Part 3: Previous statements on New Zealand's long-term financial position

3.1
In this Part, we summarise the Treasury's first two statements on New Zealand's long-term financial position, and briefly summarise recent international developments.

An overview of the Treasury's 2006 Statement

The context

3.2
In 2006, the then-Government's financial position was strong. Government debt was low and financial assets, such as those held by the New Zealand Superannuation Fund, were increasing.

3.3
The Treasury identified that New Zealand's ageing population was a key challenge to this strong position. The first part of the "baby boomer" generation was nearing retirement and fertility rates had fallen dramatically since the 1960s.

The objective and what was said

3.4
The Treasury prepared New Zealand's Long-term Fiscal Position (the 2006 Statement) with little external contribution apart from some specific data projections from, for instance, Statistics New Zealand. The 2006 Statement had a clear informative purpose:

We see the purpose of this Statement as being to increase the quality and depth of public information and understanding about the long-term consequences of spending and revenue decisions. This will assist governments in making fiscally-sound decisions in the decades ahead.¹¹

3.5
The 2006 Statement identified that the major long-term issue was the changing structure of New Zealand's population. It described the effects that this would have on future government revenue, spending profiles, and the resulting debt position.

3.6
The evaluative framework in the 2006 Statement was entirely economic, and two projections were discussed:

• A "bottom-up" view assumed that the then-Government's current policies and intentions would continue. This showed that, because of the Government's strong opening position, the financial implications of an ageing population would not become onerous until about 2030, when gross debt reached about 30% of GDP.
• A "top-down" view targeted lower and stable gross debt of 20% of GDP, through increasing taxes and/or reduced spending.

3.7
The 2006 Statement looked at the sensitivity of these projections to changes in some of the assumptions. It found that lower fertility rates, smaller increases in life expectancy, and greater labour force participation could all reduce debt during the period.

3.8
Looking back, the Treasury acknowledges that reaction to the 2006 Statement was muted and did not fully meet Treasury's expectations and objectives.

An overview of the Treasury's 2009 Statement

The context

3.9
By 2009, New Zealand's economic position and outlook had deteriorated significantly. The global financial crisis and recession meant that much of the financial strength seen in previous years had disappeared. The then-Government's accounts were already in substantial deficit.

3.10
The main long-term concern of Challenges and Choices: New Zealand's Long-term Fiscal Statement (the 2009 Statement) remained the changing demographic profile. However, recent events meant that governments did not have as much time to deal with demographic change as the 2006 Statement had assumed. The tone of the 2009 Statement was understandably less optimistic. The further realisation that material shocks could and would happen increased uncertainty when managing the longer-term demographic change.

The objective and what was said

3.11
As with the 2006 Statement, the Treasury prepared the 2009 Statement with little external contribution. However, to encourage wider and more informed debate, the 2009 Statement was shorter and designed to make it more appealing to the reader.

3.12
After the limited effect of the 2006 Statement, the goal of the 2009 Statement was to become more "engaging". In the Treasury's words:

… we want this Statement to help this and future governments and the New Zealand public to think about what the major fiscal challenges are and what some different ways of dealing with them might be.¹²

3.13
The two main scenarios were the same as in the 2006 Statement, but were renamed the "historical trends" and "sustainable debt" scenarios. These scenarios showed that, given the prevailing circumstances, the then Government had to make short-term policy changes to avoid ever-increasing debt from ongoing deficits and increasing finance costs. Without moving to a "sustainable debt" scenario, net debt was projected to be an "unsustainable" 223% of GDP by 2050.¹³

3.14
The overall conclusions in the 2009 Statement, reflected greater uncertainties, but were non-specific. They included the need to:

• make early changes;
• keep debt under control;
• encourage workforce participation;
• focus on growth;
• keep spending under control; and
• improve public sector productivity.

3.15
The Treasury believes that the 2009 Statement, was better received than the 2006 Statement.¹⁴ However, as in 2006, the Treasury sought no formal feedback after publishing the statement.

International developments in long-term financial reporting

3.16
During the last several decades, many organisations have worked on public sector financial sustainability and related issues. These include the Organisation for Economic Co-operation and Development (OECD) and the European Union, professional bodies such as the International Public Sector Accounting Standards Board, and both national and sub-national organisations.

3.17
Figure 3, adapted from an OECD paper, shows some of the regular and formal long-term financial reporting in other countries.¹⁵

Figure 3
Regular and formal long-term financial reporting in some other countries

3.18
The Government of Australia released its latest Intergenerational Report in 2010. This focuses less on the financial facts and more on the drivers. The report's overview includes graphs and tables related to various social, economic, and environmental indicators to describe the challenges of the next 40 years. The Australian Treasury claims some success in influencing policy debate through this report. As a commentary on a resource-based economy, it discusses many of the issues that New Zealand also faces.

3.19
Canada's Parliamentary Budget Office produces a financial sustainability report. The 2010 report shows the effects of delay in addressing the financial gap.

3.20
Sweden, like New Zealand, is a small country with a floating exchange rate. Sweden considers that long-term financial sustainability depends on welfare and economic resources being redistributed acceptably, with "limited" conflict between redistribution, stabilisation, and structural policy. Sweden's National Audit Office and Fiscal Policy Council note weaknesses in the Swedish government's financial policy framework and in the methods used to assess long-term sustainability.

3.21
The United Kingdom set up an Office of Budget Responsibility to monitor financial sustainability. The first Office of Budget Responsibility report described the elements of past and future government activity in terms of stocks and flows. The report used this to underpin sustainability assessments and to show the limitations of the different methods used. For example, flow-based methods predict future revenue and spending, and stock-based methods measure assets and liabilities and then assess future revenue and expenditure streams. The Office of Budget Responsibility's 2013 Fiscal Sustainability Report continues this approach, using sensitivity and "fiscal gap" analysis, and explanations and commentary that are comprehensive and substantive.

3.22
The General Accountability Office (GAO) in the United States has been producing long-term fiscal outlook statements at the federal level since 1992. It provides six-monthly updates showing:

• a "Baseline Extended" scenario, which assumes the continuation of current settings, including the application of legally specified discretionary spending limits; and
• an "Alternative" scenario, which projects the situation if the legal limits and expiry provisions are not applied.

3.23
The GAO fiscal outlook statements show the changes in revenue or types of spending required to meet the fiscal gap under each scenario and show clearly the scale of the challenge.

11: The Treasury (2006), New Zealand's Long-term Fiscal Position, page 3, available at www.treasury.govt.nz.

12: The Treasury (2009), Challenges and Choices: New Zealand's Long-term Fiscal Statement, page 6.

13: The Treasury (2009), Challenges and Choices: New Zealand's Long-term Fiscal Statement, pages 9 and 21. In Challenges and Choices, the main financial indicator changed from being based on gross debt to net debt.

14: See Rodway, P. (2012), Reassessing Assumptions Testing New Perspectives, page 3.

15: Anderson, B. and Sheppard, J. (2009), Fiscal Futures, Institutional Budget Reforms, and Their Effects: What can be learned?, OECD (page 23).