6.2.2  Government health expenditure as a percent of GDP

As Figure 5 shows, expenditure as a percent of GDP rose steadily from the 1950s to about 1980, but since then has shown no consistent trend upwards or downwards. The sharp fluctuations in growth rates mean that conclusions about historical trends in expenditure are extremely sensitive to the choice of period. If the whole period 1950/51-2001/02, or the period since the early 1990s, is used, then expenditure as a percent of GDP appears to have been increasing steadily. If the period since the late 1970s is used, then expenditure as a percent of GDP appears to be roughly stable (see also Table 11).

As with growth in expenditure, growth in government expenditure as a percent of GDP can be expressed in terms of three underlying components:

Note that Equation 4, unlike Equation 3, does not include a term for population size. Population size raises both expenditures and GDP, so its effects cancel out. Equation 4 includes the growth rate of GDP per capita, which is subtracted from the other two terms. All else equal, faster GDP growth implies slower growth in expenditure as a percent of GDP.

Table 11 shows results from applying Equation 4 to New Zealand data. The growth rates for expenditure as a percent of GDP and for GDP per capita are calculated from standard GDP data. As with Table 10, the growth rate for the ageing and health effect is calculated using the model. The growth rate for coverage and price is calculated from the other terms, using Equation 4.

Notes – Calculations assume that disability rates constant from 1951 to 2002.

The results in Table 11 suggest that there might be a positive relationship between growth in the coverage and price effect and growth in GDP per capita: the coverage and price effect seems to grow fastest in periods when the economy is doing well. The more detailed results shown in Figure 7 largely bear this out except for a period in the early 1980s. This period in New Zealand was characterised by high inflation, large government budget deficits and subsequent economic reforms.

Figure 7 – Growth rates for the coverage and price effect and GDP per capita

Note – both series are 5-year moving averages, centred on the year shown. Calculations assume disability rates constant from 1951 to 2002.

6.3  Comparison of past and projected spending pressures attributable to ageing and health

The population share of older people will rise more quickly over coming decades than it has in the recent past. (Table 9 presents some representative statistics). Many commentators argue that the New Zealand health system therefore faces rapidly increasing spending pressures. There are, however, potentially important offsetting effects: declines in disability and mortality rates would reduce the proportion of each age group that is disabled or in the last year of life. It is therefore not obvious how future spending pressures attributable to ageing and health will compare to past spending pressures.

Spending pressures attributable to ageing and health are measured in our model by the “ageing and health effect”. Changes in spending pressures can be summarized by the growth rate of this effect. Estimates of historical and projected growth rates are presented in Figure 8.

The left panel presents two sets of results from the back-casting. The first set is based on our benchmark assumption that age-specific disability rates were constant over the period; the second is based on the assumption that disability rates declined at 0.25% per year. The growth rate of the ageing and health effect is lower under the second assumption. Under both assumptions, however, the growth rate increases considerably between the 1951-1976 and the 1976-2002 period.

Figure 8 – Annual average growth rate for ageing and health effect

The right panel presents three sets of projections’ results. The first is based on an assumption of 1.5% annual decline in mortality rates but no decline in disability rates. The second is based on our benchmark assumption of 1.5% mortality decline and 0.5% disability decline, and the third on an assumption of only 1.0% mortality decline and the original 0.5% disability decline. Under the first, constant-disability, scenario, the growth in the ageing and health effect increases over coming decades, consistent with conventional expectations. Under the second and third scenarios, however, growth in the ageing and health effect in 2002-2026 is roughly the same as growth in 1976-2002, and only slightly higher in 2026-2051. This demonstrates the potential for decline in disability rates to offset the effects of changes in age structure.

We also carried out projections and back-casting using different assumptions about the relative costs of disabled, non-disabled, decedents, and survivors. The effects of these variations were small, and are not shown here.