Treasury forecasts government debt blowout by 2060 without pension or health spending changes due to ageing population; suggests options for reform; says no crisis for now

Treasury forecasts government debt blowout by 2060 without pension or health spending changes due to ageing population; suggests options for reform; says no crisis for now

By Bernard Hickey 

Treasury has released its third Long Term Fiscal Outlook that repeats a general warning to future governments that net debt will blow out to an unsustainable 198% of GDP by 2060 because of the increased costs of pensions and healthcare from an ageing population unless government change their spending or revenue tracks.

That projection for a net debt blowout from around 25% now includes an assumption that the current terms for New Zealand Superannuation, which include a retirement age of 65 and payments for couples of 66% of the average wage after tax, and that the eligibility and growth track of New Zealand's publicly funded health system not change. 

Treasury, which is required under the 1989 Public Finance Act to release long term forecasts every 4 years, outlined four major options for spending and taxation reform that would substantially reduce that net debt track back towards 20% of GDP over the long run.. 

They included in no particular order or preference:

1. Indexing personal income tax thresholds to price inflation, but not to real wage growth.

Currently, wage earners automatically progress up into higher tax brackets and pay proportionally more tax as their real and nominal wages rise in a process known as 'bracket creep' or 'fiscal drag'. Treasury's baseline assumption is that governments would keep revenues at around 29% over time by adjusting for the bracket creep by periodically increasing the bracket thresholds. 

This option means that brackets would be increased to adjust for consumer price inflation, but not be adjusted upwards for real wage inflation. This would see the amount of government revenues rise, allowing government spending to rise in a way that that kept net debt around the 20% of GDP seen as prudent in the long run.

2. Increase the GST rate to 17.5% from 15%.

Treasury said increasing the Goods and Services Tax (GST) to 17.5% would increase the government's tax take from around 29% of GDP to 30%.

3. Reduce the projected rate of growth in public healthcare spending

The baseline forecast leading to the blowout in net debt forecasts that an ageing population would increase government spending on healthcare from 6.8% of GDP in 2010 to 10.8% in 2060. 

This option involves reducing the growth in public health care spending to 9% of GDP rather than 10.8% by 2060.

4. Raise the eligibility age for NZ Super to 67 and index payments to price inflation rather than wages

This option involves lifting the age of eligibility by 6 months each year starting in 2019/20 so the age would be 67 for everyone by 2023/24. It would also see the annual growth in NZ Super payments indexed to price inflation, rather than wage growth, from 2019/20.

Treasury Secretary Gabriel Makhlouf said the potential options outlaid in the report were not recommendations.

"The bigger picture is there is no crisis in the issues we're addressing here," Makhlouf said of the report tabled in Parliament after a year of research and consultation. See the full report and package of papers here. 

The aim of the report was to stimulate public debate so gradual change in policy settings early enough to avoid a crisis in later years, he said.

Sticking with pension settings 

Deputy Prime Minister and Finance Minister Bill English, who was speaking on behalf of Prime Minister John Key, defended the National-led governments rejection of calls to change the retirement age or superannuationa entitlelments, saying the government's spending restraint and aim to reduce net debt below 20% of GDP by 2020 meant the government was well placed to deal with future shocks.

“By taking action early, we are ensuring New Zealanders continue to receive the public services they require, which is important as the population ages and requires extra resources in areas such as superannuation, healthcare and disability services," English said.

"The Long-Term Fiscal Statement shows the longer the current fiscal strategy is followed, the more the fiscal position in the 2020s and beyond will improve – particularly with respect to significantly lower debt," English said.

Labour Finance Spokesman David Parker said the report showed the Prime Minister's pledge to resign if he ever changed the entitlements to New Zealand Superannuation was foolish and would cost New Zealand NZ$30 billion by 2030.

“National makes all sorts of noise about long-term fiscal sustainability, but they are ignoring the ageing elephant in the room," Parker said. Labour has pledged to increase the retirement age to 67.

(Updated with more detail, Treasury comments, Finance Minister comments, Opposition comments)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

29 Comments

Comment Filter

Highlight new comments in the last hr(s).

How far down their list was the option to farm out the 'work' currently done by Treasury...and give the dept a number one haircut...?

rather than risk wasting your time and mine Wolly, may I ask whether you are actually interested in a thoughtful discussion about the merits and problems of outsourcing Treasury's and other Government departments' work?

