Government debt forecast to cost $100b a year in interest

Even with a larger migration gain government debt would become unsustainable. Photo / The Aucklander

Government debt will climb to intolerable levels by the middle of the century on present policy settings and this is a problem that we cannot simply grow - or tax - our way out of, according to Treasury projections of the long-run fiscal outlook.

That leaves a focus on spending.

The projections have the Government's net debt, which stands at around 16 per cent of gross domestic product, climbing to 223 per cent by the middle of the century, compared with just over 100 per cent in the previous projections made in 2006.

If that happened the interest bill would be more than $100 billion a year and would dwarf any other item of Government spending.

About half the deterioration since 2006 is the legacy of the financial crisis of the past two years - an end to fiscal surpluses and a shrunken tax base. The rest reflects higher costs of existing programmes and changes to Government policy

Treasury Secretary John Whitehead stressed that the projections are not forecasts of what will happen, but rather where policy, demographics and past trends in factors like productivity growth and migration would take us over the next 40 years if nothing changed.

The projections assume productivity (or per capita GDP) growth of 1.5 per cent a year, in line with the long-run historical trend, and a net migration gain of 10,000 a year. But even if productivity growth lifted to 2 per cent, the migration gain was 15,000 a year and the labour force rose significantly from its already internationally high level, the Government's net debt would still reach an unsustainable 146 per cent of GDP by the middle of the century.

"Growth alone does not solve the fiscal problem," Whitehead said. Higher productivity means higher wages, and New Zealand Superannuation is indexed to wage growth, too.

The impact on the fiscal position of another $1 of GDP from higher productivity would be to increase the tax take by 33c but, when that is offset by higher superannuation and public sector wage costs, the net gain to the Government is about 13c.

Higher taxes would reduce fiscal deficits but at the expense of weaker economic growth.

"In a world competing for skills and investment, tax rates are also important factors in whether New Zealand will keep or attract the skilled people, capital and businesses it needs," the Treasury says.

Whitehead said the projections offer some "scenarios".

One assumes that the eligibility age for New Zealand Superannuation is raised to 67 progressively between 2017 and 2023 and linked to longevity gains thereafter. It also assumes a less generous Working for Families regime and tighter eligibility criteria for sickness and invalids benefits.

On that scenario the basket of other public services individuals receive would be 20 per cent higher by 2050.

The ageing of the population combined with no change to entitlement parameters of NZ Superannuation would see its cost rise 66 per cent in real terms by the middle of century. It would rise from 4 per cent of GDP now to 8 per cent.

It reached the 8 per cent level briefly after Sir Robert Muldoon's lowering the age of eligibility to 60 and increasing the payment to 80 per cent of the average wage for a couple. That did not last. The age was put back to 65 and the indexation lowered to 65 per cent of the average wage.