New Zealand’s fiscal settings are not sustainable in the long-term and the spending cuts required to balance the budget this decade are “unprecedented” in recent history.
That’s the view of the Treasury’s chief economic advisor, Dominick Stephens, who gave a speech on debt, deficits and the ageing population in Queenstown on Thursday.
His speech reiterated the Government agency’s often repeated message that New Zealand’s fiscal settings will not be able to cope with the ageing population.
The Treasury had been “banging the drum” on the need for policy reform for many years but higher levels of government debt had now added to the fiscal challenge, he said.
It was in 2006 that analysts first advised net debt would rise exponentially as the population aged, unless significant policy changes were made to prevent that outcome.
At the time, net core Crown debt was forecast to be roughly 13% of gross domestic product in the year ended June 2020. In actuality, it ended up at 26% and has risen to 39.3%.
“Starting out with higher debt increases the sustainability challenge, because of the compounding nature of interest,” Stephens said.
At minimum, the Government’s annual operating costs need to be brought back into balance with its revenues just to halt the growth of debt. But Finance Minister Nicola Willis wants to go even further and reduce overall debt levels in the long term — this would be a challenge.
Treasury has estimated New Zealand would be in deficit even if the country was in normal economic times rather than recession, and the Coalition have compounded the problem with tax cuts.
Willis has opted for new spending allowances of just $2.4 billion each budget through to 2027 in order to return the Crown accounts to a surplus in the year ended June 2028. That allowance is $100 million less than the estimated costs of delivering existing services.
“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,” Stephens said in his speech.
“The Treasury’s latest forecasts assume that most of the return to surplus will be driven by declines in per capita government consumption. The implied speed and size of this decline is generally unprecedented in recent history in New Zealand.”
Michael Reddell, an independent economic commentator, said on Twitter that this comment shouldn’t be overblown as spending levels were coming down from abnormally high levels.
“While the implied decline is sharp, so has been the decline in the last couple of years, and the increase since 2019 was also without precedent in recent times,” he wrote.
Reddell also pointed out this analysis assumed only spending cuts were used to achieve a surplus, and didn’t factor in planned revenue increases.
Simon Watts, the Minister for Revenue, said the Coalition was focused on the spending side of the equation. However, they were taking advice on collecting more from unpaid student loans overseas and possibly taxing charities which operate as commercial businesses.
Looking ahead
Despite the headline-grabbing comment, Stephen’s speech was about the fiscal challenge of an aging population over the next five decades. The cuts per capita planned over the next four years will only stop this from getting worse, it won’t do anything to solve it.
The problem is really the opposite of a problem: New Zealanders are living longer and better lives. While this is unquestionably good, it hasn’t been budgeted for in existing policies.
Stephens said there were seven working age people for every person aged over 65 back in the 1960s, but today there were only four and in 50 years’ time there may be just two.
NZ spends considerably more on people over-65 than it gathers from them in taxes, and therefore will find the public purse “stretched further and further” as the population ages.
There have been three unexpected developments which are helping to offset the impact, even as higher-than-expected debt makes the challenge harder to meet.
Seniors are staying in work much longer, the population has grown faster, and long-term interest rates are lower than forecasters had predicted when first sounding the alarm.
Stephens said it was “hard to overstate how profound” the first change had been. NZ has gone from having one of the lowest rates of over-65s working in the OECD, to one of the highest.
Labour market participation of 65 to 69 year olds was first forecast to be around 38% in 2023 but it was actually 49%. Even 27% of those in their early 70s were still working that year.
This may be partly because earning extra income doesn’t reduce superannuation payments and therefore discourage people from staying in work.
“The downside of universality is that it makes National Superannuation expensive, as discussed earlier. This tension between affordability and work incentives will need to be balanced in future thinking about the design of retirement policies,” Stephens said.
Faster population growth has also helped reduce NZ’s average age and made universal healthcare and superannuation more affordable. The population is 10.5% larger today than it was forecast to be in 2006.
Act early
Regardless, these helpful developments are not enough to stop a rapid increase in debt over the next few decades. Governments will have to adjust their policy settings.
“There is no silver bullet: none of the policy options we modelled in 2021 was large enough to stabilise debt on its own. This means that governments will likely need to draw on multiple expenditure and revenue changes to close the fiscal gap,” Stephens said.
Managing the amount of money spent on healthcare would be critical, as it is a fast growing part of total spending and isn’t likely to get significantly cheaper in the future.
