John Whitehead: Treasury's soul-searching will aid economic planning

The Treasury will shortly publish the first of what will be regular reports on the outlook of the central Government's accounts over a long-term horizon.

Parliament instructed the Treasury to use its best professional advice and skills to produce a report on the outlook for our Government's financial position over the next 40 or so years.

The product of our labours, the Statement on the Long-term Fiscal Position, will be presented to Parliament tomorrow.

For those who are middle aged or older it might seem a rather academic exercise as, barring some spectacular and unexpected developments in science, we won't be here in 2046.

But it isn't academic at all. How future governments' accounts will look in the 2040s matters a great deal to our children, grandchildren, nephews and nieces.

But they also matter for adults and today's taxpayers because the future state of the fiscal position is increasingly a factor that governments take into account when setting today's policies.

A prime example is the New Zealand Superannuation Fund, where a portion of today's tax take is being invested to contribute to the future cost of New Zealand Superannuation.

It is, of course, impossible to predict accurately what governments will do over the next half-century across the very wide range of policies in which modern governments are involved.

The Treasury's statement will use available information to outline a set of potential scenarios based on the likely drivers of government fiscal policy in the decades ahead.

Worldwide, population structures started to change hundreds of years ago, and New Zealand has been part of this trend. The statement shows how this demographic shift is expected to affect government finances in the years ahead.

Demography is, however, only one driver of government spending. While it is important for some programmes, it has little or no impact on others.

It is important not to lose sight of the broader issues, such as overall economic performance and productivity.

The statement will capture the uncertainty around its projections by using scenarios, a series of "what if" questions. For example, what if economic growth is higher than we assume; what if fertility increases; what if governments chose to spend more on education?

It would be a mistake for anyone to try to use this statement to draw definitive conclusions about whether an individual policy is appropriate or affordable. Often such conclusions will depend on knowing what else the government is doing, or on having a view on the preferred role of government, an appropriate level of taxes or the overall state of the economy.

But it is hoped that the statement, as tentative as it must inevitably be, will nevertheless encourage discussion by New Zealanders and their representatives to inform policy formation in the years ahead.

The Treasury expects that the statement, which will become a regular feature of the news in the years ahead because it will be updated at least every four years, will be used by government departmental policy advisers as reference material as they advise ministers of the day

So what will our first report on the long-term fiscal position say?

Anyone hoping the statement will offer policy prescriptions will be disappointed. The report will have nothing to say about the affordability or otherwise of any individual policies or suites of government polices.

The statement, which will be posted on the Treasury's website www.treasury.govt.nz, will indicate that the combination of the projected structural change in the population and present policy settings is likely to lead to growing challenges to the fiscal position, and these pressures will accelerate from the 2030s.

At the same time, the statement assumes that governments will continue to follow the principles of responsible fiscal management contained in the Public Finance Act, meaning that they will act to ensure that the fiscal position remains sound.

The statement presents a range of scenarios about how governments could maintain a sound fiscal position.

The largest single driver of the fiscal position is the policy choices governments make, which means governments have the capacity to make the necessary changes.

Policy adjustments need not be large. Small adjustments to policy, starting early and sustained, would be sufficient to maintain a sound fiscal position. Small changes in individuals' behaviour in response to those policy changes will also be relevant.

Governments have already taken a long-term view in setting policy and this trend is likely to continue.

Preparing this statement is not an end in itself. The statement is a resource for policy makers, commentators and the public. We hope that they will all find it a useful addition to the information they use in making policy choices.

* John Whitehead is Secretary to the Treasury.