Treasury warns on spiralling debt

Last updated 15:51 11/07/2013

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A return to pre-recession spending increases by the Government would cause debt to spiral to twice the size of the entire New Zealand economy in 50 years, Treasury warns.

According to a new Treasury publication, if the Government returned to its historical spending increases after reaching surplus in 2014/15, debt as a proportion of gross domestic product (GDP) would increase from 27.4 per cent in 2020, to 198.3 per cent in 2060.

The Government has targeted returning debt to 20 per cent of GDP by 2020, which follows Treasury advice.
But if spending was relaxed to past levels, spending on healthcare would rise from 6.8 per cent of GDP in 2020, to 10.8 per cent in 2060, while spending on NZ Super would rise from 5.1 per cent to 7.9 per cent over the same timeframe.

The figures were presented in Treasury's statement on New Zealand's long term fiscal position, designed as a warning of a "what if" scenario to prompt governments to make early decisions over the implications of spending.

Officials have presented a series of "options" for keeping debt under control - insisting these were not meant to be seen as recommendations. Today it presented four to Parliament, which were:

* Linking personal tax thresholds to inflation

Such a move would increase revenue compared to periodic adjustments in thresholds, meaning Government spending could be higher than otherwise while maintaining lower debt levels.

Officials said this would mean people would only be liable to pay more as they became wealthier, but it would also make the tax system less progressive and could lower economic growth.

* Hiking GST to 17.5 per cent in 2017

According to Treasury, this would increase the tax take by 1 per cent of economic output, allowing spending to be higher while keeping debt under control.

Officials warn the move would be more likely to hurt broader growth then help it and would affect people on lower incomes. Such a move to increase calls for exceptions such as food, and could prompt more people to shop overseas, "potentially damaging the local retail industry".

* Dampen the projected increase in healthcare spending

Treasury projections show the impact of having healthcare spending increase to only 9 per cent of GDP by 2060, not the 10.8 per cent currently projected.

Officials said this would mean some without the means could not access certain treatments and the policy would depend on what New Zealanders wanted from the health system relative to over government services.

* Raise the age of eligibility for NZ Super

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The proposal would lift eligibility from 65 to 67 (by six months a year from 2019), with increases to inflation rather than wages.

Officials say this would cut debt by around 4 per cent of GDP by 2060, but there was uncertainty because it could mean people require welfare benefits of other kinds. Three quarters of the savings from the policy comes from changing increases to inflation.

Treasury presented a similar paper four years ago, which actually showed a significantly higher debt burden if historic spending was increased, to around 220 per cent by 2060, with gains made because of recent Government austerity.

Unlike four years ago, the paper made only passing mention of the benefits of introducing a capital gains tax.

Finance Minister Bill English told reporters that today's papers were relatively upbeat, because they showed that recent spending restraint had a substantial impact on the long-term fiscal position.

"If we stick to the track we're on then we would have the long-term outlook for government spending in reasonable control," English said.

While he admitted there could be a time when pressure would increase to raise spending, it was unlikely to be at the same rate as in the past.

"I don't think there's any need for going back to the historic level of spending."

Gabriel Makhlouf, Secretary to the Treasury, said the paper was an attempt to create a discussion of the difficult choices which had to be made over government spending.

- Fairfax Media

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