The Treasury says the Government needs to start thinking about how it’s going to get on top of rising costs associated with both an ageing population and climate change.
It maintains the level of debt issued in response to COVID-19 is “prudent”, and reducing debt levels too quickly could come at a “significant” cost.
However, it also says “net debt is likely to be on an unsustainable trajectory if expenditure and revenue follow historical trends”.
It made this comment in its draft combined 2021 Statement on the Long-term Fiscal Position and Long-term Insights Briefing, released for consultation until July 30.
The Treasury said the “scale of long-term fiscal challenges” means a “significant adjustment” in policy settings is necessary.
“Policies often have long lead times and it is important that any changes are signalled in advance, giving time for people to adjust,” the Treasury said.
“Small and gradual changes in the nearer-term could help to minimise the cost of fiscal pressures across generations, preventing higher debt and a larger adjustment in the future.
“There are also likely to be costs to delaying action, particularly if interest rates start to rise (increasing our debt servicing costs).”
One policy change won't cut it
The Treasury didn’t provide policy advice around what the Government should do long-term to reduce its debt levels.
Rather it did some modelling around potential policy changes, noting a “comprehensive package” would be required.
It considered raising the age of entitlement for NZ Superannuation (NZS), indexing NZS to inflation rather than wages, raising tax rates, and lowering health spending growth, among other changes.
The Treasury projected government spending on health will increase from 7% of gross domestic product (GDP) to 10% by 2061.
Meanwhile spending on NZS will rise from 5% to 7.6% of GDP by 2061, all the while tax revenue is expected to remain the same as a percentage of GDP.
"Our current tax-to-GDP ratio is below the OECD average, but New Zealand depends more than most OECD countries on a relatively narrow range of taxes on income and consumption - around 90% compared to an OECD average of around 70%," the Treasury said.
"Provided that current taxes are considered fair and efficient, a relatively narrow range of efficient taxes could be the best choice for New Zealand."
Difficult to put a number of the ideal level of debt
Importantly, the Treasury also suggested walking away from pinpointing a government debt target.
Pre-COVID-19, it recommended governments target net debt of 50% to 60% of GDP with a buffer of around 20% of GDP to respond to shocks.
However, the Treasury is now taking a broader view, saying there are a number of measures beyond debt-to-GDP - “generally the preferred measure” - that indicate whether a fiscal position is sustainable or not.
“There is no explicit definition of what a “prudent” level of debt is,” the Treasury said.
“This is because that level may vary over time, is more likely to be a range, and the decision involves both value judgments and analytical judgement.”
The Treasury said it is useful to consider both the “level” and “trajectory” of debt.
“In the absence of a long-run target for the level of net debt, governments can still identify and implement policy options that return net debt to a sustainable trajectory,” the Treasury said.
Evolved thinking
Publication of the Treasury’s draft document follows Secretary to the Treasury Caralee McLiesh delivering a comprehensive speech a fortnight ago around how government spending may need to do more to support the economy longer-term, particularly if interest rates remain relatively low by historic standards.
“While fiscal discipline is always important, it is also important not to have an excessive focus on debt levels as an end objective in and of themselves,” McLiesh said.
“The general rule of thumb is that debt should fund spending where, across generations, the benefits in wellbeing exceed the costs of that spending.
“The ‘right' level of spending therefore depends critically on the value of spending initiatives. Where initiatives can deliver high value for money, the appropriate level of debt will be higher.
“And with debt servicing costs at historically low levels, there is greater headroom for high-quality investments that raise living standards across generations.”
89 Comments
All that money printed is money borrowed by RBNZ on behalf of NZ tax payer allowed by the current government in power. There is no escape unless it becomes unbearable and unhealthy, then people and companies start to leave the country and the people left have to pay extra to take that burden.
That just simply isn’t true. At all. https://www.interest.co.nz/opinion/108139/jude-murdoch-and-steven-hail
This is one of a very very short list of actions this government has taken that I support.
