H. Option: Government restricts spending growth

The projections in our "Resume Historic Cost Growth" scenario - the standard orange line on the graph - show the possible path of government spending if we resume historical spending patterns, taking into account legislative settings as well as assumptions about the expected demand for certain services. However, the Government could make decisions that restrict spending growth to a lesser rate. This approach could make a significant difference to the long-term fiscal position.

There are many ways in which governments could restrict growth in government spending, such as those discussed in Annex 1 to this Statement. Here we look at one example: what would happen to the Government's overall financial situation if we allow healthcare spending to grow in the future, but not to the extent that the "Resume Historic Cost Growth" scenario suggests.

Healthcare spending is central to the long-term fiscal challenge because it is a large and growing part of total government spending. Controlling spending has historically been challenging, and this is likely to continue to be the case. Growth in healthcare spending is driven by many factors. While population ageing is important, it is not the most important factor. Other factors include: the development of new technologies and treatments, increasing public demand as national income increases, and rising costs owing to wage growth across the economy. Our projections suggest that these factors could push public healthcare spending from 6.8% of GDP in 2010 to more like 10.8% in 2060 if we revert to historical spending growth rates.[71]

There are arguments for letting public healthcare expenditure continue to grow. We will become richer over the next 40 years. So, as more and better healthcare will be available, perhaps it makes sense to spend a higher percentage of our national income on it. There will be trade-offs, of course, in the form of paying more tax or not getting so much from the Government in other areas, but we might be happy to make those trade-offs. Nevertheless, we need to make sure that we are maximising the returns from each dollar spent on public healthcare, even if spending is allowed to increase.

Most likely, what we do in the future will represent a compromise. Public healthcare spending might grow somewhat, but maybe not to the extent of reaching 10.8% of GDP in 2060. If public healthcare spending grew to 9% of GDP by 2060, rather than 10.8%, this would still represent considerable growth but would put less pressure on the overall fiscal situation.

Figure 13 shows how much difference it would make if public healthcare spending grew only half as much, reaching 9% of GDP in 2060 rather than 10.8%. It shows three lines:

• Our standard orange "Spending path under 'Resume Historic Cost Growth' scenario" line, which tracks the average spending path we would see if expense areas grow at the rates we have seen historically, also taking into account current legislative settings and demographic changes.
• Our standard blue "Spending path that maintains 20% net debt" line, which tracks the average spending path that would allow us to keep net government debt at an average of 20% of GDP from 2020, assuming our tax take remains constant at 29% of GDP.
• The dashed orange "Spending path with lower growth in public health spending" line, which shows how far constraining growth in public healthcare spending would bend the "Spending path under 'Resume Historic Cost Growth’ scenario" line down.

Figure 13 Three government spending paths - the impact of lower growth in healthcare spending

It is important to recognise that even a lower projected spending growth track for public healthcare spending still implies that public healthcare spending will grow faster than the overall economy. Between now and 2060, we assume that economic growth will average around 2.1% per year in real terms. The scenario that produces the "Spending path with lower growth in public health spending" in Figure 13 assumes average real annual healthcare spending growth of around 2.8%. We set out below some ways in which we might be able to achieve growth in public healthcare spending that is below what our "Resume Historic Cost Growth" scenario suggests.

Can we get more healthcare for less?

It is possible that we'll get better quality healthcare in the future for less money. Looking at other countries, we see that more money does not necessarily lead to better outcomes. We might be able to get more from our existing pool of resources. This is something we are always trying to do and it will continue to be important regardless of the level of future spending.

About 80% of the total amount spent on healthcare in New Zealand is spent by the Government. Our publicly funded system acts as a social insurance model, pooling resources and spreading risk. Private health insurance can play a similar role, but it doesn't cater well for certain groups, including the elderly, the chronically ill, or those on low incomes. Systems like ours also typically perform better in terms of containing overall healthcare spending, because the Government can control the amount of funding that is made available.[72] While other countries may have a different mix of public and private spending, there seems to be no single approach that is clearly better than the alternatives.

In looking at how to get the best possible health outcomes from the money we spend, we could consider ways of organising healthcare differently - to increase efficiency and reorient the system to deal better with the rising proportion of chronic conditions like diabetes and age-related disabilities. We could think about the skill mix of the health workforce, allowing professionals such as nurses and pharmacists to take on some of the tasks previously performed by doctors. We could also consider providing healthcare for certain conditions in more cost-effective locations (such as community settings rather than hospitals). Creating the right incentives for healthcare providers to deliver better quality healthcare and manage costs will also be important.

However, we should be careful not to view efficiency savings as an easy solution. Making significant savings in a system as complex as a public health system is a challenging task. We should not expect that this will be enough to meet future demand for extra spending.