How to live with the Treasury’s Long Term Financial Projections.
Listener: 11 August, 2013.
Keywords: Regulation & Taxation; Retirement Policy; Social Policy;
I was on the external panel advising the team from the Treasury that put together its Long Term Fiscal Projections, required every four years and looking half a century forward. A hopeless exercise? They are not predictions but offer a framework to think about the future further out than most politicians do. Their aim is to reduce political shorttermism – the failure to face a looming reality. This column is not about the advice I gave (or what the Treasury
thinks), but about what I learnt.
The Long Term Fiscal Projections incorporate population change more clearly into our economic thinking. Because demographics change slowly – migration aside – we tend to be a bit casual about them in short-term forecasting. But because they change slowly, we can predict the population much further into the future. We know about the prospect of the population ageing, although in recent years it has been more than offset by changes in younger age groups. This “demographic dividend” of the past is ending as baby boomers retire. The big pressure is over the next decade, after which the proportion of aged will still rise but not so severely.
This means increased fiscal pressures. I have long argued we should raise the age of ntitlement to New Zealand Superannuation in line with our increasing longevity. It would be stupid if we all got Super from 65 but lived to be 100 on average. The reversing of the demographic dividend adds a fiscal reason for raising the age.
Before an explanation of the related problem of costs of healthcare for the elderly, something about the general problem. Government expenditure has tended to rise as a share of the total from as far back as there is data. There are a few exceptional items – spending on defence has been coming down; let’s leave social transfers for a later column.
There is nothing wicked about this rising share. Society wants things that cannot be efficiently delivered by the market. Many – state expenditures on conservation, heritage, culture and recreation – are relatively small at present but they are growing. After decades of increases, education spending may flatten out relative to GDP, reflecting the diminishing proportion of the young in the population. The law and order vote is rising.
The biggest problem is government spending on healthcare, which according to the projections may double as a proportion of GDP in the next half century. That is no more than has happened in the past, together with demographic change, and is similar to what is happening elsewhere.
It is perfectly reasonable to want to spend more on effective healthcare as we become more affluent and technological innovation creates new opportunities for treatment. Public funding is the most efficient way of doing so. If there was an equally effective form of private funding, I would favour it. Private insurance is hopeless (ask President Obama); compulsory social insurance is just another (clumsy) form of public taxation. We are stuck with a large part of health spending being paid for out of the public purse. (Not all; we buy our own aspirins.)
That means rising tax levels for those things that cannot be privately funded, effectively putting upward pressure on the tax take. (Sure, we can introduce new taxes; my list of possibles includes carbon taxes, a capital gains tax, a financial transactions tax and GST on online overseas purchases.)
Consequently, there will be severe pressure to spend less. In response, we could easily undercut the very high-cost services to the very elderly by neglect; they can’t complain as much because of their infirmities
If we do, some of you may find yourselves having to provide extra care for your parents; of course you should, but in companionship not finance. Moreover, not all the very old have children, so they will be neglected. Aside from the common sense of raising the age for New Zealand Super in line with our living longer, reducing fiscal pressure from doing so means we will have more for public spending where it is needed, like when we are really old.