Finance Minister Nicola Willis. Photo / Mark Mitchell
The Government would need to reduce health spending to roughly 2008 levels by 2038 if it continues to use its current tools to meet its fiscal goals, according to a new briefing released by Treasury after a long tussle with the Ombudsman.
That would open up a $10.8 billion gap (in today’s prices) between the amount of money available and the amount of money Treasury believes would be required to fund services at their current level.
The forecast comes from a Treasury paper warning that every single slice of Government spending, bar superannuation, would need to be reduced in real terms by 2038 if the Government is to hit its fiscal goals without raising taxes or hiking the super age.
Finance Minister Nicola Willis said the forecasts used to calculate these figures were “mechanical, make simple assumptions and are extremely uncertain”.
She said Treasury’s long-term forecasts did not take into account Finance Ministers’ decisions in future Budgets and essentially modelled today’s spending decisions forward into the future.
“In reality, future governments will take active decisions to allocate resources to those areas they want to protect, and if I am Finance Minister in 15 years that will most certainly include health, and away from those they think are less of a priority,” Willis said.
However, others were not so quick to dismiss the numbers.
Act leader David Seymour, an Associate Finance Minister, said the figures showed the need for an “honest conversation” about superannuation. He said superannuation was “on train tracks – it cannot deviate unless we have that conversation”, whereas health spending was largely at ministerial discretion.
This meant that in the future, health spending may need to be sacrificed to pay for superannuation. Wills’ National Party has also proposed raising the super age, but parked the issue during coalition negotiations with NZ First.
Labour’s finance spokeswoman Barbara Edmonds said the documents showed the Government was under-funding “public services that Kiwis rely on into the future”, although she did not address questions about how Labour might avoid these cuts.
Green Party co-leader Chlöe Swarbrick pointed to her party’s fiscal strategy, which included more than $80b of new revenue (over four years).
“If they chose to move ahead with their arbitrary, self-imposed targets they will be leaving a legacy of austerity,” Swarbrick said.
The Government is currently trying to get on top of a large deficit, but it has also set itself a goal of reducing core government spending as a share of the economy to 30% of GDP from about 33% currently.
That target was also a goal of the Labour Government in its first term, but during the pandemic, spending rose. Core spending is about 33% of GDP now. Spending levels have been 27% to 34% of GDP since the 1990s.
The Treasury paper modelled what sticking to spending levels of 30% of GDP might do to government departments into the 2030s.
The paper, given to Willis in December, was released under the Official Information Act after nearly six months of wrangling between Treasury and the Herald. Treasury initially refused to release the paper at all, but released it in heavily redacted form after the Ombudsman began an investigation.
The paper warned that if the Government only uses its current fiscal tools to achieve this target – meaning not using other tools like raising the super age or introducing new taxes – the spending levels of every single part of government, including health, education, law and order, and transport, would be reduced as a share of the economy. Only superannuation and debt servicing costs would rise.
“Fiscal consolidation” is the name given to the process of getting the Government’s books back in order after an economic shock like Covid.
Treasury notes that the current “consolidation” is actually very similar in economic terms to previous consolidations both in New Zealand and abroad, which have “typically reduced expenditure by 6% of GDP over a nine-year period”.
In the past, governments have “relied on a mix of revenue measures, transfer reform and reductions in government consumption” – or, in plain English, a mix of tax hikes and benefit cuts - to achieve this consolidation.
This time, however, the main tool being used is a “tight” operating allowance, which gets the books back into order by increasing new spending, called an allowance, at a slower rate than the Government increases its overall revenue.
Every year, as the economy grows, the Government usually takes in slightly more tax revenue than the year before. It then puts some of this money into an “operating allowance”, a pot of money which is meant to fund the rising costs of delivering existing services and anything new the Government might want to do.
The current Government has set very small allowances, which Treasury previously said are not large enough to meet the growing costs of existing services, however they will help to bring the books back into balance.
The paper explains that using “tight operating allowances” to reduce spending to 30% of GDP would mean “a marked decline in spending in some areas” of government.
The paper warned this would happen at the same time as “large” spending pressures “relative to history, due in part to the impact of an ageing population” put pressure on the books.
The paper used the December 2024 forecasts, which did not factor in changes made in the 2025 Budget, including cuts to shore up the fiscal position, and increased spending on defence.
No one knows what this kind of strategy will do to spending on the likes of health and education long term because beyond the current Budget (or next year’s Budget in the case of health), the Government has not made any decisions about where it will spend its money.
This paper tried to plug that gap by guessing what decisions a finance minister would make in the Budgets out to 2037-38 if they tried to use tight operating allowances to get spending down. The paper assumed that new money is allocated from the operating allowances at roughly the share that departments are currently funded.
What this found is that outside superannuation and debt servicing costs, all sectors’ spending fell “well below historical averages as a percent of GDP”.
Another reason for this decline is that the forecasts baked in a rise in superannuation expenditure of about a fifth over the next 15 years. Other departments have to “compensate” for this increase in superannuation costs by cutting their own spending.
This has a big impact on departments that typically receive a big increase in their spending, like health.
“[R]eal per capita spending in the health and education sectors is approximately flat [in the model], compared to historical growth of 2.3% and 0.8% per annum, respectively,” Treasury said.
Over time, this would reduce health spending to about 6% of GDP – roughly where it was in 2008 – below current spending levels, which are about 7% of GDP and lower than the long-term average of about 6.5% of GDP.
Health spending has tended to rise as a share of the economy as the population ages. In 2008, about 12% of the population was over 65. Treasury’s most recent population projections estimate that in 2038, about 21% of the population will be over 65.
It would be very hard to fund 2008-style services for a population that is far older and less healthy.
Treasury also looked at how much new money departments actually need to continue offering the same level of service they do today: three departments, health, education and defence, were responsible for 75% of the rising cost of public services.
Treasury calculated health spending would need to hit 8.5% of GDP by 2038 to fund “an ageing population and non-demographic factors associated with costs and productivity”.
The gap between the 6% of GDP Treasury thinks will be spent on health in 2038 and the 8.5% it thinks needs to be spent would work out to be $19b in 2038 money (or about $10.8b in today’s money).
Treasury has warned for years, including in its briefing to the incoming Minister in 2023, that it thinks a mix of new taxes, like a capital gains tax, and savings measures like spending cuts and lifting the age of superannuation eligibility, will be needed to secure New Zealand’s long-term fiscal future.
While at first glance this briefing is a warning to the coalition about the consequences of its fiscal restraint, it is really a warning to all parties about the cost of an aging population.
Treasury has been fairly clear that some combination of tax hikes, spending cuts, and changing superannuation eligibility needs to be on the table as future governments grapple with the fiscals.
OPINION: Takutai Tarsh Kemp was at Parliament yesterday.