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7.4  Sustainable debt scenario

The historic trends scenario provides a sense of long-run spending pressures within health care, but is somewhat removed from the fiscal constraints facing the government. The sustainable debt scenario, as outlined in Section 2.4.2, imposes a constraint on government spending that is consistent with net government debt trending back to 20% of GDP in 2050 (and assumes no increases in tax rates, and no changes to major policy settings, such as NZS). The sustainable debt scenario allocates available spending to meet projected demographic pressures in areas such as health care and superannuation. The remaining portion of available spending is then allocated proportionally across spending areas according to the share of existing expenditure base.

Under the sustainable debt scenario, spending on health care grows at an average of 4.3% per year, reaching 8.1% of GDP in 2050. As Figure 7.6 shows, this level of spending is well below the result obtained in the historic trends scenario (10.7%). This result also represents a lower level of spending than that obtained under the most favourable productivity assumption in the historic trends scenario, where health spending reached 9.6% of GDP in 2050. The magnitude of the fiscal constraint suggests that substantial productivity gains alone would not be enough to allow the health system to match the quantity of services modelled under the historic trends approach.

Figure 7.6 - Health spending under the sustainable debt scenario
Figure 7.6 - Health spending under the sustainable debt scenario.
Source: The Treasury

Under the sustainable debt scenario, the annual increase in spending averages 4.3% -lower than the average of 7.6% per year since 1994, as Figure 7.7 shows. The rate of annual increase is lower during the initial period, at 3.3% per year until 2023, as the government limits spending increases in order to manage rising net debt. After net debt is reduced to around 30% in 2023, the operating allowance of new spending is adjusted so as be consistent with net debt gradually being reduced down to 20% of GDP in 2050 –the Government’s long-term net debt objective. This allows some room for the rate of health spending to increase after 2023. The annual increases in spending are projected to reduce gradually after the mid-2030s, as the effect of population ageing slowly subsides.

The sustainable debt scenario implies a level of spending that would allow inflation (2%) and average annual real input price growth (0.9%) pressures to be met in the medium term. Demographic and non-demographic demand pressures would be only partially met - implying a reduction in health services per capita of around 10% by 2023, similar to that illustrated with the basket of public services in Figure 2.3. After 2023, higher spending growth allows population growth pressures to be met, and some scope to increase the bundle of services per capita. In 2050, service levels approximate those reached in 2013.

Figure 7.7 - Annual nominal growth in health spending - sustainable debt
Figure 7.7 - Annual nominal growth in health spending - sustainable debt.
Source: The Treasury
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