The Government could also choose to raise taxes, although this comes with economic costs and would require successive increases if the costs were not also reduced.
Stephens said boosting productivity would be vital for improving New Zealand’s general economic wellbeing but would have minimal impact on this particular problem.
“Higher productivity growth would boost wages, which flows through to higher wage-indexed superannuation payments and higher costs of providing labour-intensive public services.”
Finally, the Treasury has advised the Government to select some solutions soon, so that young New Zealanders can feel confident they will not be short-changed in the future.
There is already a growing wealth gap between younger and older New Zealanders, which could translate into a reluctance to support their retirements.
“Acting early to ensure fiscal sustainability will help sustain this trust and may bolster the willingness of future generations to continue participating in our pay-as-you-go pension provision system,” Stephens said.
87 Comments
This is a lot less complicated than Treasury are making it. If, as a country, we need more of our people, materials, energy, machines etc dedicated to meeting the needs of older people, then, all else being equal, we just need to shift some of the real resources currently being used for other things over to that new purpose.
Govt has a simple tool that is literally designed to reduce private sector consumption and ensure that there are enough real resources available to do what they need to be done - that tool is called 'tax'. So, tax people who spend a lot so that they consume less real resources, and then spend a bit more money on stuff that older people need. The net impact of this shift is less people selling us crap we don't need in Briscoes, and more care workers. Fewer helipads on Waiheke, more residential homes. Less SUV tanks on the roads, and more ambulances.
The trap that Treasury are falling into (and many do) is thinking about this challenge in financial terms - like we have to find the money! It is not a money problem, it is a resource problem. I would recommend Treasury revisit the Keynes' classic 'How to pay for the War'.
Just examples of things that we buy that we don't need. Around a third of the new cars we buy have engine sizes above 2000cc - over-powered for general use on our roads. SUVs are also heavy, dangerous and resource-intensive - and, in the future, they will be a huge waste of batteries that we could be using for other things. If we were thinking as a country in resource terms, we would tax the hell out of luxury items like this, so that fewer people bought them, and we had the resources needed to support our changing population (and do other sensible stuff like re-build our railways).
This is unhinged but OK? Not sure why someone having a car big enough to serve all their needs represents some sort of existential capital crisis that must be taxed off the roads immediately, but sure.
Kinda feel like we should be doing thing like supporting our population's needs and bringing in public transit without the need to meltdown over what are usually just lifted wagons.
It was just an example! We consume a lot of stuff we don't need. My point is simply that we have enough real resources to meet the needs of our population, even as that population ages considerably. We just need to distribute the resources differently and be more strategic (e.g. investing in productivity and effiency).
Which SUV have you got?
Giving the government more money is very seldom "investing in productivity and efficiency".
It's not about giving the government more money though, in this case it's more about incentivising different behaviours behaviours like switching to cheaper, more fuel-efficient vehicles.
Heavier, less efficient, and more expensive vehicles generally won't benefit the overall economy unless they are needed for work purposes. They increase our reliance on fossil fuel imports and worsen our trade deficit in quite a significant way. This in turn reduces the amount of resources we can dedicate to other things such as healthcare, infrastructure, or even local consumption that feeds back into our own economy.
Vehicle imports totalled approximately $6.8 billion last year. This spending largely goes overseas to countries that actually manufacture cars. Reducing this expenditure could help improve our trade deficit and lower private debt levels.
I think that’s loosely the point. Private individuals cannot be trusted to invest money into the things we need, and would instead prefer the tax free gains to spend on their pretty new toy.
As the population ages we have a dilemma where too many have far too much and too many have far too little.
This can be fixed but the squealing would be intolerable.
What is your point here Jfoe, that taxing people to the point they buy the 4 cylinder engine rather than the 6 cylinder will allocate resources more efficiently? Both are wants rather than needs. I would have though high interest rates is the best way to achieve this - encourage savings rather than consumption which builds our pool of investable funds. But you have been vehemently against this.
Lord, I wish I had never mentioned cars in a middle-aged blokes' forum.
Your response is helpful though because it highlights a fatal flaw in your thinking (and many others). The investable funds we have in our bank accounts are the DIRECT RESULT of increases in PRIVATE DEBT. Savings don't create investable funds, lending does. Loans create deposits. Banks do not lend out customer deposits - they print new money and give it to the lucky borrower.
Now, I am not saying, 'yay, let's max private debt to the moon', but the idea that everyone saving will help us afford the future is crazy.
