Less reliance on immigration to fill workforce skills gaps and far better value for money from government spending on social policy and higher education emerge as essential counterweights to ballooning health and pension costs over the next 40 years in a new Treasury report.

The four-yearly long-term statement on New Zealand's fiscal position, dubbed Te Tirohanga Mokopuna and published today, projects the country's economic outlook over the next four decades, based on current policy settings.

Among the issues it highlights is that Auckland is falling off the pace in its natural tendency, as the country's largest city, to produce disproportionately more economic output than the rest of the country.

Auckland's economic output per head of population "has reduced since the early 2000s, when it was 14 per cent greater than the rest of the country", the report says. "This suggests that we are not seeing the agglomeration effects we would expect from Auckland's size and scale."


Lagging infrastructure, including public transport, partially explains this, but the report also cautiously suggests too much reliance is being placed on immigration to meet workforce needs.

While New Zealand's light labour market regulation assists people to move from one job to another and helps keep unemployment low, this regulatory environment is also discouraging firms from investing in developing their existing and future workers, the report suggests.

"Further work is required to understand how regulatory flexibility impacts New Zealand's ability to sustain and build both human and social capital, particularly as the nature of work continues to evolve.

"A key part of this response is encouraging employers to take responsibility for workforce planning rather than relying on migrant labour alone," the report says. "This approach to immigration provides employment opportunities for domestic workers, with higher wages or improved working conditions where appropriate, and incentivises greater capital intensity, innovation and productivity."

A tertiary education system better geared to the needs of employers is also highlighted, with considerable weight placed on the Productivity Commission's review of new models of tertiary education.

The commission's interim report last month raised questions about whether resources are too skewed to universities rather than skills-based tertiary training.

However, migration is not all bad.

The report suggests the country could make more use of the fact that it has a larger proportion of foreign-born citizens than any other developed economy.


"The opportunities this presents for the economy include encouraging the use of our foreign-born population as a source of ideas and market knowledge, to use our offshore diaspora to connect to new markets, and improving cultural literacy so we better understand and engage with growing Asian markets."

On the fiscal outlook, the report projects the tax take remains at current levels, around 29 per cent of GDP, while government spending blows out to 47.1 per cent of GDP. That's because higher pension and health costs lead to a blowout in debt servicing costs from 1.6 per cent to 11 per cent of GDP by 2060.

That sees roughly balanced government books today moving back to an unsustainably high deficit at 16 per cent of GDP without policy changes.

To keep government debt-to-GDP ratios at the current targeted 20 per cent, spending would need to move in the opposite direction, reducing by about 7 per cent annually, the report suggests.

One way to achieve that would be to get far better value for money from spending on social policy.

It issues what amounts to a major challenge to public sector agencies to lift their game, using the 'investment approach' to spending advocated by Finance Minister Bill English to close the "wide gap between the highest and lowest performers" in society.

"The real challenge will come from the public sector responding to the need to be more flexible, more effective at targeting resources and better at using available data.

"Overall, improved effectiveness of social spending has potential to be substantial enough to support sustainable long-term public finances.

"The modelling of social investment suggests that there may be approaches that both reduce spending and improve social outcomes. However, this cannot be achieved if government organisations continue to operate as they have in the past," the report says.

The report also identifies environmental threats such as climate change, water quality erosion, and natural disasters as fiscal pressures, along with rising global protectionist sentiment if it reduces New Zealand's ability to grow export markets.

The report stops short of recommending a higher age of entitlement for New Zealand Superannuation, but notes spending on pensions is projected to rise from 6.2 per cent of total government spending to 9.7 per cent by 2060 even though one in four people over 65 is likely still to be working by 2060.

"Given the proportion of New Zealanders aged above 65 is projected to increase from around 15 per cent to around 27 per cent over this period, labour market, tax and retirement age settings, and supportive employers will play important roles in future economic growth."

It notes that New Zealand also has one of the highest rates of labour market participation by people over 65 in the OECD, with one-in-four workers in 2060 projected to be over 65.