Economic outlook bad, but not as bad as expected last year

Updated long-range projections for Government debt are less unnerving than last year's but still unsustainable, the Treasury says.

Speaking to a conference on retirement income policy and inter-generational equity in Wellington yesterday, Treasury deputy chief executive Gabriel Makhlouf said last year's Long-term Fiscal Statement, prepared at the depth of the recession, had recently been reviewed to reflect the stronger economic and fiscal starting point prevailing now, and policy changes in the Budget.

Instead of net Government debt hitting 223 per cent of gross domestic product in 40 years, it would be just above 100 per cent, or about where Greece is now.

But what mattered was not so much the level as the direction, Makhlouf said. If the direction was ever upwards, and deficits were set to continue, then it was unsustainable and only a matter of time before 100 per cent spiralled to 200 per cent.

"If you project historic trends in spending into the future, then the projections for the Crown's debt curve is headed upwards, meaning that growing debt-financing costs ensures net debt will continue to grow at an accelerating rate."

He said these were not forecasts of what would happen but projections which extrapolated current trends and policy settings. That included demographic trends.

"By 2060, we expect that there will be four people aged 65 years and over for every 10 New Zealanders of working age, between 15 and 64. That ratio compares with a ratio of two to 10 today," he said.

"If you combine the pre-working age population [those under 15] together with those aged 65 and over, then in 50 years' time demographers expect that the ratio of these traditionally non-working age people will be seven to every 10 ... compared with a ratio of 5 to 10 today."

Among the projected effects of an ageing population were a fall, from the middle of this decade, in the labour force participation rate, that is, the proportion of the working age population either working or actively seeking work.

That would contribute to an expected decline in the economy's trend growth rate from an average of 3 per cent a year over the next three years, to a bit under 2 per cent from the mid-2020s, Makhlouf said.

It was also projected to drive spending on New Zealand Superannuation from 4.4 per cent of GDP now to 8 per cent by the middle of the century, and health spending from 7 per cent to more than 10 per cent.

But economist Suzanne Snively warned of a dismal Armageddon view becoming self-fulfilling. In particular she objected to drawing a boundary between working age and dependency at 65 or any other age.

"Why does the participation rate decline at all as the population ages? Do people suddenly become decrepit? No. They don't even become less healthy. That happens two years before they die and as longevity rises that age goes up too."

Berl chief economist Ganesh Nana said projections reflected what was assumed about people's behaviour - and behaviour changed. "The participation rate of those over 65 has risen already," he said, "particularly for the 65 to 70 age group. It was 11 per cent 20 years ago but had risen to 33 per cent in the most recent Census."

Treasury analyst Paul Rodway said the projections did anticipate that more people would work later into their lives than in the past. "But even if the participation rate among older age groups rises, the aggregate participation rate comes down."