"Serious"...me!....you know the answer to that Ms de Meanor.
Since when did Treasury have a right to be protected from competition...all other depts of govt face this prospect to a some degree...always subject to Treasury proposals...
Let's shine some light in on Treasury...a thermal laser would be best...Or we could carry on treating this govt dept as some sort of special entity...a club for the bureaucratic elite in wgtn.
If savings can be made without a decline in the fabulous performance of this entity to date!...ha
then let's be having it...let's see Treasury subject to the same rigors of the free market that they demand of all other depts....fat chance Ms de Meanor

There is a problem with the accounts and now the pollies are grabbing at tax for offshore purchases, incr in gst and higher eligibility age ... sounds like a distress call ;) 

Treasury has released its third Long Term Fiscal Outlook that repeats a general warning to future governments that net debt will blow out to an unsustainable 198% of GDP by 2060 because of the increased costs of pensions and healthcare from an ageing population unless government change their spending or revenue tracks.
 
Can someone post the methodology for projecting the GDP forecasts out to 2060 along with the resultant numbers?
 
Let's hope they have been more rigourously investigated for veracity than the casino conference centre deal. Read more
 
In a regulatory impact statement, it says "the potential costs of the regulatory concessions [to SkyCity], in terms of harm from problem gambling, are outweighed by the benefits to New Zealand from having an international-standard convention centre".
 
Regrettably, just-released documents about the project do little to advance that assessment.
 
Vagueness is the common trait of much of the paperwork. The impact statement notes, for example, that it is expected the centre will be the catalyst for $90 million of additional tourism spending in Auckland each year.
 
This, however, is based on an Institute of Economic Research study done two years ago. Similarly, the ministry anticipates that the 3500-delegate centre will attract 31 additional conferences to New Zealand each year, which will mean an additional 33,000 conference attendees.

 

This is sourced from a study done by tourism consultant Horwath HTL for the Auckland City Council as far back as 2009.

in particular
http://www.treasury.govt.nz/government/longterm/fiscalposition/2013/pdfs/ltfs-13-bg-ratna.pdf

 
Ms de Meanour thanks for the link and I guess you are referring me to section 4.7 - page 24 (page 30 of 53 PDF Reader).
 
Frankly, I find the description laughable - please explain with the sources for the variable forecasts. In the same vein I find the static CPI assumption (Section 4.5) given the expected rise in the government 5 year note rate from 2.2% to 6.0% (Section 4.6) contemptible.
 
I await some projected GDP values.

For the avoidance of doubt I am not responsible for the content of the link.  All I did - which you could with equal facility have done for yourself - was look on the Treasury website to find the paper and the publication. 

I can assure I make it my business to read these reports, my life depends on it - but I remain in a constant state of confusion having spent considerable time reading documents that are created in such an inchoate manner that they can only have be prepared to impress those already in possession of the undelying facts.

Thirty minutes elapsed between me posting a link to the full set of Treasury analysis and you posting an opinion on it.
 
Do you really think you've given it a fair reading?

Do you really think you've given it a fair reading?
 
What can I say? - recognised and banned card counter, amongst many other extraordinary faculties. Does that suffice?

Skimmed through in 10mins, what struck me was they have taken others projections and have not considered greaty their validity.
Stephen used a great descriptive word, inchoate, very apt.
The main reason my opinion formed so quickly is because its BAU....which is void.
The first thing, unemployment is going to be more like 12% and not < 6%.
Second they say in one point that crime is a young man's game and indeed it is, youth unemployment could well rock in at 24%....crime therefore will be higher and hence the costs.
I'll carry on reading....but its a joke.....
Look at the way the debt forecast went from 100% of GDP to 220% just from 3 years of recession. Now I have not located (yet) how long they expect this to last but its another 3 years minimum....and with peak oil kicking in I think its 30 years....
In terms of reading it in detail, detail isnt want you want its the overview....50 years pf BAU? even the most optimistic oil guy isnt projecting much oil past 2050. So there is nothing to drive our economy with past that date at the latest, and i think 2030 could even be too optimistic.
regards
 
 
 
 
 
 
 

Found the comment on oil and gas, we have some "we" think there is moreso we'll earn money from it. Nothing on the neg impacts of peak oil to our economy despite it now being pretty main stream.
ho hum.
 

Oh yes MDM. I to, would proffer an opinion sub thirty minutes, given histororical  Treasury analysis I have read....
 It is to say the least  in a constant state of flux, between the good news and good news yet to be interpreted as such.
 They all float ...down here.

"Can someone post the methodology for projecting the GDP forecasts out to 2060 along with the resultant numbers?"
They would have no idea....just more garbage from treasury. Out to 2060...hahahaha.
Remember fiscal tightening?  good luck with that, or pulling back on QE....yeah right.
Seriously we are really in a debt bind that will require check kiting between treasury (US) and the Federal Reserve....for the forseeable future.
New Zealand is collateral damage.
Cheers
 

and perma shrinking GDP / economy scenario?
oh no that cant happen, no such thing as peak oil...no...no...no.....
regards
 

Superannunation. A small business of my aquaintance sent $10,500 to the IRD for PAYE and Kiwisaver, for June. 
$1900 of that total was input into Kiwisaver.  Thats actually quite a large chunk, compared to the income tax.  In a couple of decades that will be a massive resource for those people.
There is potential to phase out National Super over (say) 30 years.  As the Kiwisaver phases in.  Especially if it was compulsory, universal, and about a total of 15%.
Take old age incomes out of the government expenditure altogether.
Yes I know you are 'yadda yadda' brilliant free investors, and of course you already pay compulsorily for national super already.

