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He Tirohanga Mokopuna: 2016 Statement on New Zealand's Long-term Fiscal Position

What if governments could improve social outcomes?

Building on the analysis in Section Four, we explore the potential impact on the long-term fiscal outlook if governments improved the impact of social services on the outcomes of New Zealanders.[140] Not only could social outcomes improve, but social sector reforms could contribute to reducing the long-term fiscal challenges. However, this is challenging to measure. There are limitations to the evidence base and the long-term projection model itself when applied to broad changes that cut across the state sector and the economy. The Treasury has considered a range of ways to address these limitations, but the scenarios remain "what if?" in nature.

The main goal of effective social investment is to improve non-fiscal outcomes. This means looking at how improved non-fiscal outcomes would impact fiscal outcomes. Fiscal benefits are a side effect of reducing expenditure on services we would rather not need: instead of welfare payments, removing barriers to employment; instead of CYF services, children having nurturing families; instead of prisons, reducing incidence of crime, and so on.

The Treasury has developed scenarios that quantify the potential impact of achieving significant change through better social spending (see Annex Two). Predictably perhaps, the largest economic growth benefit is from increased labour market participation. To varying degrees, the scenarios assume an increase in participation that would increase GDP and increase nominal tax revenue.

However, we have not included the fiscal gains from increased labour market participation. This is because the underlying model (Historical Spending Patterns) assumes that a larger economy also leads to increases in government expenditure, which offsets the effect of higher participation. There are two reasons behind this assumption.

First and most importantly, the role of the long-term fiscal statement is to draw out the fiscal challenges facing New Zealand. The modelling of social investment suggests that there may be approaches that both reduce spending and improve social outcomes. However, this cannot be achieved if government organisations continue to operate as they have in the past.

Secondly, and more pragmatically, the estimated labour market impacts are uncertain. No model can capture everything, so the approach is to be conservative in the estimates of potential benefits where there is substantial uncertainty.

There is a great deal of variation between the social outcome scenarios. Most of the scenarios reflect a combination of expense increases and reductions. The components of each bar in Figure 6.3 are the difference between the baseline cost (i.e. Historical Spending Patterns) and the scenario cost in each sector, as a percent of GDP, in 2060. For example, the orange area is how much spending in education changes in each scenario. Generally, welfare expenses are the largest contributor to reduced costs. The "low ambition" scenario in Figure 6.3 represents a change equivalent to delivering and sustaining the improvements in the Better Public Service targets. The "high ambition" scenario presents more favourable outcomes. Therefore, the low ambition scenario represents success at meeting and sustaining current system objectives, while the high ambition scenario is beyond what people working in the current system feel is feasible.

Figure 6.3 – Improved social outcomes: Differences across six scenarios in 2060
Figure 6.3 – Improved social outcomes: Differences across six scenarios in 2060   .

Importantly, the analysis assumes more effective social sector interventions are feasible and that any upfront costs are merely transition costs. If these "transition costs" become part of ongoing spending then the fiscal benefits will be reduced. Moreover, the fiscal benefits are diffuse and difficult to collect. Long-term settings will need to be in place that ensure reductions in ineffective spending can be spent anywhere in the state sector, and that the state sector is innovative and flexible enough to adopt innovations. There is uncertainty about the timing of the outcomes because social investment is a process of change that accumulates. Its impact is dependent on when it starts and the rate of change.

Figure 6.4 - New Zealand's long-term fiscal outlook: Projected primary fiscal deficits in 2060 (percent of GDP)
Figure 6.4 - New Zealand's long-term fiscal outlook: Projected primary fiscal deficits in 2060 (percent of GDP).

Note: The primary deficit is the shortfall between core Crown revenue-to-GDP (excluding interest revenue and dividends) and core Crown expenses-to-GDP (excluding debt-financing costs). The impact on net debt will reflect accumulated primary balances and debt financing costs. The GST increase is assumed to occur in 2024; and inflation indexation of income tax thresholds starts in 2021. For NZS, the increase in the age of eligibility is phased in between 2021 and 2024; and inflation indexation starts in 2021.

Notes

  • [140] For more detail, see the background paper prepared for this Statement: The benefits of improved social sector performance.
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