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Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position

3.3  How much could demography ease fiscal pressures?

One response, often heard when population ageing and the fiscal position are discussed, is that perhaps the projected gap between revenue and spending could be closed with increases in immigration, or fertility. This section examines the fiscal impact of these sorts of changes.

If the net inflow of migrants were to be increased from 10,000 a year to 30,000 for each year from 2014 onwards, using the current proportions of each age and gender, and if other demographic assumptions stayed the same as in the base case, the old age dependency ratio would be lower by about 2 percentage points in 2030. Eventually, the earlier migrants become old and add to the rise in the old age dependency ratio, which would increase by about 0.9 percentage points in 2050. The overall effect is that net debt in 2050 would move from 223% to around 180% of GDP, as figure 3.7 shows.

If annual fertility were to increase from 1.9 to 2.5 babies per woman by 2014, then the old age dependency ratio would be lower by 4 percentage points in 2050. Yet over the next 40 years, this would lead to a deterioration of the fiscal position with net debt climbing to 251% of GDP in 2050. This is because the additional children require higher health and education spending early in their lives. Although this additional expenditure is followed by tax payments as these additional children move into the workforce, the initial increases in expenditure are not balanced out by the end of the projection period (2050).

These examples show that although changes in assumptions about demography can assist the fiscal position, the general story of increasing net debt remains the same.

Figure 3.7 - Effect on net debt of 30,000 migrants, and fertility of 2.5 from 2014
Figure 3.7 - Effect on net debt of 30,000 migrants, and fertility of 2.5 from 2014.
Source: The Treasury
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