Opinion: An opening salvo in the coming clash of the generations

By Bernard Hickey Treasury Secretary John Whitehead is a typically dry and careful mandarin from the very top echelons of New Zealand's public service. So it was no surprise today that his presentation of the Treasury's Long Term Fiscal statement was couched in the usual dry, careful language of a document from a long-serving bureaucrat. He highlighted the outlook for government debt rising to more than 220% of GDP or over NZ$2 trillion by 2050 was just a projection dependent on many assumptions. He pointed out casually that the various options for dealing for this were simply options, even if they do include lower standards of living and/or higher taxes. Any hard decisions would have to be taken by the public and politicians, he said, adding he was not a political expert. But it's clear once you dig below the surface of this statement that the mandarin cares deeply about what the future holds for New Zealand and is determined to sound the warning bell as loud as any mandarin can. He broaches some sensitive issues and has essentially fired the first shot in a decades-long clash of the generations.

I asked him about Treasury's net migration projections and whether an assumed net 10,000 inflow was realistic when many in the younger generations would simply vote with their feet and leave the country when faced with massive debts, higher interest rates, health rationing, education rationing, lower pensions and higher taxes. He sensibly answered that most other western countries faced the same diabolical fiscal outlook (except for Australia it has to be said). Then he digressed to tell us how he really felt. Whitehead talked about 'the generational aspects of this' and what his one year old grandson might think when he was 40 and labouring under a high tax, user pays environment. Whitehead goes straight to the heart of all these projections and numbers and assumptions when he talks about his grandchildren. New Zealand faces a bleak outlook without significant economic reform, but the bleakness is a human story as much as a financial story. It's all about our grandchildren and where they will grow up. Here are the reform options that Whitehead gently introduced in the paper. If the current structure of the tax system was used to increase tax revenues to avoid a debt blowout there would have to a be a 5.5 percentage point increase in tax rates across the board or the GST rate would have to rise to 20%.

This increase in the overall tax take would also likely result in lower GDP. This would mean lower incomes overall and less money for individuals to spend. If other countries were also increasing tax to finance increased government spending, or if our taxes are really targeted at less mobile factors like land, then the effect could be less. Nevertheless, it would be unlikely that such a shift would help achieve the Government's objective of closing the income gap with Australia by 2025.

Controlling the debt path with the current tax structure and superannuation settings would require significant cuts in public  services.

The conclusion is that, given current policy settings, NZS continues to grow at the expense of other public services, such as health and education. This raises questions of intergenerational fairness, given that services for other age groups will decline over the next 15 years and grow only slowly thereafter "“ and as mentioned, the projections assume rising tax rates through to 2023.

These cuts could include health spending rationing.

An important part of securing more health care from the limited resources available involves the allocation of those resources. Funding decisions need to be consistently based on evidence of the relative cost-effectiveness of an intervention. The government may choose to make greater use of agents to weigh up diffi cult choices about which treatments to fund "“ in the same way that Pharmac is charged with maximising health outcomes within the pharmaceutical budget. This would require improvements in information, analytical capability and clinician engagement.

One option would be to imprison fewer people, Treasury suggested.

There are steps that we can take to minimise spending pressures in the justice sector in the short to medium term. As imprisonment rates are a major cost driver, one step could be a review of sentencing practices to ensure that we are not increasing the rate at which low-level offenders are imprisoned. The justice sector is also looking at ways to use courts, police and prisons more effectively.

Another option is user-pays in education...

...by shifting more of the cost of education services from the government to individual students and families, and targeting government support to those who will benefit most.

All these are unpalatable. It's time for the government to take some tough decisions about our tax structure to drive up productivity growth, which would need to rise to 3.3% from the current 1.5% to avoid the debt blowout. Let's hope John Key reads John Whitehead's outlook and is thinking about this grandchildren rather than the next electoral cycle.