4.2  Social expenditure

Future rises in social expenditures depend on three critical sets of factors. These are the population ageing effect, labour market changes and policy settings. The benchmark model can be viewed as providing estimates of the “pure” population ageing effect as it assumes that existing policies remain in place unaltered, and that all categories of social expenditure grow at an annual rate of 1.5%, equal to the underlying rate assumed for productivity growth.

Figure 3 summarises the changing distribution of the ratio over time, and shows that the steepest increase in the average is projected to occur between 2011 and 2031, flattening thereafter. The critical issue concerns the uncertainty surrounding this point estimates. Even after only ten years, these bands are 20.0% to 26.8%. While the central estimate for 2051 is 31% of GDP, the 95% confidence bands range from 21.1% to 44.7%. The upward drift in the mean and the widening spread of the estimates are depicted in Appendix Figure 7, which plots the histograms resulting from the simulations. These show that the distributions become not only more spread, but also more skewed, in the later periods. This explains why the 95% confidence intervals are not symmetric about the average value.

The benchmark model projects that mean social expenditures rise from 22.7% in 2001 to 31.0% of GDP by 2051. Comparable results from other New Zealand studies are from 22.9% to 35.6% (Polackova 1997) and from 23% to 33% (Bagrie 1997) while a similar study for Australia reports that in the base case, social expenditure is projected to rise from 20.7% to 28.0% of GDP by 2051(Guest and McDonald 2000).[29]

Table 5 presents a summary of the projected growth in major groups of social expenditure as a share of GDP, due solely to population ageing. These are graphed in Figure 4. The costs of superannuation rise most markedly from 5% today to 10% by 2051.

Education costs fall slightly and there is a small increase in social security and welfare costs. Under the benchmark growth rates of the per capita real costs of social expenditure, the share of health costs in GDP rises by 50%, or by 3 percentage points. When health expenditure is divided into the seven sub-categories, the first two (age related and medical/surgical) account for almost all of this increase, as shown in Figure 5. For further details, see Appendix Table 6.

Figure 3 - Projected social expenditure as a share of GDP : 2001-2051

Figure 4 - Projected mean total social expenditure and expenditure by major categories

Figure 5 - Projected increases in health costs