Public purse will be stretched ‘further and further’, Treasury warns

Thursday, 26 September 2024

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Treasury chief economic adviser and deputy secretary Dominick Stephens has delivered a stark warning over the trajectory of government finances, saying the public purse will be stretched “further and further” as the population ages.

Higher-than-expected debt and “structural fiscal deficits” were compounding the fiscal challenge of an ageing population, he warned.

Stephens acknowledged his comments in a speech delivered to a conference in Queenstown amounted to the more of the same from the Treasury.

“The Treasury has been banging the drum for many years on the long-term unsustainability of fiscal policy,” he said.

Treasury chief economic advisor Dominick Stephens.

“Since 2006, the Treasury’s Long-term Fiscal Statements have repeated the message that our fiscal settings are not sustainable over the long run, given the impact of population ageing.”

But he emphasised the seriousness of the situation.

“The healthcare, societal and economic advances that have allowed us to live longer lives represent a fantastic improvement in living standards.”

But in the 1960s there were about seven people aged between 15 and 64 for every person aged 65 or over. Now there were four and in 50 years there would be only two, he said.

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Stephens described the current trajectory of government debt as concerning.

“New Zealand is currently running a fiscal deficit of around 2.4% of GDP. This deficit is structural, meaning it is not solely the result of the current economic downturn.”

That meant government action, as well as economic recovery, would be needed to return the Government’s books to surplus, he said.

The Treasury is not currently forecasting a return to surplus until the year ended June 2028, after a series of previous delays, and the surplus forecast for that year is small, at $1.5b, appearing to put even that target in doubt.

The Government has announced operating allowances for new spending of $2.4b for each of its Budget between 2025 and 2027.

But Stephens said the Treasury’s high-level estimates suggest that the cost of delivering current services would rise by about $2.5b over the year ahead “and we must bear in mind that the population will grow”.

“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,” he said.

His analysis came on the heels of a call from ANZ Bank chief executive Antonia Watson for a capital gains tax, and after a warning from an accounting industry body that managing public finances would just get “harder and harder” without tax reform.

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Stephens didn’t refer directly to the desirability of new or increased taxes during his speech.

But he said governments would likely need to draw on “multiple expenditure and revenue changes to close the fiscal gap”.

Raising additional revenue had economic costs as it affected decisions to work, save, and invest in the economy or ourselves, he said.

But he said there were options that came with smaller economic and social costs than others, “including opportunities to improve the efficiency of our tax system”.

“Successive increases in taxes over time” would be required unless actions were also taken to manage “demographic expenditure pressures”, he said.

He suggested pension reform might need to be part of the equation.

“The downside of ‘universality’ is that it makes national superannuation expensive,” he said.

“This tension between affordability and work incentives will need to be balanced in future thinking about the design of retirement policies.”

Assuming most of the return to surplus was achieved by cutting per-capita government spending, the speed and size of that decline would be “generally unprecedented in recent history in New Zealand”, Stephens said.

Responding to that assessment, Finance Minister Nicola Willis said she didn’t think that was the only lever the Government had.

“I think what is instead required is that the Government continuously looks at how it can spend effectively and support the needs of its population,” she said.