Wednesday, June 28, 2006



The long-term forecast

I spent some time last night reading Treasury's new long-term forecast of the government's fiscal position, in which Treasury attempts to present some idea of what the government's books will look like in fourty year's time. This sort of crystal-ball gazing is frought with peril, and everything really depends on your initial assumptions. The two key ones for Treasury are that the Department of Statistics' long-term population projections are correct, meaning that we will shortly see a permanent change in our demographic makeup and far more old people, and that as in the past, health spending will rise faster than economic growth. The result of these assumptions is that both health and superannuation spending look set to double as a proportion of GDP by 2040. While welfare and education spending are both set to decline, it is not nearly enough to compensate. The result is a growing slice of government revenue being spent on health, super, education, and welfare, which (if revenue remains roughly constant as a share of GDP) results in narrowing surpluses, and eventually deficits from about 2030 onwards.

(Image stolen from Treasury here)

Its unclear what effect the Cullen Fund has on this, though you can bet we'd be in a worse position sooner if we didn't have it. Saving for the coming rainy day seems to have been a useful strategy, though not enough in itself.

As for the long-term options, its a stark choice: either we accept lower provision of health and superannuation (a political non-starter), or we slowly raise taxes to fund it. I prefer the latter option. Those health and superannuation costs will be paid somehow - people will still get sick, and old people will still need to eat and have a roof over their heads. The only question is whether we fund it through taxation, or the private sector. The latter is inherantly wasteful - you must pay for shareholder's profits as well as benefits delivered - and it leads to inequality, which I regard as being inherantly undesirable. I'm quite happy therefore for the government to increase its share of GDP in order to ensure New Zealanders the standard of living we expect, in accordance with the values we share.

12 comments:

Perhaps we need a ring fenced super contribution like the National Insurance they have in the UK. Problem is it is really just another tax, that's what it felt like when I was living there at least. A compulsory Kiwisaver may make a difference as well but I can't see a voluntary scheme being especially effective.

I guess those of us with enough income and enough time (say, my age (35) and below) should have realised by now that we should be saving for our own retirement.

Posted by PabloR : 6/28/2006 03:04:00 PM

Thing is, I don't believe it's all that sustainable to have a society that spends substantially more than it produces - even if the spending is coming from an alleged pool of saved money. Money is only a medium of exchange - someone is going to have to do work corresponding to the (internal) expenditure of pensioners.

I'd suggest that we need a plan to encourage immigration and maintain a reasonably youthful society. We do have the advantage over other nations that NZ is massively underpopulated compared to the amount of habitable land.

Posted by Rich : 6/28/2006 04:32:00 PM

Hard to take this seriously.

Imagine a forecast done 40 years ago in 1966. Let's see:

Obviously the extremely high birth rates we've seen over the last 20 years will mean explosive population growth. But that's good because labour shortages will be a critical factor limiting NZs economic growth in the 1980s and 1990s...

This kind of crystal-ball gazing can be fun, but it's dangerous to take it too seriously.

Posted by Icehawk : 6/28/2006 05:16:00 PM

I will be suprised if the concept of retirement from work at 65 with superannuation paid for by the tax payer lasts that long. It's already outdated as people have much higher life expectancies than they did previously and they (generally) stay healthy and able to work longer. That trend is likely to continue.

Posted by Make Tea Not War : 6/28/2006 05:31:00 PM

"the private sector. The latter is inherantly wasteful - you must pay for shareholder's profits as well as benefits delivered - and it leads to inequality, which I regard as being inherantly undesirable"

Bit of a bold statement - why isn't food, clothing, all housing and publishing nationalised then?

The tradeoffs are more like this:

State sector: tendency to be wasteful as funding is guaranteed and not competitive, tendency to grow functions not demanded by consumers, but by vested interests. Profit motive not there, and can have pressure placed on funding directly, but without alternative suppliers this can simply degrade standards.

Private sector: wastefulness avoided as it reduces profits, except in natural monopolies where less incentive to be innovative and cut costs. Competition and voluntary nature of revenue (customers choose to pay rather than forced to pay) increases responsiveness to consumers.

