A. Where we've come from and where we're heading - continued

We assume that economic growth will continue to be moderate

The Treasury assumes that New Zealand's average economic growth rate over the long run will be consistent with historic trends.[13] A more interconnected world means that New Zealand will share in the gains from rising global incomes through export volumes and prices, and in productivity and technological improvements embodied in more sophisticated imports. Sustained economic growth means that people are likely, on average, to have higher incomes in the future.

It seems likely that in a more interconnected world, there will be increased competition between countries for skilled labour. Compared to other OECD countries, New Zealand has a high proportion of foreign-born people as a share of the total population and also has a high proportion of its New Zealand-born population living overseas. In terms of skills, currently the inflow of highly skilled migrants roughly balances the outflow.[14] Whether we are able to sustain or improve on this state of affairs will affect our future economic growth: our growth path will be affected by our ability to attract highly skilled migrants.

Whatever the average rate of New Zealand's economic growth, we know we will go through cycles and experience shocks. A recent study estimated that since 1970 there have been a total of 147 banking crises, 218 currency crises, and 66 sovereign debt crises.[15] New Zealand will feel the impacts of future crises even if it is not directly involved. The future is also likely to bring resource shocks, geo-political shocks, and natural disasters like earthquakes - all of which can impact on economic growth.

Economic growth will present challenges as well as opportunities

Spending on healthcare and long-term care appears to be strongly influenced by national income. One explanation for this is that higher income drives higher public expectations of the healthcare services that should be available and, in a broad sense, a greater willingness to pay for these, although the strength of this relationship is uncertain. Public expectations also increase as technology extends the range of possible treatment options. A further consideration is that, as national income rises, so does the cost of labour, which is the major input into health and long-term care services. Together, these factors are expected to contribute significantly to future spending growth and, in fact, play a larger role in our projections of future spending in these areas than population ageing.

Health and long-term care services are likely to become relatively more expensive, compared with goods and services for which there is more scope for productivity gains. If unit costs for health and long-term care rise faster than inflation, then ongoing fiscal constraint implies either a reduction in the scope of the public system or a reduction in service quality, possibly both. Alternatively, if we allow spending to keep growing similarly to the way it has grown in the past, we would need to cut spending in other areas or raise taxes to pay for it.

The distribution of rising incomes is uncertain

We don't know how the benefits of future economic growth will be distributed across the population. Research suggests that household incomes in New Zealand are less equally distributed than they were in the mid-1980s.[16] While disposable incomes for most household deciles grew during this period, households with the highest incomes tended to see theirs grow faster.[17] This was largely owing to changes to market income levels, rather than direct changes in the redistributive role of the government.[18] This trend of increasing inequality was broadly mirrored across other OECD countries, although the change has been relatively sharper for New Zealand. Technological change, globalisation, and household structure have been identified as the major causes of these changes both in New Zealand and around the world.

Just as we do not necessarily know what will happen in the future in terms of income inequality, neither do we have a good understanding of the impacts of income inequality. A recent review of over 400 studies showed there is no simple relationship between levels of inequality and economic growth.[19] There are studies that do find a link, and others that do not. There is also some dispute about whether there is a connection between inequality and poorer social outcomes.

Income inequality within age groups might change in the future. For example, disparities within older age groups could become more pronounced if those who are healthy enough to continue working past 65 do so and also receive NZ Super (and might also be able to supplement their incomes with income from savings). Those who are unable to continue working might be more reliant on NZ Super as a source of income. This scenario would result in more inequality within the 65+ age group.[20]

Pressures on natural resources are likely

Developments in the natural environment will affect New Zealand in different and potentially unforeseen ways. Renewable resources, such as land, fresh water, and marine resources play an important role in New Zealand's economy, as do non-renewable resources, such as oil, gas and minerals. Demand for these resources in the developing economies is likely to increase in the future, but also global technological and regulatory changes will affect supply and demand factors. How we respond to that demand and adapt to new technology will affect not only our growth path but also our living standards more generally.