Health services may need to be cut to slow rising costs

Health costs will place huge pressure on public finances because tax revenue is not forecast to rise at a similar rate. Photo / Alex Cairns

The Treasury has repeated its warning that New Zealanders need to think about cutting some publicly funded services delivered by the health system or face a significantly higher tax burden in the future.

Last week, Treasury uploaded a pair of speeches delivered by Treasury Secretary Caralee McLiesh last year and this year, both warning about the fiscal challenges faced by the country.

The speeches come as the Government moves to publishing New Zealand’s first Health Government Policy Statement (GPS), essentially a stand-alone health budget, which Health Minister Shane Reti says will be published before the Budget. Both the present and former Government signed up to the same level of health spending, meaning cuts are not in the cards in the near term.

McLiesh’s speeches looked at the mid-to-long term, however. Her earlier speech warned health costs as a share of GDP will rise to over 10 per cent by 2061 - a 40 per cent increase on their present share, which is 7 per cent. If health spending were at that level today, it would be roughly $40 billion a year instead of $27b a year.

Alongside superannuation costs, which are also rising, health costs will place huge pressure on public finances because tax revenue is not forecast to rise at a similar rate.

Treasury looked at what would happen if each year, the Government tried to restrain the growth in health spending by only 0.1 to 0.5 per cent - this means spending would still rise, but not by as much.

Under the “no change” scenario, rising health costs saw the share of Government spending in the economy rise to 36.6 per cent of GDP. Putting pressure on spending growth by 0.5 per cent a year would bring that down to 34.9 per cent of GDP.

Both of these scenarios are a huge problem, given the trend of New Zealand’s tax system is to raise about 30 per cent of GDP in revenue - a 5-ish per cent annual, structural deficit caused by superannuation and health is unsustainable.

Hiking taxes to 35-ish per cent of GDP would be an option, although that, too, would involve some tough decisions. Labour’s 2023 wealth tax, taken on its own, raised only about 1 per cent of GDP, and Labour intended for all of that to go back out the door in the form of tax cuts.

Even this fairly modest restraint in the growth of spending would probably have the services New Zealanders can expect from the publicly funded system decrease. McLiesh said there would probably be a discussion between the generations over what level of service should be publicly funded, and the level of taxation required to pay for this service.

“Reaching the 0.5 per cent upper end of savings is likely to require some tough choices around entitlements.

“Different generations are likely to place different weights on judgments around lower health entitlements versus higher public health expenditure, and taxation to pay for those choices,” she said.

The speech used data from Treasury’s 2021 He Tirohanga Mokopuna report on the long-term fiscal position. The speeches were delivered to the New Zealand Economics Forum and Transparency International.

That document had been hopeful that the former Government’s health reforms would bring about some savings by reducing duplication and rolling out better, more cost-effective forms of care. Treasury is keen to see a greater use of primary and community care, which keep people out of hospitals, where it is more expensive to treat people.

In 2021, Treasury said it was keen to see more centralisation of some services, using a Pharmac-style model to drive down cost and reduce duplication. It also wanted to see workforce changes that pushed some services out into the community, where people could receive better care before they got to hospital.

Treasury also said reforms to things like housing could reduce health costs to the Government by reducing conditions Kiwis contract from substandard accommodation.

Reti told the Herald last week he was keen to publish the first Health GPS before this year’s Budget (the document must be published before the end of June). The former Government had been working on the GPS prior to the election. Reti has inherited that work.

He said planning for the document was “excellent”.

“We’ve been working on it for weeks and weeks and we’re well advanced on it,” Reti said.

The GPS will act almost like a three-year health budget, allowing the minister to direct the somewhat independent health system, led by Te Whatu Ora Health New Zealand, which puts together the New Zealand Health Plan, a more conventional, costed document that responds to the direction set by the minister in the GPS.

Forecast core health spending is about $27b this year, rising to more than $30b by the end of the GPS period.

Documents released to the Herald under the Official Information Act warned health funding was already under pressure thanks to things like lower immunisation rates among children, and “more complex demand for health services, changes in technology and the needs of an ageing population”.

Reti said he would not “pre-empt” the document, but said it will “very clearly identify the priorities that we have”.

He said some parts of what Labour was looking at before the election “had merit because the truth is the truth, why would you want to change that”?

“There other parts where there are very clear directions from this Government,” he said.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.