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Summary
- Rising debt in New Zealand a cause of worry for Treasury.
- Says, debt is driven mainly by ageing population and cost of healthcare.
- Suggests super age should increase from 65 years to 67 years.
The New Zealand government is worried about the rising debt, which could rise to more than 2 trillion in 40 years. The reasons may be many, but the main one is the rising cost of ageing population.
A draft brought out by the Treasury said that the long-term finances of the government were stressed and might become unsustainable. The draft has been put out for consultation.
COVID-19 pandemic not the cause
While some feel that the handling of the COVID-19 pandemic has put a lot of burden on the finances, the debt is mainly due to the cost of healthcare and superannuation, which are likely to increase with more ageing population.
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Treasury has been warning that the ageing population will cost the country more than it can afford. This was also the tone of Treasury in its 2016 briefing.
According to estimates, the cost of healthcare is expected to rise from 6.9 % of the GDP this year to 10.5% in 2061 and the cost of superannuation will rise from 5% of GDP now to 7.6% of GDP in 2061. The cost of government spending will go up by 43.4% of the economy, up from 33.1% at present. This will not be sustainable by the tax revenue as the government will be spending much more than it raises.
According to Treasury forecasts, the New Zealand debt is likely to be five times more than it is today as a share of the economy. It even compared it to Greece, where the debt-to-GDP ratio was 177% during the debt crisis of 2015.
The New Zealand government is aware of this debt situation and had tried to keep the debt in control in the last Budget.
So, what is the solution for the rising debt situation?
According to Treasury draft, one way of keeping the finances in control is to keep the superannuation expenses from increasing. This, it is being suggested, could be done by increasing the superannuation age of eligibility and payments in line with inflation rather than wages. It is being suggested that the superannuation age should be moved from 65 years to 67 years.
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The other option is to raise taxes by not adjusting tax brackets and adding new taxes such as capital gains tax. This could let the revenue catch up with spending.
However, the super policy has been politically debated and the current government has committed that it would not change the policy. That’s why when the treasury brought out this document on Monday, prime Minister Jacinda Ardern did not comment and just said that in the Budget the finance ministry was very careful of not swelling the debt situation further.
