The impacts of an ageing population, climate change and historical trends mean governments have important choices to make to ensure debt remains prudent and supports higher living standards for future generations, says Treasury Secretary Caralee McLiesh.

Today the Treasury released its combined Statement on the Long-term Fiscal Position (the Statement) and Long-term Insights Briefing, He Tirohanga Mokopuna 2021. The Statement is a requirement under the Public Finance Act, which requires the Treasury to use its best professional judgement about the risks and outlook for New Zealand’s fiscal position over the next 40 years. The Long-term Insights Briefing, a new requirement under the Public Service Act, looks at the medium to long-term trends, risks and opportunities to New Zealand - and potential policy responses - through the Treasury’s core fiscal stewardship lens.

"The Statement published today reaffirms the Treasury’s view that current debt levels are prudent," Caralee McLiesh says.

"Though the fiscal response to the COVID-19 pandemic has caused net debt to increase significantly, there are high benefits for spending that offsets the worst aspects of the crisis and avoids long term economic scarring. It’s appropriate that debt should fund spending where, across generations, the benefits in wellbeing exceed the costs of that spending.

"We know there will be other shocks and big trends to face in the years ahead, and this will pose challenges. Projections in the Statement show net debt is likely to be on an unsustainable trajectory if expenditure and revenue follow historical trends. As they have in the past, governments will need to make important decisions and trade-offs to maintain fiscal sustainability so they can continue to pay for the services and transfers they provide, respond to shocks, and ensure future generations are not unfairly burdened through higher taxes or reduced government services.

"Long-term projections are inherently uncertain and sensitive to many factors. They illustrate how the fiscal position could change under a set of assumptions - they are not our forecast or prediction of what we think will happen. However, even optimistic changes to those assumptions do not change the fact that New Zealand will face significant long-run fiscal pressures.

"Previous Statements have highlighted the impact of demographic changes on areas such as the fiscal costs of New Zealand Superannuation and rising pressures on the cost of health services. These issues remain very relevant and are well covered in the Statement published today.

"What’s new in He Tirohanga Mokopuna 2021 is the expansion and deepening of our analysis in some areas.

"For the first time we have included projections of some of the fiscal impacts of climate change. Climate change will have significant impacts across all aspects of our wellbeing - economic, social and environmental. Modelling suggests more frequent and severe droughts and storms over the next 40 years could lead to net debt being around 4% of GDP higher, with larger effects possible. We are already feeling the consequences of climate change today. The size and distribution of future climate impacts will depend on New Zealand’s approach to adaptation and mitigation. Adaptation efforts may involve upfront costs, but have the potential to reduce the total costs from climate change impacts over the long term.

"We have made greater use of our Living Standards Framework to ensure we take a broad and rigorous view of how fiscal sustainability contributes to wellbeing now and in the future. For this Statement, we are also drawing from He Ara Waiora, which is a framework built on te ao Māori knowledge and perspectives of wellbeing.

"These frameworks have been very valuable in helping us consider the distributional impact of policies, for example, how the policy option of raising the eligibility age for New Zealand Superannuation might affect Māori and Pacific Peoples.

"There are many possible paths New Zealand could follow to tackle our fiscal challenges, and the actual responses are up to New Zealanders and governments to decide. Future governments will likely need to use multiple levers and consider trade-offs across different policy options. We hope that He Tirohanga Mokopuna 2021 will spur discussion and support well-informed decisions about our future."

Editor's note: He Tirohanga Mokopuna 2021 is developed around long-term projections, not forecasts. Forecasts attempt to predict future outcomes by using wide-ranging resources, comprehensive modelling and expert opinion and knowledge. Projections are based on trend or long-run averages for growth rates or levels of key economic, fiscal and demographic variables, and generally assume no policy changes. The projections the Statement includes illustrate a range of assumptions and potential outcomes; they are not forecasts

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