Part 4: He Tirohanga Mokopuna 2021

Commentary on He Tirohanga Mokopuna 2021.

Comprehensive and realistic information about the future is fundamental to good financial management and decision-making.

The building blocks of the 2021 Statement are a step forward from previous statements. They could support more meaningful insights about the future and the Government’s long-term financial position.

In particular, a new set of projections using the NCGM and integrating the long-term insights briefing into the long-term fiscal statement provide the potential for a more wide-ranging analysis and discussion of the long-term risks, opportunities, and policy options that matter to the well-being of New Zealanders.

However, we do not consider that the 2021 Statement achieves its potential as a key foundational resource that informs the Government, Parliament, and the public about the financial implications of future trends, risks, and challenges.

In this Part, we summarise how the Treasury’s long-term fiscal statement has developed so far. We also consider what the Treasury may need to do to improve the ability of a combined long-term insights briefing and long-term fiscal statement to:

  • enhance the quality and depth of public information about the government’s long-term opportunities, challenges and policy choices; and
  • support and inform the Government’s strategic priorities and fiscal strategy.

The evolution of the long-term fiscal statement

Governments can create impact beyond their terms through, for example, the strategic and decision-making phases of the Budget process. However, to do so in an informed way, they need knowledge about past performance, current priorities and spending intentions, and future challenges and opportunities.

Since 2006, long-term fiscal statements have been the main way for governments to receive information about the financial implications of future challenges and opportunities. In our view, neither successive governments nor the public have given these statements enough attention.

The Treasury has tried different ideas to improve the long-term fiscal statement’s value and impact, including an extensive public consultation process in 2013 and an increased focus on well-being in 2016.

The 2021 Statement introduces several different initiatives. These include integrating the processes and information needed for the Treasury’s first long-term insights briefing and developing the NCGM to project the long-term financial position and consider other shocks and crises.

The messages about population ageing remain largely the same as in previous long-term fiscal statements. There are new insights about the long-term financial implications of the Government’s response to Covid-19 and the scale of tax increases that might be needed to pay for the effects of population ageing and some other shocks and crises.

The changes made in developing the 2021 Statement are a step in the right direction. We support continued improvement in the financial projections and work to explore the links between the long-term insights briefing and the long-term fiscal statement.

These innovations should assist the Treasury, as the government’s lead economic and financial advisor, to facilitate public discussion about the challenges and opportunities facing New Zealand and inform government decision-making.

The Treasury has also told us that it is looking to further develop its analytical programme before it prepares the next long-term fiscal statement. We support this initiative. In our view, the Treasury should consider how it can strengthen the process it uses to plan for and prepare these statements in a way that progressively improves the statement’s value and impact over time.

In the next two sections, we consider how future statements and briefings could have better value and impact.

Improving the quality and depth of public information

Boston, Bagnall, and Barry observe that, for people of different cultures and generations, there are many reasons for thinking about, and planning for, the future.50 For governments and the public sector, involving the public in that thinking can also improve public trust and confidence.

By improving the quality and depth of public information and supporting people’s understanding of the Government’s long-term opportunities, challenges, and policy choices, the 2021 Statement can encourage people to think about the future.

Care is needed when integrating a long-term insights briefings with existing work

Overall, although the process for preparing a long-term insights briefing aligns well with the process for preparing a long-term fiscal statement, we consider that the Treasury needs to give more thought to achieving the aims of both processes.

In our view, the Treasury was not able to realise the full potential of integrating the 2021 Briefing into the 2021 Statement. One reason for this was that the short time frame limited the Treasury’s ability to make the most of the process for preparing the long-term insights briefing.

The Treasury told us that, despite the relatively compressed time frame, it felt that it had struck the right balance between the need to communicate in a timely manner and the analysis that it wanted to do.

The Treasury also told us that the subject matter and discussion for the long-term insights briefing should complement and draw on existing work where relevant. We agree.

