Tax hikes and superannuation cuts will likely be needed to stop the country's debt spiralling out of control over the next few decades, a new report from Treasury has warned.
He Tirohanga Mokopuna 2021, published online for consultation, combines Treasury's Long-term Fiscal Statement with its first Long-term Insights Briefing.
The former was originally due to come out in March last year, but held back once Treasury realised the economic impact of the COVID-19 pandemic would render most of its contents almost immediately irrelevant. It takes a 40-year look at the future of the economy, and the picture isn't pretty.
"One of the big conclusions is there is no one-size-fits-all policy option that can basically fix what is going to be a fundamental problem down the track," economist Cameron Bagrie told The AM Show on Tuesday.
"What we're going to likely need is some form of superannuation restraint, in terms of who gets it; we're going to need some other spending restraint in certain areas of Government; and odds are we're going to need some tax increases. If we can chip in a little bit from all those avenues it's probably a little bit more of a balanced response, as opposed to hitting one of those levers pretty hard."
Before COVID hit, core Crown net debt was at about 19 percent of GDP - low by international standards.
"This strong fiscal position allowed the Government to respond to the COVID-19 pandemic with significant fiscal stimulus, which has been critical to maintaining relatively low unemployment and enabling a swift economic recovery," Treasury's report states. "This complemented the national health response and monetary policy stimulus."
But it's also blown out debt - it'll reach 48 percent of GDP by 2023, "with further years of fiscal deficits".
The previous record is about 55 percent, reached in 1992. By the end of the Helen Clark-led Government in 2007, that had been reduced to 5.4 percent. But the debt currently being racked up will likely be tougher to get rid of.
"Our projections indicate that the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends, in the absence of any offsetting action by the Government," said Treasury. "This will cause net debt to increase rapidly as a share of GDP by 2060."
By then, on current trends net debt will be at 177 percent. Treasury's report it could even blow out over 200 percent if the average interest rate over the next 40 years is over 5 percent. Rising incomes can only offset so much, Treasury says, because richer people tend to live longer and use more healthcare services - costing the taxpayer.
By 2060 it's expected around 7.6 percent of all spending will be on superannuation, which at present is universal for anyone 65 or over - that's still lower than the bill many OECD countries face now, with Greece for example already spending about 17 percent on pensions.
Bagrie says the projection is "a combination of population ageing hitting superannuation expenditure, which is already moving up rapidly; healthcare expenditure is projected to move up towards 10 percent of GDP; and when you get population ageing, you get slower growth in the labour force, which means slower economic growth".
Both he and He Tirohanga Mokopuna 2021 warn it's better to do something now than later.
In terms of taxes, the report goes over a number of different options - including using fiscal drag to raise revenue, hikes to personal or company taxes, or introducing taxes on capital, wealth, land and use of the environment. It notes taxes on labour and incomes tend to hit working age people hardest, transferring their wealth to older generations; while taxes on capital, land and wealth are more progressive, but present their own challenges.
One idea the report suggests is taxing other income earned by people who receive superannuation higher, or gradually raising the age of eligibility. Soon-to-be Prime Minister Jacinda Ardern in 2017 said she'd quit before raising the age of eligibility for superannuation, despite it previously being Labour Party policy. The Prime Minister at the time, Sir Bill English, had said National would start putting the age up - a plan that was scrapped when Labour won the election.
The Treasury report says if the age was increased from 65 to 67 over four years from 2025, it would save about 0.7 percent of GDP every year. People aged between 20 and 40 now would on average still receive super for as long as today's pensioners, thanks to rising life expectancy.
"To be fair we have had some tweaks over the years - KiwiSaver, building up a little bit of a retirement nest egg; the Super Fund," said Bagrie, "but the crux of the problem is really being kicked down the road. We've put on the table the idea of raising the retirement age, and we probably need to go back and have a look at that."
He remains confident we'll figure out a plan well before debt starts to pile up too much.
"We're going to intervene, we'll do something before then. The real question at the moment is whether we've got the will to move early or whether we're going to hold on and move late. If you move late, you're going to end up needing to be a little bit more disruptive in regard to what the policy response is going to need to be."
Ardern told reporters on Tuesday morning she was sticking by her promise never to raise the age of eligibility.
"This is in my view something that we need to give people certainty over, so that's why I've said that whilst I'm Prime Minister, we won't be changing the age at which people are eligible for superannuation.
"At the same time we have continued to contribute to the Super Fund, New Zealand's savings scheme, to ensure that we're able to afford superannuation... As long as we continue to contribute… we should be able to give that ongoing certainty to New Zealanders about when they'll be able to retire."
She wouldn't rule in or out any other suggestions in the Treasury paper, but confirmed she hadn't changed her mind on a comprehensive capital gains tax, which she ruled out in 2019.
National Party leader Judith Collins said raising the retirement age was "something we need to talk about", even if "people don't particularly want to talk about that one".