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NZ must fund higher healthcare, pension costs while avoiding debt blowout, Treasury says

Thursday 11th July 2013

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New Zealand needs to consider how it is going to fund rising healthcare and pension costs in the future while avoiding a blowout in government debt, the Treasury says in its latest statement on the nation's long-term fiscal position.

On the nation's current track, revenue will fail to meet expenses by the mid-2020s, the Treasury says in its third such outlook statement to the government. The report, which must be produced every four years, aims to stir debate on options to address the shortfall.

The two areas of government spending projected to grow significantly are healthcare and superannuation. Government spending on healthcare is projected to grow to 10.8 percent of gross domestic product by 2060, from 6.8 percent in 2010. Meanwhile, spending on New Zealand super is predicted to increase to 7.9 percent of gross domestic product in 2060 from 4.3 percent in 2010.

"The sooner we make decisions or choices, the better," Treasury secretary Gabriel Makhlouf told a briefing in Wellington ahead of the report's release. "There is no crisis. If we start thinking about gradual change rather than change in crisis circumstances we will be able to address (the issues) in a much more effective way. There are examples throughout the world of societies having to put in place radical change quickly which is much, much harder."

Treasury projections for government expenses, revenue and debt show net government debt could balloon out to 198 percent of gross domestic product in 2060 if no changes are made, from a forecast 27 percent in 2020.

The government's lead economic policy adviser suggests four broad options for closing the looming gap between projected spending and revenue.

The country could automatically adjust income tax thresholds to compensate for price inflation growth. This would see the government collect more tax and be able to spend more while still maintaining debt at an average of 20 percent of gross domestic product over time. Still, this would probably have negative economic growth impacts.

Alternatively, the level of GST consumption tax could be raised to 17.5 percent from 15 percent in the 2018 financial year, which would also enable higher spending whilst maintaining debt levels. Raising GST would ensure costs were spread across different income groups. Still, GST is essentially a tax on labour so any economic growth effects would be negative. Also, it could prompt people to buy more goods from overseas, decreasing revenue and hurting the local retail industry.

Separately, the government could reduce the pace of growth in healthcare spending, so it reaches only 9 percent of gross domestic product in 2060 rather than 10.8 percent. Still, that is likely to mean those who have the means could purchase treatments which weren't funded while others may not be able to access them.

To be sure, the country could also increase the age of eligibility for New Zealand superannuation to 67 years from 65 and index the level to price inflation rather than wage growth from the 2020 financial year. However that means the impact would fall mainly on people whose primary income was New Zealand super, raising equity concerns. On the other hand, it may boost economic growth by encouraging people to work for longer and save more.

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