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Part C - options

8 Combined scenarios

In the following combined scenarios we look at the impact that various policy changes could make to the long-term fiscal outlook. There are numerous policies or options that could be looked at, and different ways of measuring the effects of change. For simplicity, the three options we look at are all measured in terms of changes to the sustainable debt scenario, which is referred to below as the base case. At one level, this assumes that governments will continue to follow the principles of responsible fiscal management contained in the Public Finance Act (1989), meaning that they will act to ensure that debt remains manageable. At another, it is useful as this scenario highlights that there are significant discussions to be had and choices to be made about what sorts of things, and how much, the government provides.

As with the other scenarios in this document, these are illustrative examples of changes that could be made, not policy proposals.

The public sector productivity scenario

This scenario projects how the basket of services to the average New Zealander could be increased by broad-level changes to government policies and the way services are delivered through the public sector. It shows the effect of spending an average $2.3 billion (3.1% of core Crown expenses, excluding debt financing costs) less per year than in the base case over the next decade by stopping less effective programmes, and doubling productivity growth across the public sector from the base case assumption of 0.3% a year to 0.6%.

As discussed in section 6, higher public sector productivity growth - if it can be achieved - has a marked impact on the level of publicly-funded goods and services that can be provided for a given level of spending. In addition, while the lower government spending over the next decade means a lower level of services initially, it results in lower debt and hence reduces debt servicing costs - resulting in even larger gains over the medium term. Overall, the basket of goods and services is 17% higher than its 2013 level by 2050, compared to just 2% in the base case.

Figure 8.1 - What individuals receive from the Government - inflation-adjusted
Figure 8.1 - What individuals receive from the Government - inflation-adjusted.
Source: The Treasury

Achieving the doubling in public sector productivity growth projected in this scenario would be a significant challenge. It would require sustained effort by government to rigorously test the quality of its expenditure. It would also require system improvements, so that institutions making spending decisions on delivering services are incentivised to ensure resources are used efficiently.

The demographic scenario

This scenario projects what would happen if the cost of the demographic changes was redistributed between the two areas most affected by population ageing - health and superannuation. In the base case we model that superannuation policy continues as at present and maintaining stable debt is achieved by allowing tax to increase through fiscal drag over the next 14 years, and by reducing the amount of other public services delivered to New Zealanders.

In this demographic scenario, we project what would happen if one aspect of that basket, health services, was to receive extra spending through an adjustment to the age of eligibility (increased to 67 by 2023 and then indexed to longevity) for NZS as well as indexing the entitlement to 1% above inflation (CPI + 1%), instead of the average wage. This still slightly increases the purchasing power of NZS each year.

Figure 8.2 - Health spending
Figure 8.2 - Health spending.
Sources:  The Treasury

As a result of these policy changes, the cost of NZS is 2.3% of GDP lower by 2050 than in the base case. As Figure 8.2 shows, transferring the savings from NZS to health means that the level of health spending would be significantly higher than the base case, and almost as high as it is in the historic trends scenario. This does not mean that the historic trends scenario is a target level of health spending, but shows the effect of this type of policy change. Although this change represents NZS recipients receiving a lower overall entitlement at a slightly later age, these same recipients also benefit from a relatively higher level of health services because health spending per person tends to be higher among older age groups.

The rebalancing scenario

Aside from the partial pre-funding provided by the NZS Fund, NZS is largely a pay-as-you-go system, whereby NZS costs at any point in time are funded from taxes at that time. As shown in the tax section, using just taxes to fund the increased government spending associated with population ageing would require a significant increase in taxes, and would be likely to have significant negative consequences for growth, which would mean reduced incomes for people and less revenue for government spending.

This rebalancing scenario considers a policy mix of increased taxes and reduced NZS and benefit costs to try to meet the fiscal challenges - as an alternative to the base case, where spending on public services is constrained so that debt remains at sustainable levels. It models a situation where people pay slightly more tax overall, and assumes a long-run tax-to-GDP ratio of 31% instead of the 30% projected in the base case. It assumes that the eligibility age for NZS is lifted to 67 progressively from 2017 to 2023 and then linked to longevity thereafter. It also assumes a reduction in the generosity of WFF and tightens the eligibility criteria for sickness and invalid benefits. In particular, we cease the inflation indexation of Family Tax Credit rates and the WFF abatement threshold, as well as reducing total sickness and invalid beneficiary numbers to 100,000 by 2013, down from nearly 140,000 currently.

Figure 8.3 - What individuals receive from the Government - inflation-adjusted
Figure 8.3 - What individuals receive from the Government - inflation-adjusted.
Sources:  The Treasury

The lower NZS and benefit costs and the higher tax revenue provide more money to be spent on other goods and services. Roughly half the fiscal improvement is from the NZS and benefit changes and half from increased taxes. The result is that the basket of services is projected to be 23% above 2013 levels by 2050. However, while the increase in tax in this scenario is smaller than in the scenario discussed in the tax section, it is still likely to result in lower GDP than in the base case.

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