Part 1: Introduction

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

1.1
In this Part, we consider:

  • why the Treasury has prepared Affording Our Future: Statement on New Zealand’s Long-term Fiscal Position (the 2013 Statement); and
  • why we carried out this work.

1.2
Part 2 sets out the background to long-term projections, the concept of financial sustainability, what drives it, and how it is shown. Part 2 also outlines the building blocks for reporting on long-term financial sustainability.

1.3
Part 3 outlines the history behind the 2013 Statement by summarising the Treasury’s 2006 and 2009 long-term fiscal statements.1 Part 3 then considers some international practice that might be relevant to New Zealand.

1.4
Part 4 describes the environment in which the 2013 Statement was prepared and the Treasury’s objectives in preparing it. Part 4 then looks at how the Treasury prepared the 2013 Statement.

1.5
Part 5 describes the Treasury’s financial model and assumptions that support the 2013 Statement.

1.6
Part 6 focuses on the 2013 Statement. We describe the form of the 2013 Statement, some of the main factors affecting financial sustainability, the resulting financial projection, and what could be done to improve New Zealand’s financial sustainability.

Why the Treasury has prepared the 2013 Statement

The legislative requirements

1.7
The Public Finance Act 1989 (the Act) is one of five major statutes that underpin the government's financial management system. The Act's objective is to help improve public sector performance by promoting "responsible fiscal management".2

1.8
The Act sets out five guiding principles that describe what "responsible" means when managing government financial performance. The principles are to:

  • reduce and then maintain prudent levels of debt;
  • ensure, on average, that spending does not exceed revenue;
  • achieve enough net worth to provide a buffer against shocks;
  • manage risks prudently; and
  • have predictable and stable tax rates.

1.9
The Treasury is required to forecast the Government's economic and financial performance and position over various periods, as follows:

  • regular Economic and Fiscal Updates (the Budget, half-year, or pre-election updates) that reflect the Government's current policies and intentions for the upcoming five-year period these updates use information from agencies' forecasts3 in the Government's internal management reporting database;
  • regular financial strategy projections published in the Fiscal Strategy Report that cover the 10 years after the initial five-year update forecasts this medium-term projection follows the same structure as the Economic and Fiscal Updates and assumes that current policies and intentions will remain in place for the 10-year period; and
  • a periodic statement at least every four years on the long-term financial position, covering not less than 40 years (the long-term financial statement).

1.10
The Act does not specify the contents of the long-term financial statement. It simply requires:

  • a statement of responsibility stating that the Treasury has used its best professional judgements about the risks and the outlook; and
  • all significant assumptions to be disclosed.

1.11
Importantly, the Treasury prepares the long-term financial statement, which is the responsibility of the Secretary to the Treasury. The Government does not issue the Statement.

1.12
The Treasury's Guide to the Public Finance Act says that the long-term financial statement:

… is intended to lead to more comprehensive reporting of the issues that could adversely impact on a prudent level of net worth and in this way to assist the Government in making decisions that are consistent with the principles of responsible fiscal management.4

The Treasury's concerns with the sustainability of government finances

1.13
For the Treasury, financial sustainability "is about whether the Government is able to maintain current policies without major adjustments in the future".5 Long-term financial sustainability has many drivers, and the Treasury measures it in the 2013 Statement by comparing projected core Crown net debt to gross domestic product (GDP).6

1.14
The 2013 Statement explains that several factors (all presenting challenges and opportunities) affect the financial sustainability of government. These are discussed in more detail in the accompanying research papers and include:

  • an ageing population;
  • an increasingly diverse society;
  • continued, moderate, economic growth;
  • changing income distributions; and
  • changes in our natural environment.

1.15
Separate from these factors, the Treasury recognises that:

New Zealand is sensitive to financial and economic shocks, as well as natural disasters … [and] our economy carries high levels of net external debt.7

1.16
The 2013 Statement says that a core problem that governments will face with an ageing population and other cost pressures is increasing debt. It projects the level of net debt to GDP to increase from 13.9% in 2010 to 198.3% by 2060. The main message is that the increasing percentage of net debt to GDP should be managed as early as possible.

1.17
Underlying this projection is what the 2013 Statement calls an "implied intergenerational contract".8 This assumes that the working-age population (taxpayers) will always support the non-working-age population. Therefore, as our population ages, it becomes more difficult for taxpayers to continue to fund our non-working-age population.

Why we carried out this work

1.18
Financial sustainability is central to the Auditor-General's role in improving the performance of, and the public's trust in, the public sector.

1.19
We wanted to look at the 2013 Statement in terms of how it describes what the future state of government finances might look like and the issues that the public sector and the country as a whole must deal with over the long term.

1.20
This work supports the Office of the Auditor-General's 2012/13 work programme, which was built around a theme of Our future needs – is the public sector ready?. The theme reflects a general recognition that public services must change and adapt to help build the future that New Zealanders want.

1.21
We looked at how the Treasury has:

  • assembled and organised the relevant information (the process);
  • considered the long-term implications that could arise for the financial sustainability of government (the model); and
  • communicated its findings (the 2013 Statement).

1.22
We note that the Treasury has written the 2013 Statement as a communications document with much of the technical detail contained in a set of 40 accompanying research papers. Our work focuses on whether the 2013 Statement's main messages are presented in an understandable, informative, and useful way. We refer to some of the accompanying papers but have not reviewed them in detail.

1: "Fiscal" means financial but refers specifically to government finances. For ease of reading, we use "financial" as the more common term.

2: Section 1A(2)(c) of the Act. The Act also covers lines of accountability, parliamentary scrutiny, and reporting obligations.

3: The Treasury uses the term "forecast" specifically for Economic and Fiscal Updates to imply greater predictive certainty compared with "projections" in the Fiscal Strategy Report.

4: The Treasury (2005), Guide to the Public Finance Act, page 37, available at www.treasury.govt.nz.

5: The Treasury (2013), Affording Our Future: Statement on New Zealand's Long-term Fiscal Position, page 11.

6: Elsewhere in this paper, we use "net debt" to mean core Crown net debt.

7: The Treasury (2013), Affording Our Future: Statement on New Zealand's Long-term Fiscal Position, page 3.

8: The Treasury (2013), Affording Our Future: Statement on New Zealand's Long-term Fiscal Position, page 7.

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