Auditor-General's overview

Commentary on Affording Our Future: Statement on New Zealand's Long-term Fiscal Position.

The Treasury published Affording Our Future: Statement on New Zealand’s Long-term Fiscal Position (the 2013 Statement) on 11 July 2013. The 2013 Statement provides a long-term financial view of the future to 2060 and is the third statement released by the Treasury under the Public Finance Act 1989.

We looked at the 2013 Statement, the process used to prepare it, and the underlying financial model and assumptions used to support it as part of our 2012/13 work programme theme Our future needs – is the public sector ready? Financial sustainability is central to my role in improving the performance of, and the public’s trust in, the public sector.

It can be difficult to plan for the future in a world of increasing complexity and uncertainty, particularly planning for more than 40 years. Notwithstanding these difficulties, long-term planning is important for prudent financial management and for preparing sensible and sustainable policy.

Since publishing the first statement on New Zealand’s long-term fiscal position in 2006, the Treasury has improved how it prepares the statement, making the process much more inclusive and more public. It has drawn on more information and perspectives than in previous statements on New Zealand’s long-term fiscal position. This included an independent expert panel that provided a helpful sounding board for discussion and debate.

Overall, I consider that the Treasury has done a good job in preparing the 2013 Statement, and presenting it in a way that is understandable and engaging. The 2013 Statement provides a summary of the issues and is supported by a set of 40 accompanying research papers.

The Treasury’s aim in preparing the 2013 Statement has been to give a sense of the size of the fiscal challenge that New Zealand faces and what might be done to address it.

The Treasury has demonstrated the size of the fiscal challenge through its projection of core Crown net debt to gross domestic product (GDP). The Treasury notes in the 2013 Statement that its projection of net debt to GDP is not a forecast of what it expects to occur. Rather, its projection is intended to demonstrate what could happen in the future, taking into account demographic and other variables and assuming no change to current legislative policy settings. It is, therefore, in the nature of an early warning system.

The 2013 Statement makes it clear that New Zealand, like many other countries, faces a range of significant social, environmental, and economic challenges.

Recently, we have seen the effect of unforeseen events such as the global financial crisis and natural disasters, most notably the Canterbury earthquakes, which have emphasised the scale of these challenges.

It is difficult to capture the nature and extent of these challenges in a single projection of net debt to GDP. Although a single projection makes it easier for a reader to understand, I am concerned that the level of uncertainty implicit in the projection may not be readily understood by readers of the 2013 Statement. I would have liked to see the Treasury make more use of sensitivity analysis in the 2013 Statement to demonstrate this inherent uncertainty.

The increasing cost of healthcare and superannuation is highlighted in the 2013 Statement as likely to contribute significantly to New Zealand’s financial challenge over the long term. Although I agree with this assessment, I think that there is a risk that New Zealand’s financial challenge could be too readily seen as one relating only to healthcare and superannuation.

I also note that the Treasury’s calculation of net debt excludes the financial assets held by the New Zealand Superannuation Fund. In my view, this approach is debatable and results in a higher projection of Crown net debt than if those assets were included. Our analysis suggests that, if those assets were used to offset superannuation costs in the period to 2060, the projected level of net debt to GDP in 2060 could reduce from 198% to about 170%, depending on the time period and rate of offsetting.

Further, some aspects of the Treasury’s financial model could be improved, particularly the extent to which it is integrated, the extent to which it distinguishes between cash and non-cash movements, and its ability to run sensitivity analyses. These are areas that the Treasury is already planning to improve.

I encourage the Treasury to build on the increased public awareness as a result of publishing the 2013 Statement and the positive initiatives of its Living Standards Framework, to further encourage public debate on financial sustainability and public policy.

I thank the Treasury for helping my staff throughout our review.

Signature - LP

Lyn Provost
Controller and Auditor-General

6 August 2013

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