future we need to do

    1. make universal super to those over 70 only.
    2. pay it under 70 to only those who have retired – thus a retirement pension between 65 and 70. Define retired as earning less than the median wage from employment.
    3. signal an increase in age from 65 to 70 (from 2022 to 2042). This gets us to age 67 by 2030.
    4. pay income support benefits to the unemployed at the rate of super between age 65 and 70, so there is no hardship for those who cannot find work at this age.

    A back up option is paying tax paid super at two rates. The assessment of the two rates being begun now and then applied when this was felt necessary.

    Universal at the current level plus the CPI.
    A means tested rate at the current level.

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  11. berend (1,709 comments) says:

    DPF: Returning the Crown’s accounts to surplus and, reducing the Crown’s net debt levels down to a low level as a ratio to GDP over the next decade, is the prudent and sensible approach to protect the interests of New Zealanders now and in the future. The current Government is doing this.

    What fantasy land are we living in? John Key has been racking up the debt, playing the Keynesian, and clearly are nowhere near a balanced budget and paying down debt.

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  12. Manolo (13,780 comments) says:

    English and Labour lite’s timidity have not made the situation any easier. I mean their lack of desire to cut spending and stop paying for things NZ cannot afford.

    At the rate NZ is borrowing money, we have little chance to get the house in order. Now, consider 2014 and the possibility of the loony Left gaining power. Arrgghhh..

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