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9 Conclusion

This Statement shows that aggregate spending and revenue determine whether the fiscal position is sustainable, and that various policy mixes can achieve this. At this stage, we do not know the exact mix of policies that will be required by future generations of taxpayers, nor do we know what shocks the economy will experience over the decades ahead. However, some changes are likely to be better than others for our future welfare and fiscal sustainability.

The three combined scenarios in section 8 illustrate the trade-offs implicit in living with lower spending growth than we have previously had. Without significant public sector productivity gains, lower spending growth will mean fewer services per person. Yet, continuing to increase public spending ahead of revenue produces a debt situation that is even more challenging. Similarly, raising taxes to cover the shortfall could have serious economic consequences. While lower spending in some areas may diverge from current public expectations, the alternative of higher levels of public debt would impose costs on everyone through higher debt servicing costs, taxes and interest rates. Ultimately, this spiral will restrict our future prospects and harm the living standards of generations to come.

As a society, we should be discussing the challenges and choices, and associated trade-offs, that must be faced to ensure a sustainable fiscal future. This document provides some general conclusions that can inform these discussions.

  • Make early changes. The longer adjustments are delayed, the larger those adjustments will need to be in future. A number of adjustments, starting early, would be sufficient to maintain the fiscal position. Making early incremental policy change reduces the risk of eleventh-hour decision-making, and gives people time to adjust.
  • Keep debt under control. If current policies lead to increasing debt, the resulting financing costs can quickly spiral out of control. Future generations will find it difficult to set their own spending priorities, or meet unforeseen challenges, if a large part of future revenue is required for servicing debt built up by previous generations.
  • Encourage workforce participation. Demographic shifts mean all developed countries will be competing for labour and skills. Policies that encourage people to enter work, to stay in New Zealand or to return after their overseas experience, will help grow the economy and the tax base. Particularly important will be tax settings that spur employment, and policies that encourage older people to continue paid work that suits them.
  • Focus on growth. Stronger economic growth means the country and individuals will be wealthier, resulting in a larger tax base. Decisions about fiscal settings should consider the impact on growth - this is particularly relevant for the overall level and mix of spending and tax. Many publicly-funded services contribute to economic activity in the private sector, so ensuring the right services are delivered as efficiently as possible can contribute to a more productive economy. However, while stronger growth helps, it will not solve the fiscal problem.
  • Keep spending under control and lift public sector productivity. This would involve governments pursuing an ongoing strategy that includes:
    • Reprioritising within existing spending – discontinuing poor value spending and reprioritising the existing $64 billion spending base towards relatively more cost-effective services. All policies should be open for examination, since excluding some areas reduces flexibility and means that larger changes in spending will have to come from other areas, or from higher tax and debt. Reprioritising existing spending can also reduce demand for new spending.
    • Setting a high threshold for new spending – any new spending being based on clear evidence of cost-effectiveness. It is easier not to introduce a poor-quality programme than to remove an existing one. Public sector chief executives have an important role in ensuring governments receive robust advice on the cost-effectiveness of policy initiatives.
    • Securing a cost-effective mix of price, volume and quality for services – striving to get the same service for a cheaper price, targeting entitlements based on need or ability to pay and ensuring the quality standard is fit for purpose.
    • Looking at institutional arrangements – ensuring that institutions, including those that make spending decisions or deliver services for the government, are incentivised to use resources in cost-effective ways and manage spending pressures within current resources.
    • Managing public expectations – publicly debating what services the government can reasonably afford to provide, and to whom, given the negative economic consequences of higher taxes or debt.

Fundamentally, a sustainable fiscal position requires that spending and revenue not to deviate from each other for long periods. Returning from our current position of deficits to one of surpluses will require tough decisions about reprioritisation, which will then need to be followed by equally hard decisions further out. The trade-offs become harder and the changes required get more severe as each year of inaction passes.

This is not a case for despair, but for beginning to act soon. The largest single driver of the fiscal position is the policy choices governments make on behalf of society, which means that we have the power to make the necessary changes.

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