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Challenges and Choices: New Zealand's Long-Term Fiscal Statement

7 Specific policy areas

The previous sections outlined the aggregate long-term fiscal issues. This section looks into the main spending areas in more detail.


  • The government spent $12.4 billion on health in 2009 – around 20% of core Crown expenditure or 6.9% of GDP.
  • Since 1994, spending on health care has grown at an average of 7.6% a year, in nominal terms.
  • Around half of public health spending is on public hospitals. The remainder goes to a range of services, including primary care, pharmaceutical prescriptions, residential care, disability support, mental health and public health services – many of which are provided by a range of privately-owned providers.
  • Since the early 1990s, 80% of all health spending has been publicly funded. Private spending such as patient copayments for GP visits, prescriptions or insurance, accounts for the remainder.[12]

Over the past 60 years, publicly-funded spending on health care has more than doubled as a share of GDP, rising from around 3% in 1950 to 6.9% in 2009. In dollars per person, the amount spent by the government has risen from $550 per person in 1950 to $2,870 per person in 2009 (2009 dollars). Figure 7.1 shows how health spending per person has grown faster than GDP per person over this period - particularly since the mid-1990s.

Figure 7.1 - Health spending and GDP per person - inflation-adjusted
Figure 7.1 - Health spending and GDP per person - inflation-adjusted.
Sources: Statistics New Zealand, The Treasury

Figure 7.2 shows that, although total spending on health care (public and private) has been growing faster than GDP in the majority of OECD countries (ie, above the solid diagonal line), New Zealand is one of a minority of countries where total health spending has been growing at more than twice the rate of GDP (ie, above the steeper dashed line). However, New Zealand spends less per person on health care than many OECD countries in absolute terms, reflecting our relatively low national income per person.

Figure 7.2 - Health spending (public and private) and GDP - inflation-adjusted 1997 to 2007
Figure 7.2 - Health spending (public and private) and GDP - inflation-adjusted 1997 to 2007.
Source: OECD

The variation in the level and the rate of growth of health spending, both through time and across countries, suggests both are partly the result of choices about what is delivered through health systems, and how it is delivered.

Drivers of health spending

Population ageing affects health spending as older people tend to need more health care, but the effects of population ageing on health spending have been relatively modest in recent decades - accounting for no more than 10 to 15% of the real increase in spending per person since 1970.[13][14] Although this ageing effect will become progressively more important through the 2020s and 2030s, it is not projected to become the dominant driver of spending growth. The main drivers of health spending have been and will continue to be income growth and technological change – both of which affect the demand for, and the cost of supplying, health care.

Economy-wide productivity growth drives the long-run cost of labour, which is the major input in health care services. Since productivity gains tend to be relatively low in labour-intensive service industries, such as health, the real cost of delivering health care rises. Higher incomes also tend to be accompanied by higher public expectations of the range and quality of health services.

Public expectations of the health system increase as technology progressively extends the range of possible treatment options. For example, treatments for heart disease have evolved from bed rest and aspirin in the 1950s, to a range of treatments that include coronary bypass surgery and angioplasty now. New treatments provide real benefits to patients but tend to involve new spending with relatively high unit costs. Although technological innovation can lead to a decline in the cost of a service, overall spending can rise if the use of the service increases.[15]

In recent years, government policy choices to expand services and increase existing entitlements have been a major driver of the growth in health spending. For example, discretionary policy initiatives between 2002 and 2008 accounted for at least half of the increase in health spending - in addition to increases to manage price and volume pressures - and increased the overall cost of labour.[16]

The institutional arrangements within the health system - how services are funded, and how and where they are delivered - also matter for spending growth. The government relies on agents at all levels of the health system, including District Health Boards (DHBs), Pharmac and clinicians, to allocate resources and manage cost pressures. The way these people are organised and motivated affects how efficiently resources are used, and how spending pressures are managed.

These factors suggest that much of the growth in spending lies within government control. Health systems are complex and there is no simple solution, but along with the key decision about how much new money is allocated to health each year, the Government has significant control over how the system is organised and how resources are used.

Health spending scenarios

Under the historic trends scenario, health spending would grow by 5% a year, increasing from 6.9% of GDP ($12.4 billion) in 2009 to 10.7% of GDP in 2050. This projection illustrates the need to address the strong underlying spending pressures in health care - in both the short and long term. For example, if health care spending continued to receive recent increases of at least 7% per year, it would consume over three-quarters of the total $1.1 billion allocated for new spending over the next few budgets. Clearly, the rate of spending growth observed over the past decade is unsustainable given the fiscal constraints facing the government.

Under the sustainable debt scenario outlined earlier, spending on health care grows at an average of 4.3% a year, reaching 8.1% of GDP by 2050. Figure 7.3 shows that these increases would be much lower than recent spending increases.

Figure 7.3 - Annual nominal growth in health spending - sustainable debt
Figure 7.3 - Annual nominal growth in health spending - sustainable debt.
Source: The Treasury


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