N.Z. Faces Challenges to Achieve Prudent Debt, Treasury Says

Future New Zealand governments will face considerable challenges to keep debt under control as the population ages and the associated costs of healthcare and pensions rise, the Treasury Department says.

Spending needs to be constrained and taxes may need to be increased if the nation is to maintain a prudent level of government debt in the future, the department said in a statement on New Zealand’s long-term fiscal position released in Wellington today. The report, which doesn’t contain recommendations, looks almost 50 years ahead to 2060.

Finance Minister Bill English has curbed government spending in an effort to return to a budget surplus by 2015, and has targeted lowering government debt to 20 percent of gross domestic product by 2020. Debt would be 27 percent of GDP by 2020 if the current fiscal strategy wasn’t in place and historical growth in spending occurred, the Treasury said.

“The difference between what debt would look like in 2020 under the two scenarios captures well why governments have been serious about adopting prudent short-to-medium term fiscal strategies over the past two decades,” Treasury Secretary Gabriel Makhlouf said in a statement. “Prudent fiscal management has permitted our society to withstand some very big shocks beyond the control of any government.”

Treasury outlines a scenario in the report assuming a return to the sort of spending growth New Zealand experienced historically, and a constant level of tax revenue as a share of the economy. Under those assumptions, government spending surges to 47 percent of GDP by 2060 from 33 percent in 2010, and debt blows out to almost three times GDP.

To avoid that, the report outlines options that governments could take either to reduce spending or gather more tax revenue. These include raising the rate of sales tax to 17.5 percent from 15 percent, increasing the age of eligibility for pensions to 67 years from 65, curbing growth in health spending or linking tax thresholds to inflation, which would progressively move wage earners into paying a greater share of income as tax.