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What options do governments have?

Broadly speaking, there are three ways to bring the two lines in Figure 6.1 closer together:

  • by collecting more tax than with the 29 percent of GDP assumption, meaning that more could be spent while still stabilising net debt-to-GDP
  • by shifting the orange line downwards by curbing growth in expenses, or
  • a combination of both.

The timing of action makes a significant difference to fiscal sustainability. The longer governments delay the return to stable debt, the larger debt-financing costs will be. As a consequence, the adjustment to spending and/or revenue would need to be larger. How quickly governments make the adjustment to a stable debt-to-GDP ratio depends on a number of factors. For example, some government actions, such as social investment (refer Section Four and the analysis below) may involve upfront fiscal costs in order to generate both long-term fiscal savings and non-fiscal benefits to living standards. Other policy changes, such as those related to NZS settings, generally require a degree of clear signalling and phasing-in.

In its most recent Fiscal Strategy Report, the Government said its short-term intention is to reduce net debt from around 25 percent of GDP in 2016 to around 20 percent of GDP in 2020. The Government's long-term objective, for the next ten years, is to manage net debt within a range of 0 to 20 percent of GDP. Achieving this debt objective involves spending control through annual allowances for both operating expenses and capital expenditure. These allowances represent discretionary new (net) spending that has not been allocated to specific spending areas. Rather, they can be used flexibly to meet a range of new initiatives and cost pressures. Increases in NZS expenses are not met from operating allowances.

Top-down discretionary spending is only part of the story. As noted previously, some spending areas such as NZS are determined by legislation. If total government spending needs to be constrained to achieve a particular debt objective, growth in the number of people receiving NZS means that it will take up a growing share of total government spending. Already, between 2014 and 2015, the number of people receiving NZS payments grew by around 25,000. Between 2015 and 2020, we expect an increase of around 125,000.

Allowances for operating spending are around $1.5 billion (or 0.5 percent of GDP), and assumed to grow at 2 percent per year from 2020, to allow for inflation. As this growth rate is below the rate of the overall economy, these allowances will decline as a share of GDP.

However, operating allowances that decline relative to GDP will provide less scope for governments to meet cost pressures and new initiatives. In comparison, the scenario where net debt is stabilised to an average of 20 percent of GDP assumes future allowances will be in the range of 0.5 percent and 0.8 percent of GDP. Although these are larger than allowances in recent years, they are not large enough to fund growth in terms of the Historical Spending Patterns scenario.[137]

Managing operating allowances and debt over the medium-term is one option to help governments prepare for long-term fiscal pressures. Long-term cost pressures will still need to be addressed, but future governments would have a wider range of choices and more time to make adjustments.[138] However, as with all ways of managing future fiscal pressures, a medium-term strategy is still likely to require trade-offs in order to deliver the same range of services. It will need to be combined with ongoing efficiency savings and finding new ways to work with existing spending.

More broadly, the 2013 Statement considered a range of options to address long-term cost pressures, including changes to:

  • Taxation – only inflation indexation of income thresholds so that fiscal drag is not fully compensated for and tax-to-GDP rises; and a higher rate of GST
  • Government spending – reduce growth in healthcare spending
  • Settings around NZS – raising the age of eligibility; and pegging payments to inflation rather than wages.[139]

The options were assessed using the five dimensions of the Living Standards Framework set out in Section One above. Figure 6.4, at the end of this section, updates some of these options and compares them to options that improve social, economic, and fiscal outcomes.

Notes

  • [137] In the scenario where net debt is stabilised, capital spending is projected as in the Historical Spending Patterns scenario rather than via capital allowances. In addition, contributions to the NZSF are as per the Historical Spending Patterns scenario.
  • [138] The Treasury has not modelled this option in terms of the impact on long-term primary spending and deficits because it requires a judgment about when to switch from operating allowances to Historical Spending Patterns.
  • [139] Under the New Zealand Superannuation and Retirement Income Act 2001, the Retirement Commissioner is required to review retirement income policies every three years. The last review was released in December 2013.
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