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2014 Investment Statement

Looking to the future - preparing for demographic change

In its 2013 LTFS, the Treasury projected the scale of the Crown's long-term fiscal challenges arising from major changes in population size and structure.[9] In particular, it highlighted the growing pressures on future health sector and superannuation expenditure from a changing population and income increases.

Current policy settings to partially prefund this future increase in New Zealand superannuation through the New Zealand Superannuation Fund (NZSF) will result in a larger Crown balance sheet, which makes the quality of its management even more important. In particular, the Treasury projects that Crown financial assets will continue to grow and form a greater proportion of the Crown balance sheet in the decades ahead. These financial assets are projected to constitute well over $600 billion, or 45% of GDP, in 2057/58 (see Figure 2.3). This will have major implications for the Crown balance sheet as well as for the wider economy.

Figure 2.3 - Projected financial assets
Figure 2.3 - Projected financial assets   .
Source:  The Treasury

Beyond accumulating financial assets, the LTFS highlights the need for continued prudent fiscal management so future governments are in a better position to manage these cost pressures. A well managed balance sheet can help reduce these fiscal pressures through providing services at a lower cost. As the LTFS shows, small changes now can have large effects in the future. Managing the balance sheet well now can have a material effect on future welfare. See Figure 2.4 for net government debt projections under three different fiscal strategy scenarios.

Figure 2.4 - "What if" paths for net government debt
Figure 2.4 -
Source:  The Treasury

Area of focus

  • Governments should consider the use of specific performance targets in meeting the requirements under the Public Finance Act to outline a strategy for managing the Crown's capital and balance sheet.

Notes

  • [9]http://www.treasury.govt.nz/government/longterm/fiscalposition/2013
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