The Government faces an interminable cycle of debt and deficits, which would see New Zealand’s debt levels rise to more than two trillion dollars in 40 years if it doesn’t get the costs of an ageing population under control.
That’s according to Treasury’s most recent analysis of the Government’s long-term finances, a draft of which has been put out for consultation. The document looks at the state of the Government’s finances over the long term and questions whether they are sustainable.
The cost increases will be driven by the cost of healthcare and superannuation, which will both increase under the weight of an ageing population.
The cost of healthcare will rise from 6.9 per cent of GDP this year to 10.5 per cent in 2061 and the cost of superannuation will rise from 5 per cent of GDP now to 7.6 per cent of GDP in 2061.
The size of government spending will swell to 43.4 per cent of the economy, up from 33.1 per cent currently. Tax revenue won’t keep up, meaning that by 2061 the Government will spend vastly more money than it raises, leading to a deficit of 11.7 per cent of GDP.
Even the cost of servicing that debt will increase. Currently, the Government spends just 0.6 per cent of GDP on debt servicing each year. This will increase to 7.6 per cent by 2061.
That will end up as Government debt worth 177.3 per cent of the economy, up from 34 per cent today – about $2,517 billion. Treasury thinks the economy as a whole will be worth $1481b in 2061.
Debt would be five times larger as a share of the economy than it is today. Our debt levels would be roughly comparable to those of Greece, whose debt-to-GDP ratio was 177 per cent during the debt crisis of 2015.
Prime Minister Jacinda Ardern said the Government was mindful of the long-term state of the Government’s books.
“You will have seen in the last budget, we were very careful to make the decisions that in our view would help support the recovery, whilst being very mindful about our long term debt and our debt trajectory,” Ardern said.
This isn’t the first time Treasury has published gloomy forecasts. In 2016, the last time it published its long-term fiscal report, it had net debt hitting 174.1 per cent of GDP.
However, this time around Treasury offered the Government alternative policy options to stop Crown finances from spiralling out of control.
One option looked at keeping superannuation expenses roughly where they are today. This could be done by increasing the superannuation age of eligibility and indexing payment in line with inflation rather than wages.
Both “options would generate substantial long-term savings and could have economic benefits,” Treasury said.
Another option would be to increase tax revenue by not adjusting tax brackets as incomes increased or by adding new taxes like a capital gains tax. This would let the Government’s revenue catch up with spending.
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