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Summary

There is a dynamic relationship between New Zealand's long-term public finances and intergenerational well-being. Intergenerational well-being relies on the growth, distribution and sustainability of the four capitals – financial and physical capital; human capital (e.g. health and skills); social capital (e.g. institutions and trust); and natural capital (e.g. water and biodiversity). Firms, households, and the government combine these four capital stocks in various ways to generate flows of goods and services that are consumed by people and enhance their well-being.

Sustainable government finances are a precondition to improving long-term living standards. They reduce the risks associated with economic, social or environmental shocks, provide current and future generations with the opportunities to participate in society (by allowing governments to provide essential services and infrastructure), and give more certainty in the future for individuals and governments to plan.

While current government finances remain relatively strong, fiscal pressures are projected to build over the next 40 years. Population ageing is projected to apply pressures through slower revenue growth (resulting from less participation) and increased expenses (primarily through New Zealand Superannuation and healthcare). In the future, we may also see threats to our natural resources (e.g. climate change, water quality and natural disasters) as a fiscal pressure.

Governments have many options at their disposal to address these fiscal sustainability challenges, many of which will also have benefits to New Zealand's well-being.

  • Economic growth provides revenue and, in turn, provides governments with options on how to address expense pressures. Improved economic growth also means higher incomes for New Zealanders. Sustainable growth contributes to resilient long-term government finances and creates broader opportunities for individuals to raise their living standards. Productivity growth is the key for New Zealanders to earn higher incomes. Opportunities for productivity growth include enabling strong and dynamic international connections, innovation, and regional and Māori economic development.
  • Better education, skill and employment outcomes further enhance these choices through a more dynamic, effective workforce and higher participation. New Zealand's education outcomes remain strong by international standards. This, combined with a flexible labour market, has enabled high labour market participation and relatively low unemployment. As the nature of work continues to evolve and skill requirements continue to change, education and training systems will be challenged to ensure New Zealanders are ready for the future. This will include realising the full potential of an ageing workforce.
  • Social inclusion enables all New Zealanders to live the lives they value. This means reducing and removing the significant barriers to social and economic participation for the minority of New Zealanders who face these challenges. These barriers result in poorer health, education, employment and criminal justice outcomes, which are often apparent from an early age. More effective social spending can contribute to a higher level of social inclusion.

These opportunities sit alongside the other options available to governments in terms of changes to taxation and major spending areas. By making well-informed choices with a view to the long-term, governments can ensure long-term fiscal sustainability and help lift living standards for New Zealanders.

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