2.5.2  Public sector productivity and the basket of services

The estimate for public sector productivity growth is based on available empirical evidence. It is important to note that we have assumed that public sector productivity growth is substantially lower than economy-wide productivity growth. The implications of this assumption are discussed in more detail in Section 6. A key reason for introducing public sector productivity was that it allows us to decompose expenditure into price and quantity components, and to equate a level of spending with a level of service provision.

This ability to decompose the quantity of services led us to create a measure we call the basket of publicly-funded goods and services. This represents the quantity of real (inflation-adjusted) public services per person, and includes a wide range of goods and services such as health, justice, education, defence and core administration. Figure 2.2 compares the long-term cumulative growth of this basket of public services with the real payments per recipient for NZS and other benefits. Section 6.3 outlines the calculation of this basket in more detail.

Figure 2.2 -What individuals receive from the government – historic trends

Source: The Treasury

NZS payments are projected to broadly increase in line with the average wage, which we assume grows by 1.5% above inflation, so the real purchasing power of a superannuitant's payment grows by a cumulative 66% from 2013 to 2050.[3]

Benefit payments are generally indexed to the CPI, and so do not grow in real terms. This allows beneficiaries to buy the same bundle of goods and services through time - whereas wage earners (or NZS recipients can afford an increasing bundle through time.

Public services per capita grow cumulatively by 34% (0.8% a year) under the historic trends scenario. Total spending on public services is larger than spending on NZS, but is shared among more people, including superannuitants, than superannuation spending.

Under the sustainable debt scenario, public services bear all of the adjustment required to reach a sustainable level of net debt. Figure 2.3 shows the effect on the basket of this adjustment. NZS and benefits are unaffected, because they sit outside the annual budget allocation process, so are modelled the same way as under the historic trends scenario. As a result of the constraint, real public services per capita are lower than in the historic trends scenario. These public services fall by around 10% by 2023, in real terms, compared to 2013 levels. Once the constrained period to 2023 has passed, public services per capita begin to increase, but reach only 2% above 2013 levels by 2050.

Figure 2.3 - What individuals receive from the government – sustainable debt

Source: The Treasury

Figure 2.3 shows that the $1.1 billion operating allowance in the medium term is not enough to cover increased public service costs and increased demand from the larger and older population. The quantity of publicly-provided services to the average New Zealander would initially have to decline if no other changes were made. The 2009 Statement goes on to discuss how this constrained path of spending on public services could be achieved, and how other policy choices could affect the basket in the long term.

The next part of this paper shows how these modelling changes, along with changes in the underlying data, affected the projections between the 2006 and 2009 Statements.