The government should consider policies to help improve the responsiveness of housing supply as one measure to take pressure off interest rates and the exchange rate, Treasury says.
Treasury also gave the government a warning that current superannuation policies presented a considerable fiscal challenge as the Baby Boomer generation retired, and that leaving settings unchanged would necessitate more tax revenue to fund in the future.
Treasury's comments on housing supply were made in it November 25 briefing for the incoming Minister of Finance. They were written before the government-appoointed Productivity Commission highlighted in December that tight land supply for new house building was one of the major factors putting upward pressure on house prices in New Zealand, leading to a deterioration in housing affordability.
In its November 25 briefing to the Minister of Finance, Treasury said steps should be taken to reduce future cyclical rises in interest and exchange rates.
Measures proposed by Treasury were:
- A fiscal structure dimension relating to the level and composition of government revenue and expenditure. This could help to improve the impact of government revenue and expenditure decisions on economic performance over time.
- An explicit macro stability dimension. Such an amendment would help to reduce the risk of procyclical fiscal policy during economic upturns, such as occurred between 2005 and 2008, and the related additional upward pressure on interest and exchange rates.
- Policy changes to improve the responsiveness of housing supply are another key way in which future cyclical pressures could be reduced. A more responsive housing supply could reduce house price cycles and the related negative consequences for household saving, interest rates, and the exchange rate.
Sort out retirement policies
Over time, the government's fiscal position would come under increasing pressure as the “baby boomers” moved into retirement, Treasury said.
"Many other developed countries are facing a similar challenge. New Zealand’s “65 and over” population is projected to grow nearly four times more quickly than the total population over the next 15 years, contributing to a rapid rise in health, aged care and New Zealand Superannuation (NZS) costs in particular. The resulting fiscal challenge is considerable and there is no way to avoid making tradeoffs," it said.
"Given the potential economic and social instability that could result from uncertainty about these tradeoffs, we think it is crucial that efforts be made to build broad public consensus on the way forward. The current acceleration in the growth of the older population means that building this public consensus is a matter of priority for New Zealand."
A range of potential options for addressing long-term fiscal challenges would be offered in the next Long Term Fiscal Statement, which will be presented to Parliament by October 2013 as required by the Public Finance Act.
"Reducing the level of government funding allocated to retirement income was one key way that long-term fiscal pressures can be addressed while simultaneously boosting economic performance. Leaving current retirement income settings unchanged would necessitate increases in tax revenue, which would harm growth, or large reductions in other government expenditures, such as health or education," Treasury said.
There were various ways in which retirement income settings could be adjusted to reduce fiscal costs.
"The evidence, including the last increase in the age of eligibility for NZS from 60 to 65 implemented in the decade to 2001, indicates that reforms can encourage significant increases in labour force participation among older workers. A number of countries have already agreed to future phased increases in the age of pension eligibility as a way of ensuring they can provide other services sustainably and encouraging households to take greater provision for their retirement income," Treasury said.
"Certain types of reform can also have an impact on household saving behaviour, which could potentially help reduce persistent saving-investment imbalances and our net external liability. Early signalling of future adjustments to retirement income settings allows households time to adjust and prepare, and, as a result, can also lead to an earlier impact on saving," it said.
Put interest back on student loans
Meanwhile, towards the other end of the age spectrum, the evidence available indicated that the introduction of interest-free student loans was likely to have discouraged saving for tertiary education and failed to significantly increase access to tertiary education, Treasury said.
"Reintroducing interest on student loans would create greater incentives for students and/or their families to save for tertiary education without significant adverse effects on tertiary education participation," it said.