Treasury on long-term fiscal challenges

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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