4.4 New Zealand's long-term fiscal outlook

So far in this paper we have argued that, based on the insights from theoretical research and country experiences, high levels of government debt and expectations that government fiscal programmes will not be financially sustainable, can have significant adverse effects on economic growth and can impact on the intergenerational distribution of benefits and costs of government fiscal programmes. Although various fiscal anchors have been either proposed or applied in an effort to discipline governments, in New Zealand the Public Finance Act requires governments to manage debt at "prudent" levels. In recent years successive New Zealand governments have managed to keep the level of public debt well within what is regarded as critical levels. But, as we foreshadowed in the opening section of this paper, New Zealand is experiencing population ageing. This is a consequence of a structural change in our demographic make-up and is not a temporary phenomenon caused by the post-WWII baby boom. This demographic change has the potential to undermine the feasibility of ensuring the sustainability of current fiscal programmes and therefore undermine the ability of future governments to maintain the current configuration of fiscal programmes without breaching the principles of responsible fiscal management specified by the Public Finance Act.

We now turn to an example of what some of the fiscal sustainability measures outlined in Table 1 look like for New Zealand. This is done by showing simulations of the impact of population ageing, and other influences such as steadily rising real incomes, on future government budget balances and debt levels using the Treasury's Long-Term Fiscal Model. Longer-term projections can provide insights into possible structural changes in government expenditure and revenue over time in light of demographic ageing and other pressures. As we discussed earlier, this is a model that can provide more detail about the components that make up the finite horizon budget constraint and is used to provide projections of future paths for the components of the budget constraint, implications for government debt and the components of the fiscal sustainability measures outlined in Table 1. Each graph presented in this section can be split into three periods:

1. A historical period, 2007/08-2011/12 (based on historical data, reflected in the Crown accounts);
2. A forecast period, 2012/13-2016/17 (based on forecasts from the New Zealand Treasury Model; for July to June years); and
3. A projection period, 2017/18-2059/60 (based on projections from the Long-Term Fiscal Model).

As explained in Section 2.3, the projections for operating allowance-controlled government expenditure (eg, government spending not on welfare or interest payments, such as spending on health, education, justice and so on) based on cost pressures differ from this and begin in 2015/16, three years after the last General Election.