Long-Term Fiscal FAQsLong-Term Fiscal Schools Challenge

Page updated 22 Feb 2012

The Schools Challenge asks you to understand and evaluate the complex fiscal challenges facing New Zealand over the long term, and to propose policy options to address these challenges.

What is long-term fiscal sustainability?

Long-term fiscal sustainability refers to the ability of a government to continue to fund its spending over the long term.

As with any individual or household, a government has a number of revenue sources (e.g. taxes, levies) with which to pay a range of expenses (e.g. social benefits, wages). Typically, if expenses exceed revenue at any time, it is able to borrow to cover the shortfall. As long as there is expected to be sufficient revenue to repay this debt in the future, the fiscal position is “sustainable” – i.e. current policy settings can continue in the long term without the government running out of money.

However, if a government's expenses (and therefore debt) are expected to grow at a rate that is significantly faster than its income over the long term, eventually it will be unable to meet its financial obligations.

The Treasury's projection is that expenses are going to increase faster than revenues over the coming decades. Therefore, to achieve a “sustainable” fiscal position, the government will need to make policy changes that either reduce the path of future expenses or increase the path of future revenues.

So what is the government spending its money on and how is this projected to change?

The government raises revenue from a number of sources and spends it on a range of goods and services. The pie-graphs below show the composition of revenue and expenses for the year ending 30 June 2011:

Core Crown Revenues, 2010/11

Source:  The Treasury

Core Crown Expenses, 2010/11

Source:  The Treasury

For a discussion of how the main areas of spending and revenue are projected to change over the coming decades, in a New Zealand context, see ‘Part B – Choices’ in Challenges and Choices: New Zealand's Long-Term Fiscal Statement at: http://www.treasury.govt.nz/government/longterm/fiscalposition/2009

The long-term outlook has changed somewhat since the 2009 Statement was published.   However, the same underlying ideas are still applicable.

What impact is “population ageing” having on the long-term fiscal outlook?

Ensuring that there will be sufficient revenues to pay expenses has always been an underlying principle of fiscal management (if not the main concern). “Population ageing” refers to the trend in many developed countries, including New Zealand, for older people to represent a rising proportion of the population. A range of factors is contributing to this, based on the trend towards people having fewer children and longer life-spans. The ageing of the “baby boomer” generation is accelerating this trend.
While population ageing itself is certainly not a bad thing (it means that we’re healthier and living longer!), it has a range of implications for the future fiscal position of the government, such as:

• A rapidly increasing number of people eligible for New Zealand Superannuation (leading to increased expenses),
• Pressures on health spending as an older population requires more medical, surgical and residential care services (also increasing expenses), and
• The possibility of a lower proportion of the population participating in the workforce, potentially dampening economic growth and reducing the tax take (leading to reducing revenues).

If population ageing continues as predicted, factors such as these will likely lead to policies that have previously been sustainable for a younger population becoming increasingly unsustainable.

The Schools Challenge asks you to understand and evaluate the complex fiscal challenges facing New Zealand over the long term, and to propose policy options to address these challenges.