Government cuts quick and deep according to Treasury. Photo / Businessdesk
Government cuts quick and deep according to Treasury. Photo / Businessdesk
Treasury’s chief economic adviser Dominick Stephens says that the “speed and size” of the cuts to the per person level of Government spending in the next few years will be “generally unprecedented” in modern times.
In a speech on the topic of what New Zealand’s increasingly long-lived populationmeans for our stretched finances, Stephens stressed the importance of getting back to surplus and said that the Government’s forward spending track implied this would mainly be achieved by cuts.
“[W]e must bear in mind that the population will grow,” Stephens said.
“This means that the Government will have to increase revenue or reduce the amount that it spends per person, in inflation adjusted terms, to meet this target [a return to surplus]. This implies that savings and reprioritisation will likely be a feature of future Budgets, as in Budget 2024.
“The Treasury’s latest forecasts assume that most of the return to surplus will be driven by declines in per capita government consumption. The implied speed and size of this decline is generally unprecedented in recent history in New Zealand,” he said.
A chart presented with the claim shows a spending track that declines markedly in the next few years, however it also shows that in real terms, per capita spending ends up roughly where it was on the eve of the pandemic.
Banging the drum
Stephens said that while New Zealanders’ longevity was obviously a positive development it presented challenges
“[S]ociety is going to have to adapt, including regarding government revenue and spending,” he said.
He said Treasury had been “banging the drum for many years” on the problem of the “long-term unsustainability” of our fiscal policy.
Stephens noted that this story had changed over time. Worryingly, New Zealand’s net core Crown debt is now much, much higher than Treasury forecast back in 2006, when it began beating this drum. Back then, it projected net core Crown debt of 13% of GDP, about a third of what debt is now.
“Starting out with higher debt increases the sustainability challenge, because of the compounding nature of interest,” he said.
Per capita spending will decline. Graphic / Treasury.
“It is hard to overstate how profound this change has been,” Stephens said.
Labour market participation of 65−69-year-olds was around 10% in 1993 and in 2006, Treasury projected it to increase to 38% by 2023. In reality, it is 11 percentage points higher, at 49%.
For the 70-74 age group, labour market participation was projected to increase from 4% in 1993 to 19% in 2023, but instead it increased to 27%.
Taxing and spending
The speech raised several concerns about the level of spending an ageing population will require.
“The New Zealand Government spends considerably more on over-65s than it gathers in tax revenue from over-65s. Therefore, as the over-65s become a larger share of the population, the public purse will be stretched further and further,” Stephens said.
He noted that New Zealand “has the highest basic pension paid out of general taxation relative to gross earnings in OECD countries”.
The $77 billion Super Fund will help future governments pay for this cost, however Stephens said “it will only reduce, rather than eliminate, the tax burden on future generations of New Zealanders”.
Superannuation costs are hitting the Crown's balance sheet. Photo / 123RF
Other costs were also a concern, particularly healthcare, which had increased in cost.
“Managing healthcare spending is central to the long-term fiscal challenge because it is a large and growing part of total government spending,” Stephens said.
He said some savings could be made through “a greater preventative focus and reducing inefficiencies”, however making larger savings would “require some tough choices around entitlements” - that means trimming what some people are able to receive from the health system.
“This would come with trade-offs, particularly for groups of the population who already face challenges accessing health services,” he said.
“[S]uccessive increases in taxes over time would be required unless actions were also taken to manage demographic expenditure pressures,” he said.
While the Government was focusing on cutting spending as a method of restoring fiscal sustainability, Stephens noted that it also had the opportunity to use revenue tools. Though not mentioned in the speech, Treasury has often discussed the merits of a capital gains tax.
Won’t somebody think of the children?
Stephens warned that the focus on the fiscal challenge presented by the elderly should not distract from the challenges faced by the young. New Zealand’s fiscal system is a contract between the generations; the young pay for the old. Today’s young expect that future generations will pay for them.
“We need a population of working people that is willing and able to support those who are past working age,” he said .
There are some emerging societal problems that suggest the young are not being looked after in the way they might expect to be.
Stephens noted that “[a]verage scores in reading, maths and science have been declining for the past 20 years, and the proportion of children reaching age 15 without basic skills is climbing” and that “[m]ental health problems are skyrocketing among young people, with 21% of 15–24-year-olds experiencing high or very high levels of psychological distress”.
This appears to be manifesting itself in the labour force. While overall labour force participation of New Zealand’s 15– 64-year-olds is very high by OECD standards, suggesting our youngest workers are not doing as well as the labour force as a whole.
Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the Press Gallery since 2018.
