![New Zealand's Long-Term Fiscal Position [June 2006]](/mastheads/government/longterm/longterm06.gif){kind=small}
Key drivers and assumptions
The key assumption underlying the projections is the regime for indexing social welfare benefits.
Under current law, benefits are adjusted annually in accordance with movement in the CPI. This has been the policy since the early 1990s. As Figure 9.2 shows, the clear trend in New Zealand since the early 1970s has been for the level of benefits to be maintained in real terms (ie, price indexed) apart from the discrete changes in the late 1970s and 1991. Since 1991, benefits have been CPI-indexed and thus have retained their real level.
Source: The Treasury
During this period, however, real wages have steadily increased. This means that benefits have been steadily falling as a percentage of wages.
Put another way, price indexation maintains the real purchasing power of beneficiaries, meaning that they can continue to buy the same bundle of goods and services in the face of changing prices. What it does not allow them to do is expand their consumption through time, as is the case with workers, whose wages grow.
It is, therefore, a strong assumption to continue to index benefits only for prices, especially over as long a period as covered by this Statement, even though there is support in history for this idea.
Alternative indexation regimes
Presented below are the fiscal effects of some alternative indexation regimes.
The first is to use the regime that applies to New Zealand Superannuation, which is CPI indexation, but within a wage-related floor and ceiling. The projections assume that benefits are increased at the same rates as wages are assumed to grow, namely 1.5% per year more than the rate of inflation.
Figure 9.3 shows that this alternative would have a substantial fiscal effect: rather than falling steadily as a proportion of GDP, spending remains largely constant.
A “middle course” assumption is to increase benefits by more than the CPI, but not as much as wages. The alternative modelled here is “CPI + 1%”, where benefits are increased by one percentage point more than CPI growth.
Source: The Treasury