It really depends on what your objectives are, but the private sector wasteful? Where is the empirical evidence? Why did west germany boom compared to east germany?

Posted by libertyscott : 6/28/2006 08:07:00 PM

libertyscott,

You are (of course) right that markets are extremely efficient in many, many circumstances.

But that's very different from claiming that the free market is a good solution for everything.

Natural monopolies are only one way in which markets are wasteful. May I recommend that you read rather more about the economic concept of "market failure".

Look (for example) at the incredibly wasteful health spending in the USA: 17% of the premiums paid to health insurance companies go on insurance companies admin costs and marketing. That's due to perfectly rational behaviour by the insurance companies: they make money out of _not_ paying for health care, so they spend a great deal on trying to selectively pick the right risks, on marketing, and on legal costs. Meanwhile people buy insurance for rational reasons (risk minimization) and then try to spend more on health than they would otherwise because it's the insurance company paying.

A set of rational, intelligent behaviours by every participant in a market can result in extreme inefficiency.

So much for health care.

Then there's lots of empirical evidence about the "success" of NZ's mutual fund industry over the last 10 years - it's been a bloody ripoff with appalling bad real returns once you take out fees and tax. Consumer magazine rightfully describes the results of our privately run pension funds as "scandalous", and Morgan's comments are barely printable.

If you want to argue that private health care and private provision of retirement care is efficient, then maybe you should have a look at the empirical evidence yourself.

Posted by Icehawk : 6/28/2006 09:55:00 PM

I phrased the above badly: by "retirement care" I really meant "savings for retirement".

Most people are very bad at understanding investment funds: which is not surprising as they're really complex and require a very long term view. I'm hoping Kiwisaver's vetting of funds will kick a few of the dodgier ones out of the market.

Posted by Icehawk : 6/28/2006 09:58:00 PM

For me, it means that when John Keys says he wants to raise gross government debt back up to 25% of GDP (i.e. issue more NZ dollar bonds to foreigners) to get the funding to deliver income tax rate cuts - that he is prepared to gamble with the country in spite 150-250 years of demographic trend history: It is incredibly risky and I don't ever want to see the Nats back in power until they start getting serious. We did that in the 1970s, we can't do it again.

Posted by Anonymous : 6/28/2006 10:08:00 PM

make tea,

Yes, I'd forgotten national super - when I talked about predictions that would have been made 40 years ago in 1966. It was only in the 70s that we began to engage in this inter-generational movements of wealth, with taxes paid by the elderly being far outstripped by social welfare benefits paid to the elderly.

Posted by Icehawk : 6/28/2006 10:20:00 PM

State sector wastefulness - well, partly that depends how you define waste. Better conditions and less pressure for workers are good things. It's theoretically quite possible to address problems with procedural inefficiency and lack of response to customer wishes. Whereas the wastefulness of the private sector can't be addressed - the system simply doesn't work without shareholder dividends.

Why did west germany boom compared to east germany? Maybe it had something to do with the fact that Russia looted East Germany, while West Germany benefitted from the Marshall Plan?

As for the long-term forecast, it's a joke. Where's the impact of converting the entire country to run without oil? We'll be long past the oil peak in 40 years time, and NZ is unlikely to get a share of what's left.

Posted by Commie Mutant Traitor : 6/29/2006 12:11:00 PM

Increase the age for super by one year each year for 5 years. then take a break and try and do it again as the population grows older.
two aims
1) Efficiency - getting healthy people to work
2) Fairness - each generation should spend about the same percentage of their adult life in work.
both should result in a pretty big savings in terms of super

Posted by Genius : 6/29/2006 09:14:00 PM

Anyone my age who assumes there'll be a Government pension upon retirement is deluded. My wife and I are planning as though it's entirely up to us, and if we do see some of our tax back in our golden years, that'd be a bonus.

It makes you wonder, though ... at what % of GDP do the socialists intend to stop taking and spending our money? 50%? 60%? 100%?

Posted by Duncan Bayne : 6/30/2006 10:06:00 AM