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6  Long-term fiscal outlook

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 increase significantly over the next 40 years. As with all three previous Statements, population ageing is projected to be a key driver of these increased pressures. These additional pressures are expected to come both through slower revenue growth (resulting from less labour participation) and increased expenses (primarily through healthcare and New Zealand Superannuation). In the future, we may also see threats to our natural resources as a key fiscal pressure.

As the previous sections have indicated, governments have many options at their disposal to address these challenges, but the challenge gets harder the longer we delay. Economic growth provides revenue (e.g. through taxation) and, in turn, provides governments with options on how to address expense pressures. Opportunities to lift economic growth through improving productivity, skills, and social outcomes further enhance these choices and can reduce some of the expense pressures (e.g. from welfare and justice expenses). These opportunities sit alongside the other options available to governments in terms of changes to taxation and major spending areas.

Building on the analysis from the previous sections, this section discusses the long-term challenges and opportunities for government finances. As discussed in Section Three, New Zealand's changing age structure in the next 15 years will see a significant shift in the ratio between those aged 15-64 and those aged 65 and over. The following fiscal projections incorporate a detailed assessment of how people at different ages participate in the labour force, how much tax they pay, and what government services they use.

New Zealand's intergenerational contract assumes that people pay most taxes during their working lives and less at the beginning and end of life (when they are more likely to receive services and payments funded by taxpayers). These come primarily in the form of education for the young, and healthcare and retirement income support towards the end of life. The combination of the implied intergenerational contract and population ageing will have consequences for future public finances.

Table 6.1 summarises fiscal projections using "Historical Spending Patterns" and the 2016 Budget forecasts as the base. This scenario does not include a government response to growing deficits and debt, even though previous governments have made such responses.[133] However, population ageing combined with the retirement of the baby boomer population cohort presents a challenge for governments unlike those faced in the past.

Table 6.1 – Projections for "Historical Spending Patterns" scenario
(percent of GDP)
  2015 2030 2045 2060
Healthcare 6.2 6.8 8.3 9.7
New Zealand Superannuation (NZS) 4.8 6.3 7.2 7.9
Education 5.3 5.4 5.5 5.7
Law and order 1.5 1.4 1.4 1.4
Welfare (excluding NZS) 4.2 4.5 4.7 4.7
Other expenses 6.3 6.7 6.7 6.7
Debt-financing costs 1.6 2.2 5.3 11.0
Expenses 30.0 33.3 39.1 47.1
Tax revenue 27.6 28.6 28.6 28.6
Other revenue 2.3 2.4 2.4 2.5
Revenue 29.9 31.0 31.0 31.1
Operating balance (0.1) (2.3) (8.1) (16.0)
Primary expenses 28.4 31.1 33.8 36.1
Primary balance 0.5 (1.2) (4.0) (6.3)
Capital expenditure 0.7 0.9 1.0 1.0
Net debt 25.1 32.5 94.0 205.8
NZSF assets 12.2 21.0 25.1 31.7
Net debt incl NZSF 12.9 11.5 68.9 174.1
Net worth 13.8 16.1 (41.3) (146.3)

Note: All variables are on a core Crown basis; New Zealand Superannuation expenses are on a gross basis; bracketed numbers represent negative values; primary expenses are expenses excluding debt-financing costs and the primary balance is the difference between revenue (excluding interest revenue and dividends) and primary expenses; these projections represent a "what if" scenario.

Notes

  • [133] See: Anne-Marie Brook (2013) Making fiscal policy more stabilising in the next upturn: Challenges and policy options, New Zealand Economic Papers, 47:1, pp.71-94; Dhritidyuti Bose, Renee Philip and Richard Sullivan (2016) Returning to surplus: New Zealand's recent fiscal consolidation experience. Paper presented to the New Zealand Association of Economists Conference, June.
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