The Spinoff: The Treasury’s dire warning – New Zealand may have to look a bit more like Europe

Read the original article in the Spinoff

Amid a slew of apparently terrifying graphs and stern warnings about the public finances, a startling truth has emerged from the Treasury’s latest long-term forecast: New Zealanders may have to resign themselves to paying taxes at a rate most Europeans would take for granted.

The revelation arises from something called the Long-term Fiscal Statement (LTFS), a 40-year forecast of government spending and revenue that the Treasury regularly produces. Normally these statements get ignored: at Wednesday’s launch of the latest iteration, Dominick Stephens, the Treasury’s chief economic adviser, noted it had been “beating this drum for 20 years”.

The ambient fear about New Zealand’s public finances, however, means that this latest statement may have more impact than most. It will certainly embolden conservatives who believe drastic spending cuts are needed lest the country go bankrupt.

Sensational headlines can, of course, be generated by those who like such things. As an ageing population pushes up superannuation and healthcare costs, the fiscal statement projects that, on current trends, state spending would reach 45% of GDP by 2065, while revenue remained at 30%. This would imply annual deficits of tens of billions of dollars; the borrowing needed to close the gap would balloon out to twice the country’s annual income.

In truth, though, the picture is not so bleak. These projections all assume no changes would be made, when in reality they will. New Zealand’s public institutions are sufficiently strong, and the citizenry sufficiently engaged, that corrective action would be taken well before disaster struck. 

We also start from a relatively strong position, at least compared to some other nations. The government’s debts, accounting for assets like the Super Fund, are currently just one-fifth of national income. The government does have what the Treasury calls a “structural” deficit – an enduring tendency for outgoings to exceed incomings – but, for better or worse, Nicola Willis’s cost-cutting is forecast to eliminate that in a few years’ time. There is currently no reason whatsoever to panic about the state of the public finances.

And although the Treasury is required by law to look out 40 years, it is debatable how much such projections mean. By that stage, we may all have been enslaved by robots.

Looking ahead a couple of decades – roughly one generation – may be more useful. By 2045, even if nothing changes, the Treasury’s projection is that government spending will be around 35% of GDP. To balance the books, revenue would have to rise to match. But as the fiscal statement makes clear, this would only put New Zealand in the middle of the rich-nation pack.

To recap: even if the New Zealand government does nothing to change its spending patterns for the next 20 years, even if it takes no steps to deliver healthcare more efficiently or constrain the cost of New Zealand Super, it would only need to raise tax revenue to the levels currently enjoyed by Slovakia, Hungary and the UK. Even if one insists on looking out further, to 2065, the cost of unchanged Super and healthcare could be funded by raising tax to 37% of GDP – roughly on par with the Netherlands and Germany, and significantly below Denmark.

These are all countries with far stronger economies than ours. So there is, once again, no cause for panic. That said, planning should start now: as the Treasury pointed out on Wednesday, making changes early and gradually is far better than waiting till the last minute.

It need not be all about revenue-raising, of course. If we are to pay extra tax – the well-off in particular – it would be good to get more from it than just preserving the lifespans and retirement incomes of the older generation. Efficiencies there could free up funds for climate mitigation and the like.

So we should be seeking ways to deliver healthcare better, potentially through stronger prevention and community care services. That said, a recent report from the Association of Salaried Medical Specialists warns that although many countries have promised healthcare efficiencies, actually delivering them turns out to be quite hard. Meanwhile, as the Treasury sagely notes, technological advances like AI “may help ease some [spending] pressures” but “cannot be relied upon to close the gap between revenue and expenditure”.

Reducing Super costs is also an option. We could raise the retirement age to 67 but keep it at 65 for people medically unable to work longer (if there is a feasible way to do that), or implement means-testing – though the latter brings immense practical and political challenges.

In the end, though, any spending gap could be closed with tax reforms that would be totally unobjectionable in comparable European countries: a capital gains tax (CGT), for instance. “Taxing all types of income more evenly,” the Treasury notes, “would reduce the incentive for people to reclassify their income to minimise taxes … [and] make it easier to use income taxes to raise additional revenue.” 

The income made from selling assets probably accrues disproportionately to older generations, making a CGT an especially appropriate way to fund higher healthcare and Super costs. The same could be said for inheritance and wealth taxes.

So the case for panicking about the public finances remains unconvincing. The case for tax reform, by contrast, just got a whole heap stronger.