NZIER warns on NZ's rotting fiscal core; Says NZ could end up like Greece, US in 10-15 years as deficit & debt balloons as population ages

By Alex Tarrrant

New Zealand's fiscal core is rotting just like in Greece and the US as the government faces ballooning deficits due to an aging population, while there is no political will to tackle the problem, the New Zealand Institute of Economic Research (NZIER) says.

Inaction now to provide for exponentially rising healthcare and superannuation costs would see New Zealand being forced to undertake the unpalatable decisions currently faced by Eurozone and US governments in 15 years time, NZIER CEO Jean-Pierre de Raad said in and op-ed piece in today's Dominion Post.

Meanwhile, de Raad's chief economist, Shamubeel Eaqub warned on Saturday that although New Zealand was not at a crisis point yet, it would be dealing with its own big challenges in 10 years' time as government spending blows out to American levels due to those costs.

The NZIER comments came as Prime Minister John Key said NZ was well-placed to handle the current turmoil in global financial markets as sovereign debt crises rock the US and Eurozone. See earlier article on Key's comments.

Market participants and the government say relatively low government debt, a track to surplus within two to three years, and policies to make NZ companies more competitive, will ensure the economy comes out of the global financial crisis on a sound footing for export-led growth.

But although New Zealand was looking relatively strong at present, its fiscal core was "rotting just like in the US and Greece," de Raad said. The economy here was looking in better shape than the US or in Europe, if one chose to not look too far ahead.

"Our newfound illusion of fiscal restraint must not derail the necessary debate on how we tackle the unsustainable health and superannuation costs of an ageing population, and the need to improve economic performance," de Raad said.

The big lesson learnt from the crises in the northern hemisphere was that when economics and politics collided, the result was a mess.

"This all seems far away from little New Zealand. But our fiscal deficit will balloon in the next 20 years, burdening future generations with debt, so the current generation can have "free" health and superannuation, which successive governments have promised but failed to provide for," de Raad said.

"Health and superannuation costs costs will grow exponentially, unless New Zealand embarks on a credible strategy to stem the flow. Governments will be forced to borrow and push public debt levels to that of the US or Greece," he said.

"If we wait until the crisis hits in 15 years or so, we will face similarly unpalatable decisions that the US and Europe are facing now."

Despite Retirement Commissioner Dianna Crossan proposing a gradual increase in New Zealand's superannuation age, both Prime Minister John Key and leader of the Opposition Phil Goff were opposed to even looking at the issue as they played politics instead of dealing with the economics of the situation.

"We also need to change what publicly funded healthcare we can access, and where and how we pay for it. There is not yet a clear strategy on managing the cost of healthcare either," de Raad said.

"Let's learn from the mistakes of the US and Europe. It may be more convenient politically to sweep economic realities under the carpet for future generations to clean up. But policies made under duress are poor. Gradual changes to policies to steer the economy for the good of all citizens are possible. But we need to start now," he said.

'Long, slow recovery'

Meanwhile, on TV3's The Nation programme on Saturday, NZIER chief economist Eaqub said the current global crises being played out were a reminder that recovery would be a slow grind.

"What we saw in the markets was really a panic reaction and we saw a big correction in equity markets and financial markets, but the real economy has just gone from kind of okay to flat.  We're not going backwards, it's still not recession, but it's still that realisation you know where things were okay, to something being quite modest, and you know markets will vacillate and they go from great to fair so quickly," Eaqub said.

Consumers in New Zealand needed to keep a focus on paying down debt.

"That’s exactly the kind of adjustment we need to see in New Zealand, that we need to see around the world, and we are actually making some progress.  So that’s part of the reason why I think New Zealand hasn’t done as badly as many of the other countries around the world, because we haven’t had the same big issues," Eaqub said.

"We have been dealing with some of them, but we still have some big challenges. You know we have an ageing population that no one talks about. Government is going to blow out to the American levels in ten years' time. So there are some big issues to discuss, but they're not in crisis point yet," he said.