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Part A - the issues

2 Key issues

  • The long-term fiscal outlook has deteriorated significantly since 2006. In 2006, when the first Long-term Fiscal Statement was produced, net public debt was projected to reach just above 100% of GDP in 2050. Now, if government spending returns to historic patterns, it is likely to reach more than 220% of GDP midway through the century.
  • The major change between 2006 and 2009 has been that the government's budget is already in deficit (by $5.9 billion in the Crown Financial Statements). In 2006, it was projected to remain in surplus for roughly another 25 years.
Figure 2.1 - Net debt[1]
Figure 2.1 - Net debt.
Source: The Treasury
  • Around half of the difference between the 2006 and 2009 projection is due to the lower revenue and increased expenses associated with the 2008/09 recession and the downward revision to economic growth and revenues over the next few years. The remainder is due to increased costs in existing programmes and changes to government policy over the past three years.
  • New Zealand's nominal (including inflation) economic growth averaged 5.2% a year over the past 15 years. Spending increased 6.3% a year in that period. Health spending increased 7.6% a year, justice 7.0% and education 7.2%.
  • Dealing with budget imbalances means spending less, taxing more or borrowing. Government deficits require borrowing and increased debt to finance them – debt builds debt. The long-term fiscal problem is "solved" if governments have budget surpluses over time.
  • The government is currently issuing around $250 million a week in debt.
  • Tax and debt can be used to manage fiscal challenges, but both can increase long-term fiscal pressures:
    • Debt transfers costs to future taxpayers, adds interest costs and means the country is less well placed to deal with shocks.
    • Higher taxes can limit growth – meaning a smaller economy and lower revenue.
  • Achieving higher economic growth means a larger economy and higher national incomes, but on its own growth will not solve fiscal problems because of the linkages between growth and spending.
  • Demographic change adds to the long-term fiscal pressures. We are facing a permanent change from a younger to older population as people live longer and have smaller families. The baby boomers do not cause this trend, but they do accelerate it.
  • By 2050, the total population is projected to have grown by around 25%, while the number of people aged over 65 is projected to have increased by around 150%. By mid-century, the number of people 85 and older will have grown by about 400% – to 330,000 from 67,000 now. These changes will accelerate over the next few years.
Figure 2.2 - People aged 65 years and over
Figure 2.2 - People aged 65 years and over.
Sources: Statistics New Zealand, Series 5 projection
  • There has been a major change in life expectancy at birth over recent decades. Over the past 55 years it has increased by about two years every decade. Although this rate is projected to slow, a person turning 65 in 2050 would still expect to live an additional 24 years, 4.4 years more on average than a 65-year-old in 2008.
  • Population ageing is important fiscally because 25% of government spending is currently spent on the 12% of the population aged over 65.
  • The first baby boomers will receive New Zealand Superannuation (NZS) from 2011 and the numbers of new superannuitants will peak in the late 2020s.
  • Population ageing is likely to cause a slowdown in economic growth because of the shift to a relatively smaller working-age population.

Notes

  • [1]All years in this document refer to the year ended 30 June and fiscal data are from a core Crown perspective unless stated otherwise.
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