5.4 Higher Growth Rates of Social Expenditure
The initial benchmark results, based on the assumption that real unit costs of social expenditure grow on average at the same rate as overall productivity, were important to isolate the pure effect of population ageing. However, this assumption is unlikely to be true. This subsection considers a different set of assumptions. This alternative uses historical annual rates of growth of real per capita social expenditures over the last 40 years, reported in Table 1 above.[31] The average annual changes exceed 1.5%, the rate of growth used in the benchmark simulations, by a considerable margin. The resulting projections are summarised in Table 8; detailed results with standard deviations for all 14 categories and for males and females are shown in Appendix Table 7.
| Categories | Projected Shares | ||||||
|---|---|---|---|---|---|---|---|
| of Social Expenditure | of GDP | ||||||
| 2002 | 2021 | 2051 | 2002 | 2021 | 2051 | ||
| Health | 1-7 | 0.26 | 0.30 | 0.35 | 0.06 | 0.10 | 0.20 |
| Education | 8 | 0.20 | 0.18 | 0.18 | 0.04 | 0.06 | 0.10 |
| NZ Superannuation | 9 | 0.21 | 0.26 | 0.26 | 0.05 | 0.08 | 0.14 |
| Social Security and Welfare | 10-13 | 0.25 | 0.21 | 0.18 | 0.06 | 0.07 | 0.10 |
| Unemployment | 14 | 0.09 | 0.06 | 0.03 | 0.02 | 0.02 | 0.02 |
| Total | 1.00 | 1.00 | 1.00 | 0.23 | 0.32 | 0.55 | |
Total social expenditures rise to a mean of over 55% of GDP by 2051. Health costs alone represent 35% of total social expenditure and rise from 6% of GDP in 2001 to a projected level of 20% by 2051. It is immediately evident that these results are improbable. When the uncertainty is taken into account there is a 5% chance that social expenditures could exceed 78% of GDP in 2051 if the costs per capita were to continue to grow in real terms at their historical rates and productivity in the economy were to grow on average at no more than its historical rate. It is most unlikely that the growth rates of social expenditures in past decades could be sustained without intolerable fiscal pressures.In fact it could be argued that, with the exception of health costs, the annual average growth rates of the other major groups of social expenditure have been slowing through time, and the rates over the last decade are below those of earlier periods, or the 1960 to 2000 span as a whole. Were this the case and were the more recent levels of higher productivity growth to prove sustainable over a very long period, then conceivably current policy settings might be manageable.
Unlike some other items, (as shown in Appendix Figure 4) the annual rates of growth in health costs, while showing some variability, do not appear to have abated. The following section explores further the impact of the growth in health expenditures.
Notes
- [31]In the case of the growth of unemployment benefits, we used data for 1980 to 2000.