This is the kind of argument that Americans use to have an F150 in every driveway. It's necessary to drop the kids off to soccer in a "truck", because you might swing by Walmart and pick up a double-door fridge on the way home. Ergo if you have one car you must have the biggest car to serve any need you may occasionally have.
In NZ this doesn't happen because indirectly we tax this by making petrol so expensive that even wealthier families would wince at the cost to run such a vehicle. Instead they get Harvey Norman to deliver the fridge once a decade instead.
The exception of course is vehicles where FBT for personal use and tax deductible fuel applies - this is why tradies have utes. The last sparky that came to our place had all his tools in the boot of a Corolla and it struck me as absolutely absurd. But the tools all fit, and he said it's easier to find a park at downtown job sites than a ute... He obviously doesn't have a good enough accountant.
OK, and? An SUV is just a form factor, there's plenty of SUVs which are relatively compact. I'm not sure you can conflate a Mini Countryman with a Ford F150 in any sane world. Most SUVs we sell in NZ would be considered tiny in the American market.
But it sounds like you guys need to make up your mind. Have a car big enough to handle all your family outings (prams, bikes, travel cots etc)? No that's bad. Taking multiple smaller cars on the same journey because at least it's not a big car = somehow makes more sense?
Yes, sure, but smaller SUVs only exist because people can't afford to run a "real" one. The form factor doesn't make a lot of sense otherwise. If petrol cost half as much and a 4L SUV wasn't much more expensive you can imagine many would go for that instead. So taxes and policies do have an impact on exactly what people decide they "need".
As it happens I have a 3.6L SUV because I need to tow the boat sometimes (not very often). But I have one car, and so it has to be able to do that. In an ideal world I would have a smaller car to take the kids around when I don't need the bigger one. I recognise the additional resources I'm consuming needlessly, rather than just make excuses for it, and I wouldn't begrudge policies that discourage me from using the bigger car when I don't need to.
Both agree and disagree with yah. Pleasure boating, complete waste of resources. Food harvesting perhaps not a waste of resources if it gets used often enough. We use our boat weekly for about 6 months of the year for fishing, so I think the resources used are probably justifiable. The people that have a boat in their yard and only use for a few days a year on their annual trip to Taupo or TGA is a complete waste of resource.
I also have a fishing kayak from before a boat was viable for us. In terms of a fish caught / resources consumed ratio, the kayak would win every time.
In the ideal world you'd hire, or borrow, the big vehicle for the few times you need it.
Or better still, our Councils would ensure there was rentable boat parking nearby the water. .... Looking at you Auckland Council in letting Bayswater Marina be turned into yet another housing estate for the benefit of the greedy rich with helicopter pads on the foreshore so they can hop to Waiheke whenever they feel the urge.
Yes, sure, but smaller SUVs only exist because people can't afford to run a "real" one.
I'm sure that's the case for some people but anecdotally I know people with compact SUV's who are quite happy with them and only wanted them for a the higher driving position, ease of getting in and out as well as loading, and having slightly more cargo space vertically.
Considering the average age of a new car buyer in countries with similar demographics and wealth distribution to New Zealand is around 50-64 years old, the type of cars that are most popular starts to make sense.
RIP wagons though, they are the real ones.
What nonsense are you talking? Petrol here is not taxed enough to get anywhere near covering the cost of roading. And no, before the howls of "it's the trucks", no it's not.
Also FBT and tax deductability of petrol have nothing to do with each other. It doesn't matter what sort of car it is, fuel is a deductable expense for a business.
But most SUVs aren't needed to serve all their needs. When was the last time you saw an SUV with mud on their tyres? I'm sure there are some legitimate uses for a Hummer H1 (aside from going to war). It doesn't mean it's a good idea for the whole country to use one to pick up some groceries.
Might help if you actually type out what SUV is an abbreviation of. Nothing to do with offloading, mud or Hummer H1s.
Give you a hint, the S is Suburban. The suburbs, where there are paved roads, supermarkets and shops. Hence why SUVs come with road tyres, mostly front wheel drive with open diffs and are about as useful as tits on a bull when you go anywhere rougher than a gravel driveway.
Doesn't it stand for Sport? As in Sport Utility Vehicle.
A sport utility vehicle (SUV) is a car classification that combines elements of road-going passenger cars with features from off-road vehicles, such as raised ground clearance and four-wheel drive.
The term for those kinds of cars that's getting used more now is crossovers or CUV's.
