F. What are some examples of changes we could make?
In what follows, we assess possible options that individually would get us closer - although not all the way - to a sustainable long-term fiscal position. As a benchmark for a sustainable long-term fiscal position, we use a long-term average of net government debt at 20% of GDP. At any particular time, net government debt would almost certainly be either lower or higher than that, as government debt fluctuates with economic cycles.
To demonstrate how much closer each option would get us to a sustainable long-term fiscal path, we will use the graph introduced in Section D:
- Figure 10 Two government spending paths - an illustration of the gap we need to close
Essentially, what governments need to do is move the orange and blue lines on Figure 10 closer together. Neither of the two lines is set in stone. Governments can move the orange line down (ie, trim spending growth), move the blue line up (ie, increase taxes), or a mixture of both.
Since Figure 10 does not include debt-financing costs, it is best to think of it as showing the size of the gap we need to close if we take action within the next few years. If we delay, the gap will actually be rather larger than that represented here.
The options discussed here are not the only options. They are examples of the kinds of choices we could make, not necessarily choices the Treasury thinks we should make. The longer papers the Treasury has prepared on healthcare, long-term care, retirement income, education, welfare, justice, tax, and natural resources set out a much broader range of options for managing future fiscal pressures,[65] and Annex 1: Supplementary material on the future path of government spending and tax sets out some key points from this work.
Three broad approaches
We can think about three different broad approaches about how our future financial challenges should be addressed:
- Government taxes more as a percentage of GDP than it does currently.
- Government restricts spending growth in some areas, relative to historical growth rates. Spending in a particular area may still grow as a percentage of GDP, but not as much as it could grow.
- Government reacts to demographic change. Because one of the major drivers behind future financial pressures is population ageing, services are redefined to compensate for the fact that people are living longer, healthier lives.
In this part, we analyse some examples of policy options consistent with each of these broad approaches. They are not Treasury recommendations. They are illustrations of the kinds of policies governments could introduce.
Notes
- [65]These papers are all publicly available at www.treasury.govt.nz/government/longterm/fiscalposition/2013.
