Ageing population could cost, Treasury warns

Treasury Secretary Gabriel Makhlouf. Photo/File/Mark Mitchell

Treasury is warning that rising costs associated with the ageing population and costlier healthcare will drive the Crown's books persistently into the red from 2020 onward unless current spending discipline is maintained or other measures such as tax increases are implemented.

Treasury this afternoon released Affording Our Future, the latest of its four-yearly statements on the country's long term fiscal position.

It said population ageing, rising demand for services and the increasing cost of those services were already beginning to create a fiscal challenge.

Treasury Secretary Gabriel Makhlouf said the challenge was not a crisis - yet.

Today's statement was intended to give an idea of the size of that challenge and ``illustrate some options for addressing it''.

As a base case, Treasury released projections based on how government spending might grow if it reverted to long-term historical patterns after the current Government's much-vaunted return to surplus in 2014/2015.

"If we do not increase taxes, expenses will soon outstrip revenue, leading to persistent deficits'', Mr Makhlouf told reporters.

"We will need to make policy adjustments, either to spending areas or to revenue, or a mixture of both.''

However, Mr Makhlouf emphasised: "there is no crisis on the issues we are facing'' if action was taken reasonably early.

"I would encourage the early conversations. The sooner we start giving serious consideration on how those policy adjustments will be designed and implemented, the better.

"That is because making early, incremental and less socially-disruptive policy responses will diminish the risk of needing to make sharper, more disruptive and potentially less equitable adjustments later on.''

The question was, "how much pain does the Government want to incur and how much pain does it think the community will be able to take on when it makes changes?''.

Mr Makhlouf said the key driver of the challenges facing governments was the ageing process affecting societies the world over.

The other key cost pressure was public healthcare, due to increasing demand for healthcare services, new technologies, and rising salary costs in the sector.

However, it was a more complex matter to contain healthcare costs than those for retirement income.

The statement noted the current Government's aim to run budget surpluses from 2014/15 to reduce the Crown's net debt to 20 per cent of gross domestic product (GDP) by 2020.

That was a sign of "a more constrained - and prudent - fiscal path'' than the base case outlined in the statement the statement said.

If future governments stuck to that approach, "it would make a big difference... but it wouldn't solve the problem forever''.

Sticking to the current fiscal strategy "will require ongoing reprioritisation and some trade offs among competing priorities'', the statement said.

The statement set out examples of how a more sustainable fiscal position could be achieved.

They included:

* Indexing personal tax thresholds to price inflation, but not real wage growth

* Increasing GST to 17.5 per cent

* Reducing the projected rate of growth in public healthcare spending

* Raising the age of eligibility of NZ superannuation to 67 and indexing superannuation payments to price inflation rather than wages as is done at present.

The most effective of those according to Treasury's analysis was the superannuation option.

Mr Makhlouf would not offer a view on which of the options he preferred other than that "we have a conversation and take the document seriously''.