Have you read the Treasury's analysis, that you know for a fact that they don't consider compulsory superannuation, or are you imagining that Bernard's summary above is a full picture?  

Of course it's a good summary, but it cannot possibly be a full picture of the Treasury analysis.   If you look here, you will see that there are no fewer than 21 supporting papers of detailed analysis as well as the main document, which is itself a summary of that.
http://www.treasury.govt.nz/government/longterm/fiscalposition/2013
 
 
 
 

I'm not saying that I've read all the background papers, just that I wouldn't presume to judge what is and isn't in them without doing so.  You clearly haven't even looked at the titles of the papers, otherwise you would have noticed that one of them specifically deals with the future costs of retirement income policy and another focuses on tax options.  If and when you read those you will be in a better position to opine on what has and hasn't been included in the analysis.

It ignores peak oil, ergo its fundimentally flawed.
regards

..add to that the inevitable limits that will come due to excessive carbon levels and the neccesity to reduce..

Hey BH, you yourself put up a chart/graph showing peak everything maybe some Qs like, oil will be gone by 2050, if not 2030 where is that effect shown in your numbers?
Answer, it isnt I bet....ergo their projectoions are make believe.
The Q is then do they know its utter rubbish or are they this bad.
The next Q is why do we employ them.
"The outcome of this scenario is very sensitive to the starting position. New Zealand went
from a projection of the 2050 (net) debt ratio of over 100% of GDP in the 2006 statement
to over 220% three years later. What had changed? There were some spending policy
changes and tax cuts, but the main change was the economy contracting in 2008 and the
need to support people through the worst of the recession."
So just the first saw tooth down took debt from 100% of GDP to 220% in just three years and this isnt the worst....thats to come...
Their projections seem to reply on long term trends? and the return to them? all these are pre-peak oil, hence wrong.
 
regards

The Treasury paper seems useful in setting assumptions and benchmarks to test for in the next 2-3 years and beyond. And it makes a reasonable case for no desperate need for panic. Nevertheless the overall assumptions feel a bit rosy; while they could have also broached a few other alternative solutions. Higher compulsory super could be one, as noted above. Dropping universality of the pension, or reverting to a means test or higher tax rate until it is negated are others. Just possibly they ran options past Winston Peters for what was remotely acceptable, and he maybe vetoed a few.
More importantly, it seems to me, Treasury have focused too much on fiscal debt (which I acknowledge is important enough), and not enough on net national wealth, in real asset terms. And so they have in my view been very culpable in selling down assets, and disregarded the effects their debt funding from offshore has on our trading position and wealth. The GDP and productivity scores are not all that helpful, if in fact we are working more and more for offshore owners, just to give them a higher return. GNP per capita, and the current account effects may be better scores-measuring the amount of the pie we keep; as well as ensuring we own a good share of the pie factory. 
In the end the nation's ability to give a reasonable lifestyle to all its citizens, young and old, will be its total combined productive ability plus or minus returns on assets and debt. Treasury are okay at looking after the government end; but in my view just trading off against the private sector, who rack up the debt instead, in their current paradigm. 

Treasury are okay at looking after the government end; but in my view just trading off against the private sector, who rack up the debt instead, in their current paradigm. 
 
So true!

Come on guys......projections to 2060...seriously.
We all know the government needs to balance the books in the present. During their own term in power. 
All spending needs to be taxed for or not spent.
We could start with windfall capital gains in Auckland.

Good that Treasury set out its main assumptions for this assessment.  
These show that it provides its assessment without seriously accounting for the implications of and costs of climate change and fails to link climate change to the need to STOP oil exploration and extraction.
Then there is the "if we continued with historic trends we would be in trouble" approach.  Is that realistic? or do politicians actually change their approach as facts change?
Overall a "D".

I hope someone can explain to me why we cannot have a flexible retirement age like Canada. You choose to retire early and get a lower state pension or you decide to retire later and you get a greater state pension, same for Kiwisvaer here of course. 
The Govt looses nothing and people get to enjoy flexibility to suit their circumstances. It also takes the heat off the compulsory retirement age of course!

maurice24. My father retired at 60 in Ontario. With a sizable nest egg, which disqualified him from old age security as it's means tested. Of course interest rates have been subsequently suppressed and his income halved (2 or 3% for 5 years).
I always wonder if he was a fool to save as much "cash" and so fall out of old age security benefits.