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Quick Guide to Affording Our Future

Quick Guide

The Public Finance Act 1989 requires that the Treasury prepare a Statement on New Zealand's Long-Term Fiscal Position at least every four years. The Statement must relate to a period of at least 40 consecutive financial years, and be accompanied by a statement of all significant assumptions underlying any projections it includes.

Affording Our Future, the Treasury's 2013 Statement on the Long-Term Fiscal Position, was tabled in Parliament on 11 July 2013. This Quick Guide sets out some key messages from that Statement.

Affording our future will require adjustments

Population ageing, rising demand for certain services, and increasing prices of those services mean that some things the Government provides will become more expensive in the future - indeed, this process has already started. These cost pressures create a fiscal challenge.

This Quick Guide gives an idea of the size of the fiscal challenge and illustrates some options for addressing it. We project a "what if" scenario that shows how government expenses might grow from the 2015/16 fiscal year if they were to revert to their average historic rates of growth per recipient (different periods of history are relevant for different expense categories), taking into account demographic and other key economic variables, and assuming no change to current legislative policy settings. We call this scenario "Resume Historic Cost Growth".

This scenario is different to the Government's fiscal strategy, which involves firm control of expenditure growth.

Two areas of government spending are projected to grow significantly in the "Resume Historic Cost Growth" scenario:

  • Government spending on healthcare is projected to grow from 6.8% of gross domestic product (GDP) in 2010 to 10.8% in 2060, an increase of 4 percentage points.
  • Spending on NZ Super is projected to grow from 4.3% of GDP in 2010 to 7.9% in 2060, an increase of 3.6 percentage points.

Our full projections under the "Resume Historic Cost Growth" scenario are set out in Table 1. We assume that we collect tax revenue equal to 29% of GDP over most of the projection period. This percentage is roughly consistent with our tax take in recent history, but of course different governments may wish to collect more or less tax in the future. One consequence of holding tax revenue constant as expenses increase, however, is that from the mid-2020s revenues become insufficient to cover expenses. Accordingly, governments must borrow to make up the difference. Table 1 reflects the cost of this borrowing in the line "Debt-financing costs", which shows these costs increasing over time. The bottom line "Net government debt" also increases as a consequence.

Table 1: Treasury projections for government expenses, revenue and debt as % of nominal GDP under the "Resume Historic Cost Growth" scenario[1]
% of nominal GDP 2010 2020 2030 2040 2050 2060
Healthcare 6.8 6.8 7.7 8.9 9.9 10.8
NZ Super 4.3 5.1 6.4 7.1 7.2 7.9
Education 6.1 5.3 5.2 5.2 5.1 5.2
Law and order 1.7 1.4 1.4 1.4 1.4 1.4
Welfare (excluding NZ Super) 6.7 4.8 4.4 4.2 4.0 3.8
Other 6.5 5.6 5.7 5.8 5.9 6.1
Debt-financing costs 1.2 1.8 2.5 4.2 7.1 11.7
Total government expenses 33.4 30.8 33.4 36.9 40.6 46.8
Tax revenue 26.5 28.9 29.0 29.0 29.0 29.0
Other revenue 3.2 3.0 3.2 3.2 3.3 3.6
Total government revenue 29.7 31.9 32.2 32.2 32.3 32.6
Expenses less revenue 3.6 -1.1 1.2 4.6 8.3 14.3
Net government debt 13.9 27.4 37.1 67.2 118.9 198.3

The projections in this table are of course very sensitive to our assumptions. But changing our assumptions within realistic bounds makes little difference to the overall message: some major expense categories are growing.

So we face a Long-Term Fiscal challenge

Clearly, spending needs to be constrained relative to the "Resume Historic Cost Growth" scenario - or taxes need to be increased - if we are to maintain a prudent level of government debt in the future.

Making adjustments earlier will avoid rising interest payments that grow rapidly the longer we delay making policy changes. Waiting until debt is high before making changes means that adjustments will need to be larger and take longer.

The Government has signalled that it will adopt a more constrained - and prudent - medium-term fiscal path than our "Resume Historic Cost Growth" scenario shows.[2]

The Government's fiscal strategy is one way of reaching a prudent level of debt over the medium term. It is not the only way, and other governments might make different choices. But a prudent medium-term fiscal strategy puts future governments in a stronger fiscal position and gives them a wider range of choices.

Meeting the challenge

One way of thinking about the size of the policy changes that need to happen is by comparing the spending path that the "Resume Historic Cost Growth" scenario implies and the spending path that would be necessary to achieve net government debt at 20% of GDP as a long-term average, assuming we do not collect more tax.[3]

Figure 1 shows two "what if" spending paths:

  • The blue "Spending path that maintains 20% net debt" line, which tracks the average spending path that would allow us to maintain net government debt at an average of 20% of GDP from 2020, assuming our tax take remains constant at 29% of GDP, and
  • The orange "Spending path under ‘Resume Historic Cost Growth' scenario" line, which tracks the average spending path that we would see if expense areas grow at the rates we have seen historically, also taking into account current legislative settings and demographic changes, as shown in Table 1.

Both of these lines track "primary" expenditure. That is, they do not include debt-financing costs.

Figure 1 Two government spending paths - an illustration of the gap we need to close
Figure 1  Two government spending paths - an illustration of the gap we need to close   .

In what follows, we set out some options for partially closing this long-term gap. We use Figure 1 as a base graph to show the fiscal impact of different tax increase and spending growth reduction options.


  • [1]In this Quick Guide, for "net government debt" we use "net core Crown debt", for "government expenses" we use "core Crown expenses", and for "government revenue" we use "core Crown revenue". All these terms are defined in the Financial Statements of the Government of New Zealand. "Core Crown" means the Crown, departments, Offices of Parliament, the NZ Super Fund and the Reserve Bank of New Zealand. It does not include Crown entities, State-owned Enterprises, or local government.
  • [2]In its 2013 Fiscal Strategy Report, the Government committed to bringing net government debt to a level no higher than 20% of GDP by 2020. Reaching this goal will mean following a tighter medium-term fiscal path than the "Resume Historic Cost Growth" scenario shows.
  • [3]The selection of the 20% net government debt average over time measure is not intended to represent a Treasury recommendation. Rather, it is a benchmark level that is within the range of debt levels that past governments have considered "prudent". While we have recommended that net government debt be reduced to 20% of GDP or below by 2020, we have not made any recommendations about prudent debt levels beyond that date.
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