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New Zealand's Long-Term Fiscal Position [June 2006]

11  Overall Results

This chapter presents projections of the overall long-term fiscal position. A range of different scenarios is presented, reflecting the fact that governments will have many choices about how they meet their policy objectives. The chapter also contains illustrations of the sensitivity of the results to some of the underlying assumptions.

The chapter focuses on the results for the core Crown (as distinct from Total Crown), because the core Crown more closely reflects government budget decisions and captures funding to areas such as health and education.[53] The projections assume that the current institutional form is maintained over the projection period. The drivers of the state-owned enterprises and Crown entities components are detailed in Chapter 10. In the main, these are projected to evolve in a manner that would see figures for the Total Crown mimic developments in the core Crown.

The starting point for these projections is the New Zealand Government’s current strong fiscal position. Debt is low, assets are being built up to provide a buffer against future events and tax and spending rates have been stable and predictable.

Figure 11.1: Core Crown spending: changes between 2005 and 2050.

Source: The Treasury

Two different approaches

Two approaches are used to project the future fiscal position, as outlined in Chapter 3: bottom-up and top-down. The demographic and economic assumptions underpinning these projections are described in Chapter 4, while the details of the spending and revenue assumptions are laid out in Chapters 5 to 10. Both approaches include projections of contributions to, and withdrawals from, the New Zealand Superannuation Fund, as set out in the 2006 Budget Economic and Fiscal Update.

The bottom-up projections

These use the base-case projections of spending discussed in previous chapters. Spending on health and New Zealand Superannuation more than doubles as a share of GDP, while the shares going to education, social welfare benefits and other spending fall (Figure 11.1).

The aggregate primary spending for the core Crown (spending excluding finance costs) is projected to rise by around 7 percentage points of GDP to 37% in 2050. For the next 15 years, spending is relatively flat before rising steadily as demographic change really begins to impact.

Combined with the projection of core Crown revenue outlined in Chapter 5 (incorporating a broadly constant tax-to-GDP ratio), the core Crown primary operating balance[54] is expected to move eventually from surplus to deficit (Figure 11.2). This is projected to take place in the late 2030s.

Figure 11.2: Core Crown primary spending, revenue and primary operating balance.

Source: The Treasury

Under this set of assumptions, government gross sovereign-issued debt will begin to rise and eventually lead to higher finance costs. The rise in finance costs will reinforce the upward pressure on spending coming from higher primary spending and accentuate the impact on the overall operating balance and the move from surplus to deficit (this occurs earlier than in Figure 11.2 because of debt-servicing costs).

Figure 11.3: The core Crown operating balance moves from surplus to deficit in the early 2030s.

Source: The Treasury

After remaining at around 20% of GDP until 2020, gross debt under these assumptions is projected to rise to about 30% over the following decade and approach 100% of GDP by 2050. This compares with a previous peak in gross debt to GDP of 75% in 1987.

Figure 11.4: Gross and net debt in a long-run perspective.

Source: The Treasury

The projected rise in New Zealand Superannuation Fund assets would provide a significant offset to the rise in gross debt, so that the net debt position of the government at the end of the projection period would be just above the level it was at in the early 1990s, despite gross debt being higher. The debt position and, more particularly, its upward trajectory, however, are not consistent with the principles of responsible fiscal management. Moreover, without some policy change, the debt position would continue to deteriorate beyond 2050.

Such outcomes are unlikely. Governments will act to adjust spending or taxes, or both, in order to stop debt-to-GDP moving onto an ever-increasing path, in part because of the responsible fiscal management aspects of the Public Finance Act discussed in Chapter 3. This is why the top-down approach discussed in the next section represents an important addition to the ways of looking at the future fiscal position.

Notes

  • [53]The core Crown part of the state sector covers government departments, the Reserve Bank and the New Zealand Superannuation Fund. Total Crown includes the core Crown but also includes Crown entities (such as councils, commissions, boards, Television New Zealand and tertiary institutions) and state-owned enterprises (for example, Mighty River Power, Meridian Energy, Genesis Power, Transpower New Zealand Limited and New Zealand Post Limited).
  • [54]The primary operating balance is defined here as revenue less spending excluding finance costs for the core Crown.
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