Growing deficit tipped from 2030 due to ageing

New Zealand's ageing population means that present Government policies on spending and taxation would result in a rapidly growing fiscal deficit emerging from about 2030, says the Treasury.

In its first Long-Term Fiscal Position report released yesterday, the Treasury published a "bottom up" projection looking at how existing policies and spending programmes would play out over the next 40 years as well as "top down" scenarios which explored changes to spending and tax policies needed to meet current fiscal objectives.

Under the bottom up projection, a doubling of health and superannuation spending as a result of the increase in the population's average age would result in core Government spending growing by about 7.5 per cent between now and 2050. At the same time the tax take would grow roughly in line with the rest of the economy.

"Not surprisingly, such an increase in spending, combined with an assumption that taxes are kept broadly constant, results in a decline in the operating balance and an eventual move from surplus to deficit," the report said.

The Government's finances would dip into the red by about 2030 and from then, debt and the cost of servicing it would rise rapidly, accentuating the impact on the overall operating balance.

While the New Zealand Superannuation fund would offset the rise in gross debt to some extent, keeping net debt below the level it was in the early 1990s, "the debt position, and more particularly its upward trajectory, is not consistent with the principles of responsible fiscal management".

"Moreover, without some policy change, the debt position would continue to deteriorate beyond 2050."

While the report revealed emerging pressures due to demography, "those pressures are a long way off", Treasury Secretary John Whitehead told a media briefing yesterday.

Nevertheless, the report's top down projections estimated that if the Government was to keep net debt at 20 per cent of GDP over the long term without raising taxes or cutting superannuation, health, education and welfare spending, other Government spending would need to be halved.

If all the adjustment took place on the tax side, the tax to GDP ratio would have to rise to about 35 per cent by 2050 from the present 32 per cent.

Whitehead said the Government had the opportunity to make small and early adjustments to policy to maintain a prudent fiscal position.

For example, trimming growth in health spending from 5.6 to 5 per cent per annum alone would preserve current debt ratios.