Finally moving the ambulance a bit further back up the cliff. Kids that through no fault of their own, now aren't getting left behind in class because they are too hungry and cold to concentrate. It'll be interesting to see some stats, or hear from teachers as to how the classrooms have improved with this initiative.
I cannot agree more, my friends parents own multiple properties, creaming in rent with no mortgage both claiming super. I know they have worked very hard in acquiring multiple properties with their inheritance and using equity to buy more and more. While nurses get no pay rises, where people live in motels, where poverty is worse than ever, they are claiming super. All I can do is nod my head in dismay.
Exactly. It should be either one or the other, not both. Take the pension and give someone younger a shot at a promotion. Or carrying working and forgo the social welfare. Unless someone over 65 can actually show me where they've paid sufficient taxes to cover their pension on top of all the other costs of a functioning society, and that society owes them the return of their money?
The problem with means testing is that it punishes the prudent. Those who haven't made provisions for their future get Super while those who've forgone short term gratification to save or invest are denied it. Far better to raise the age of entitlement gradually and signaled well in advance. Start now 2022- raise the age of entitlement by 1 month per calendar year. It'll be age 67 in 24 years- 2045.
Nonsense. As has been patiently explained by many people, many times, over many years, NZ Superannuation is an unearned social welfare benefit like any other, universally available to over-65s to ensure that New Zealanders don't die in poverty in their old age. Logic demands that it be means-tested, to make sure it does not go to the undeserving rich. Everyone who wants to get NZ Super should be on a special tax rate that taxes all other income at 39% or higher. That would see quite a few oldies have a rethink about their sense of entitlement.
This is just utter BS. The current retirees have all been told during their life by politicians in the 70s and before that a portion of their tax is being put aside to pay for their retirement. It is not at all unearned, unless you are so gullible and stupid to swallow the propaganda from the politicians since then. Our Government has for decades committed to funding superannuation for retirees. The fact that they pillaged the retirement fund is no fault of the retirees, and as Sam Stubbs has pointed out, if they hadn't, NZ today would be one of the richest countries in the world per head of capita.
Your suggest as to tax rates here would just penalise the lower socio-economic classes.
What useless, meaningless ‘advice’. It honestly echoes something off Yes Minister: “We can’t sustain the current debt trajectory. Nope. But we shouldn’t be too quick to lower debt levels. Debt-to-GDP ratio ain’t everything, ya know. Gotta keep debt levels prudent. Not gonna define ‘prudent’ though. That would never do. It’s kinda a ‘vibe’ thing.”
“There is no explicit definition of what a “prudent” level of debt is,” the Treasury said.
“This is because that level may vary over time, is more likely to be a range, and the decision involves both value judgments and analytical judgement.”
Hardly decisive analysis.
The problem is the Treasury.
The government needs to pull them aside and then kick them to touch.
If they have only just worked this out then they need to go.
If they knew all along, then they need to go.
Treasury is a viper pit of sloth with no idea of the implications on a nation.
Well the utter financial mis-management over this last 18 months is stagering.
For house prices to be booming, building booming, inflation booming is a disgrace. The objective should have been to limit the damage not throw Billions and Billions around willy nilly.
There is going to be a massive financial crisis in the next wee while, everyone knows its coming, and we've wasted all our amo early.
It aint gunna be pretty!
The standfirst says 'The Treasury "warns" the Government needs to start looking at the tax, health and superannuation systems, as an ageing population is set to send the country's debt too far north.'
I'd say "asserts" would be a better word. Universal superannuation and a free, comprehensive health system are entirely affordable if the Government is brave enough to shift into high gear on the third one: tax.
New Zealand must tax the imputed or implied income from all wealth including the family home the same as it taxes earned income. If it does that, NZ Super and the public health system will continue to be entirely affordable.
Imputed rents on family homes is insane. It's the single stupidest idea you could imagine to address government funding shortfalls given the huge incentive it gives to already lazy governments to keep house prices high, and rewards them when they increase. Meanwhile, citizens have to pay today dollars for the privilege of living in their own home, and the resulting allowable deductions would encourage even higher levels of actual household debt to offset the imaginary made-up income you've just decided people are 'making'.