It's all a bit blurry really, but when people refer to SUV's I think it's generally interpreted as referring to the larger SUV's like a Ford Everest, Land Cruiser's, Range Rovers, BMW X5's, etc opposed to the more compact options.
You mean CUV is just an abbreviation of crossover SUV. https://en.m.wikipedia.org/wiki/Nissan_Qashqai
The Nissan Qashqai is a compact crossover SUV (C-segment)
Everybody including the motoring press refers to them as SUVs
"
The RAV4's first generation, especially as a three-door, was pioneering and not unfunky. Then things went downhill. The outgoing fourth-gen car was a visual assault and a dynamic misery, even if it was at one point the world’s bestselling SUV.
The latest RAV4 has better proportions than it used to: longer in the wheelbase but shorter overall. That means not only that it looks less ungainly, but also that it still lines up against the larger midsize family crossovers. Think the inevitable Nissan Qashqai, Honda CR-V, VW Tiguan, Ford Kuga and Peugeot 3008, albeit now with heightened competition from the likes of the Kia Sportage that comes with hybrid options.
Like I said, the definitions are blurry, certain CUV's have much way more in common with hatchbacks than they do with full size SUV's or Utes. What I'm saying though is that people who are complaining about SUV's are more likely referring to the full-size SUV segment and utes rather than compact SUV's.
This is kind of going into way too much detail on a simple metaphor that Jfoe was using to illustrate his point, but when he says the following "Less SUV tanks" do you think Jfoe is picturing a Hybrid RAV4 or something more like a Ford Ranger? In this context I think people are more referring to specific types of SUV's rather than everything that can technically be defined as an SUV.
SUVs were just one example, often expensive vehicles that generally aren’t needed, you could say luxuries. Others could be, bmw’s, big tvs, burgers, beer, baches (and that’s just listing the b’s).
He is right, at the moment we produce/ import too many luxuries and can’t pay for the needs, e.g new Dunedin hospital. So the resources need to be re-organised, this is done through tax.
How will means-testing super and lifting age to 67 release the *real* resources that older people will need to live well - housing, care workers, GPs etc? Capital gains tax, sure, that could release some resources that could then be allocated to important stuff like housing and feeding old folk.
My point here is that the challenge is not financial - it is about having enough real resources to support the population.
The other issue is if we change things too much - whether our smart oung people will hang around, and young talent from overseas will come here to work. And of course whether the wealthy will stay.
If we increase taxes whilst we cut super , coupled with super-expensive housing and quite unexciting careers vs over seas.... i am not sure of the attraction.
compulsalary kiwisaver, CGT -> equate our taxes and pension plans with the rest of oecd first.. so its a level field.
Absolutely spot on and if only more people could see through money and finance to the real underlying economy of resources, production and consumption. Answers become much easier when we do - the problem is the spectacular amount of resources and "productive" effort devoted to things we don't need.
He's no Tsar, just someone with an in depth understanding of macro-financials integrated with policy, and with this understanding integrated with the availability and allocation of resources which, IMO, should be the #1 view taken when making large scale decisions at policy level to plan for the future. PDK already illustrates repeatedly the eventuality of dwindling high density energy resources to come. It takes some introspection to take several steps back form your own experience, that of your family, upbringing, lifespan, community, even your country, and look at the world with such a broad view. One which we should all consider when looking at core issues from a range of different angles before making decisions in life.
Earning or receiving? If an over 65 is a capable maths teacher and continues to teach past 65, I've got no problem with them plugging our skills shortage while receiving their Super entitlement.
If someone is receiving $1m a year in term deposit interest maybe a different matter. However, they're taxed on that interest, and you could imagine the tax isn't that far off their Super payment, so they're still self-sustaining.
I am saying it should be extra tax on top of that. They are still receiving 61% of their Super even though they are probably earning well over $150k+. I have no problem with Teachers and people earning normal wages still getting Super as it currently stands, but anyone still earning over say 2x median salary shouldn't really get any Super.
The insane thing is that you can't just say "I will get super when I want and work when I want" once you are over 65. It should be completely turn on/turn offable, but once you get it, you can't turn it off. And you have to get it post 65 or you might never get it. Its well stupid.
Super should be income tested at the minimum, or just switch offable when its not needed. Then those boomers owning 20 properties wouldn't get it and the maths teacher that wants to work until 75 can delay getting it until they are 75 (or whatever age they decide to retire after 65).
The investment banker lobby groups are thought of as just greedy and self-interested.
