Treasury think-piece breaks many sacred cows

Thursday 29th October 2009

Shorter prison terms for non-violent offenders, larger school class sizes, reduced public services, a higher age of pension eligibility, and a higher rate of GST are among the many unpalatable choices the Treasury says New Zealand must face or watch public debt levels blow out unsustainably.

Among other sacred cows examined for slaughter are the notion that NCEA is working just fine, and that too much of the public debate about government spending focuses on the wrong things.

"We need to focus on what works and what doesn't and it's for the public to think about it wants overall," said the Treasury Secretary Whitehead at a presentation for media and economists. "For example, (talking) about having healthier people rather than numbers of doctors' visits, instead of measuring a government's commitment to policy by spending levels".

The government's lead economic policy adviser has used the publication of its second Long Term Fiscal Statement to stir public debate on what it calls the "challenges and choices" facing the country economically, and warns that even much higher rates of economic growth would not fix the looming debt problem.

As much a public relations document as a Treasury report, the 2009 40 year outlook is in stark contrast with the first such statement, published in 2006 to minimal fanfare by the then Finance Minister Michael Cullen.

The document is clearly intended to assist the Government's expectation-setting ahead of the 2010 Budget, and to give real examples of what Finance Minister Bill English's $1.1 billion a year new spending cap could mean in practice for public services.

The underlying message is that if historical productivity growth of 1.5% a year does not improve, and Budget deficits projected over the medium term are not controlled, public debt to GDP could blow out from 106% today to $223% by 2050.

If productivity growth were to improve by 2% a year, labour force participation was 3 percentage points higher than it is today, and new migrants added 15,000 to national population annually instead of the 10,000 forecast, net debt would rise to 146% of GDP by 2050. "This is still an unsustainable fiscal position," the report says.

It looks at several core areas of government spending, and notes the huge drive to increased spending that the national superannuation scheme represents, because its payout rate is linked to wage movements and people over 65 will be approaching half the total populatioin by 2050, on current projections.

It notes that the New Zealand tax system, lauded in the late 1980s, is now incapable of raising sufficient funds and relies too heavily on company and personal income taxes, while the 12.5% rate of GST is low by global standards, and New Zealand has no property or capital gains taxes.

Looking through the low productivity performance of public sector spending, the paper makes a number of radical suggestions as to the kinds of actions that a government seeking to control spending over the long term might pursue.

These include:

• Linking the age of pension eligibility to national average lifespans, as Denmark has done, with changes not kicking in until the late 2020's.

• For a quarter of all pensioners, Government Superannuation is less than 20% of their income, while for the other 75%, it is more than 80%. Halving or axing eligibility for pension payments to this upper quarter would yield significant savings. A trade-off could be to spend more on health services to meet the growing costs of an ageing society.

• Adopting health system practices which, in other countries, have halved the length of average hospital stays.

• New Zealand's prison population is forecast to rise from 150 prisoners per 100,000 citizens in 1999 to 225 per 100,000 by 2017, and justice system costs have doubled in the last 15 years despite a stable crime rate. "Given that New Zealand's imprisonment rate is already one of the highest in the OECD, and recent increases have had little impact on recorded crime rates, it is unlikely that further increases in our imprisonment rate will be the most cost-effective way to achieve lower crime rates," the Treasury said.

• Education funding assistance is indiscriminate and risks not being captured by groups in society who need it most. The report suggests more targeted assistance, especially in early childhood education funding. Likewise, basic indicators should be reassessed. "Research shows that smaller class sizes are a relatively expensive and ineffective option", except for some disadvantaged children if the small classes can be sustained over several years.

Businesswire.co.nz

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