It's incredible the lengths people will suggest we go to to avoid the option of gutting a combative and rudderless public service who have strangled every region other than Wellington and held up vital infrastructure across the country. Pick the things we want to fund and fund them properly, and let the productive economy flourish, instead of undermining it at every turn.
Bravo GV! I will repeat what you have said which should be heard above all other noise; "Imputed rents on family homes is insane. It's the single stupidest idea you could imagine.." The only people who will think this is a good idea will have to be in favour of absolute Government control. Bringing to life George Orwell's 1984 if you will. It's a sort of "lets punish people for the consequences of their choices, especially if they are prudent ones" perspective.
When observing peoples behaviour, it seems that too many just don't want to grow up. Teenagers demonstrate extreme desires to have the freedoms and choices of adults. But they do not understand that every choice has consequences, and that to have the right to make that choice, they must also bear the responsibility for the consequences. So we see today many young people spending money hand over fist, mostly fairly wastefully because they want the "lifestyle", but then just a few years down the track they begin to realise what they are missing out on, and begin to exhibit the traits of spoilt children with severe cases of FOMO, and jealousy. Much of that attitude can be identified in this forum, where people blame groups like the boomers, of landlords (which is morphing into multiple-property owners) for their own ills. But what they don't do is place responsibility for what is happening where it belongs; on their own shoulders for the consequences of their choices, and the politicians for screwing up our country.
You cannot tax a country to prosperity and we may already be at peak tax so more tax reduces motivation and increases the desire to avoid both are counter productive. Provide incentives, reduce wasteful govt expenditure as well as getting a better bang for your buck and you are part way to achieving the desired result.
How to get debt to zero: (1) tax back $8bn worth of notes and coins and destroy them (2) seize the $67bn of NZD that people and businesses have deposited in banks and press shift + delete on that balance (3) tell foreign banks that their deposits of NZD are now worthless (4) tear up the $50bn of IOUs from Treasury (Govt's left pocket) to the Reserve Bank (Govt's right pocket)... I could go on. The point I am making is that Govt will NEVER balance the books - and the closer it gets to balancing its books, the further it pushes the non-Govt sector into debt (and that's us). So when people say that we need lower Govt debts, they are saying that people and businesses need less 'surplus'. So, what's our interest in lowering Govt debt again? https://eveningreport.nz/2020/05/21/keith-rankin-chart-analysis-nationa…
Anyhow, the artificial scarcity narrative applied to Govt money is plain stupid and is increasingly being seen as such - even in countries like the US (https://www.c-span.org/video/?512625-5/washington-journal-rep-john-yarm…). What matters is not how big the 'debt' number is, but whether we are using our real resources (people, materials, plant, infrastructure etc) sustainably and efficiently to support a healthy and happy population now and in the future.
The USD has lost over 15% of its value due to monetary policy over the last 18mths. No one is immune to having their currency smashed by bad policy.
Prudent players just dont want to buy your worthless paper anymore, which blows up the cost of imports. Zimbabwe, Venezuela, Argentina, Germany are all examples
All those countries had huge debts denominated in other country's currencies apart from Zimbabwe… who shut down their primary industries!!! The US currency value has changed - but has life changed in the US for the better or worse? Look at the history of AUS dollar vs US dolllar - has moved all over the place. Did Aussies suffer as a result?
Stunning really. It seems Treasury can't get it's head around the principles behind being the sovereign owner of our dollar. It seems they are too wedded to economic theory that dates from before 1971. I wonder what it will take to drag them, the RBNZ and our politicians into the 21st century?
For some context have a look at the Old Age Pensions Act 1898 (MANY of us wouldn't have qualified - yes asset tested and behavior tested)! Time to turn back the clock?