Taking 5% of everyone's earnings and giving it to to accredited fund managers to "look after" is a great idea for investment banks. They will definitely keep trying to make it compulsory and maybe one day will see a shift in public opinion.
I’m firmly in the dark green bar under x-axis. I will be old when we have only 2 tax payers per dependent. I could feel royally screwed by being in this demographic.
However, I say to the NACT whiners - draw a circle around the yellow bars on the 15-29yr age group, call these the “dole bludgers”, and then compare it to the size of the yellow bars in the 65+ age group…tell me who gets more welfare.
$200,000,000,000 of resident term deposits in New Zealand. That's spare cash that people don't need for their day to day expenses. Much of it held by the 900,000 people aged over 65.
Is the preservation of capital and the ability to leave an inheritance something that needs to be protected in law ? As it seems that is what is preventing a large portion of the population from accumulating any assets at all.
Just because someone dies, there's no reason to loot their bank accounts.
What are you suggesting? That it gets buried with them like a Pharaoh? I guess you are suggesting that it gets passed on to their off-spring tax free.
How is it fair that someone gets a massive unearned dollar payout and doesn't have to pay tax on that income like everyone else has to? Just because their parents were rich? Hardly supports your argument that people who are rich have earned it ...
Stephens said there were seven working age people for every person aged over 65 back in the 1960s, but today there were only four and in 50 years’ time there may be just two.
If we were or are going to be working the fields, that would matter.
As PDK likes to point out, the real work is done by oil, not people. Thus a somewhat meaningless comparison.
Get out now, while you can still take your assets with you. Move to where superannuation and aged care costs are not going to cripple the country.
In 2019 .... 'Australia has reached a major milestone, with most new retirees having enough savings to be self-funded rather than reliant on the age pension, new research shows.
More than half of 66-year-olds were not accessing the age pension at December 2018 because their assets and income were too high, while 20 per cent were on a part pension.
Only 25 per cent were drawing a full age pension."
https://www.afr.com/policy/tax-and-super/the-average-retiree-is-now-sel…
Fundamentally we have an economy with more consumers per worker as our population ages:
https://data.worldbank.org/share/widget?indicators=SP.POP.1564.TO.ZS&lo…
We are entering a secular labour shortage and will be forced toward higher per capita productivity. When we have the next boom comes there will be an absolute knife fight for workers.
Yes there is going to be a serious shortage of working age professionals, especially skilled whether white collar or trades.
I feel it is going to be in the 24 - 36 month window it will start, pretty close to when we hit net zero migration.
In reality feel like this is just going to be a bit of the balancing of the books wheb it comes to wage earners from the last fifteen years, where wage growth can outperform asset growth (in NZ).
It is going to be very interesting to see how it plays out.
Not triggered, but objectively as a millennial yes, I understand completely. As an age bracket they wish to rearrange society so there's something left for them as the status quo will collapse the superannuation system, and leave them with even less available resources to draw from to live and prosper. They wish NZ to be a desirable place with a sense of identity and pride like we all do, not the current, tilted, divided, nation we have become with wealth accumulating more and more at the top while the hard working middle income earners get their pockets pillages at every turn, and the government wish not to show gumption to favour the majority.
People are far too focused on wealthy superannuants. Wealthy superannuants are not the problem. They have contributed greatly to government coffers throughout their lives and continue to do so in retirement. You should reserve your ire for people who have spent a lifetime contributing little and accumulating even less.
It's not about targeting ire towards anyone, that's kind of missing the point. The issue is our growing retiree population, shrinking working-age population, and a limited set of resources.
Given these circumstances, it's more practical to adopt something closer to a triage mentality. Is it fair that someone who has been waiting in the emergency room longer gets treated after someone who just came in with a more urgent situation? Maybe not, but no doctor is going to treat a papercut first when someone else is bleeding out and about to die. The same applies to our welfare system, it's a last resort meant to prevent the elderly from dying of poverty, not a cash reward for being a good taxpayer.
Tax does not earn you a right to anything. If you wish to derive an income from the economy today, there are tax incentives and disincentives to do so.
Tax does not pay for anything, it is the end of the line for money, not the start.
Superannuants who are wealthy may have paid tax 20 or so years ago, but they clipped their ticket on the day to pay that tax, and that's the only reward there ever is. Not some magical pot of money in retirement where all their tax has been saved up for them to splurge.
Every dollar we unnecessarily spend on the already wealthy by way of a benefit is taking away from services and infrastructure this country so desperately needs the govt to fund.
Dunedin Hospital enter stage.
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