8. No such person shall be entitled to a pension under this Act unless he fulfils the following conditions, that is to say-
(1.) That he is residing in the colony on the date when he establishes his claim to the pension; and also
(2.) That he has so resided continuously for not less than twenty five years immediately preceding such date:
Provided that continuous residence in the colony shall not be deemed to have been interrupted by occasional
absence therefrom unless the total period of all such absence exceeds two years; nor, in the case of a seaman, by absence therefrom whilst serving on board a vessel registered in and trading to and from the colony if he
establishes the fact that during such absence his family or home was in the colony; and also
(3.) That during the period of twelve years immediately preceding such date he has not been imprisoned for four months, or on four occasions, for any offence punishable by imprisonment for twelve months or upwards, and dishonouring him in the public estimation; and also
(4.) That during the period of twenty-five years immediately preceding such date he has not been imprisoned for a term of five years with or without hard labour for any offence dishonouring him in the public estimation ;and also
(5.) That the claimant has not at any time for a period of six months or upwards, if a husband', deserted his wife, or without just cause failed to provide her with adequate means of maintenance, or neglected to maintain such of his children as were under the age of fourteen years; or, if a wife, deserted her husband or such of her children as were under that age:
Provided that, if the pension-certificate is issued, the pensioner's rights thereunder shall not be affected by
any disqualification contained in this subsection unless the fact of such disqualification is established at any
time to the satisfaction of a Stipendiary Magistrate; and also
(6.) That he is of good moral character, and is, and has for five years immediately preceding such date been, leading a sober and reputable life; and also
(7.) That his yearly income does not amount to fifty-two pounds or upwards, computed as hereinafter provided; and also
(8.) That the net capital value of his accumulated property does not amount to two hundred and seventy pounds or up[1]wards, computed and assessed as hereinafter provided; and also
(9.) That he has not directly or indirectly deprived himself of property or income in order to qualify for a pension; and also
(10.) That he is the holder of a pension-certificate as hereinafter provided.
Agreed...however, have a look at how well we currently means test Residential Care and some asset tested benefits. Not easy, particularly when so many now are from overseas...how you gonna fund out whats held offshore and never arrived here?
Not to mention trusts, family loans, gifts, fabricated debts. Good lawyer/accountant and your ok. But these professions would welcome it...great revenue streams for them
So what is the carrot here for those currently working, who are doing their best to pay massive mortgages and now face no support in their retirement years on the off chance they manage to actually own their own home before they retire? Because 'just leave' sounds better and better with each passing day. More ladder-yanking from the people who had their hand out at every turn on the way up.
Lots of hand wringing about Super. I would have thought the vast bulk of super would be recycled back into the community. It's hardly a fortune! Basic living costs would eat up the lions share. Considering officially sanctioned inflation is robbing lifetime savings, maybe throwing a few crumbs back into the cap is fair?
Very good point Colin, and one I struggle with too. I can't get my head around why our Government is does not have, or is not developing a major strategy to build business, and therefore employment across the country. Especially Labour, supposedly the party of the working classes, who are so afraid of business they won't work to restore working conditions, they won't work to support and build business's. Somehow they seem to think this is all beyond their reach/control and will somehow happen magically?
A one-off 10% tax on all investment properties would net a good amount of money.
Savers and taxpayers in general have subsidized speculators for too long - it is now time that parasitic housing specuvestors start contributing to the NZ society and economy, for a change.
NZ Super best model in world. Cheap, efficient and effective4. Great policy. Read Retirement Commission Review 2019 and remember past comments.
Economic forecasts out to 2060 are worthless, discussion
comment only, but accuracy useless and without foundation.
Two of New Zealand’s eminent commentators Martin Hawes and Michael Littlewood have strongly supported the New Zealand Superannuation Model. Littlewood in a 2013 paper said New Zealand Superannuation (NZS) is one of the simplest, most effective, and most cost effective Tier 1 schemes in the developed world. We mess with it at our peril” and Hawes said “NZ Super is a system so simple and cheap that we need to give people certainty and stop playing football with it”.
Little wood repeated his comment in 2018, stating “the net cost of NZS today is 4 per cent of GDP. That's a lot but it’s among the lowest total public pension spending in the developed world. Our Treasury thinks that in 2060, 42 years away, that net cost will be about 6.7 per cent of tomorrow's GDP.
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