However, care is needed when combining the long-term insights briefing process with another existing process so that the opportunity to explore new or unconsidered issues is not lost or subsumed.

Better integrate the feedback from consultation

The issues that a department focuses time and energy on can be current and important to that department. However, preparing long-term insights briefings provides departments with an opportunity to explore what is important for the public and what may affect them in the future.

Although these documents should reflect the expertise and opinions of the department, consistent with the DPMC’s guidance, this is also an opportunity to reflect the voices of those who have been engaged.

Good consultation takes time. We would like the Treasury to consider how it might better incorporate the views that it heard through feedback into future long-term fiscal statements and insights briefings.

Assisting governments in making financially responsible decisions

Governments regularly use information about the future to make financially responsible policy decisions. For Boston, Bagnall, and Barry, understanding long-term challenges and opportunities is fundamental to good governance and decision-making.

This involves:

  • looking forward to plan and shape the future;
  • designing and implementing coherent long-term policies;
  • identifying, minimising, and managing significant risks;
  • protecting critical resources and ecosystems for future generations; and
  • preparing for unexpected eventualities, including economic shocks.51

As part of the annual Budget process, the government decides which of its many competing strategic priorities and objectives are achievable with a finite set of resources. For example, one aim of the 2021 Wellbeing Budget is to:

improve New Zealanders’ living standards by tackling long-term challenges and ensuring what matters to New Zealanders drives Government decision-making.52

Combining the long-term insights briefing with the long-term fiscal statement and expanding the range of analytical tools could improve the government’s understanding of what could be important to New Zealanders in the future and what this may mean for the government’s financial sustainability and its well-being domains.

We set out some observations that may improve the ability of future statements to provide relevant information that informs the Budget process below.

More comprehensive analysis

The NCGM allows a more comprehensive analysis of what may happen in the future and the financial implications for the Government. This is the first time that the Treasury has used this type of model for long-term projections, and it is currently used in a limited way to project a narrow set of scenarios.

Preparing a set of scenarios that captures combinations of opportunities and challenges could generate important and useful insights about the future financial risks, capacity, and sustainability of the government.

These scenarios could take place in different time periods. For example, a 10-to-20-year horizon may be more appropriate to consider the financial and policy implications of opportunities and challenges that are more defined and likely to impact over the short to medium term (such as housing shortages or raising productivity). A 20- to 30-year horizon might be appropriate to consider the implications of more regular occurring natural disasters and economic crises.

The Treasury told us that widening the parameters for the range of topics could lead to departments duplicating material in their insights briefings and raises questions about resourcing and what is feasible in the available time frame. We agree that these are important considerations.

However, in our view, widening their parameters and providing more realistic and understandable scenarios are critical to the usefulness of these documents.

Think about the financial implications of, and on, other dimensions of well-being

As we have mentioned throughout this paper, understanding and thinking about long-term trends, risks, and opportunities is an important part of the policy decision-making and the annual Budget process.

Not all policy options need to be financially focused. For example, the 2016 long-term fiscal statement considered options such as better education and more social inclusion as possible policy choices.

In our view, policy options that are financially focused are also useful to consider in a wider well-being context. Some options could affect other well-being domains. For example, reducing superannuation or health spending to avoid increasing debt could affect New Zealand’s social and human capitals. This in turn could affect long-term productivity and economic growth. Understanding these kinds of feedback effects is important to understanding long-term financial sustainability.

Take a broader approach to financial sustainability

The 2021 Statement defines financial sustainability broadly but measures it narrowly. By focusing on the government’s net debt to GDP, the 2021 Statement’s discussion about financial sustainability misses the full extent of other projected changes and policy options that could influence the government’s financial sustainability over time.

Taking a broader approach to financial sustainability may mean focusing less on the negative factors (such as rapidly increasing debt) and more on positive opportunities (such as becoming more productive and growing GDP).

It could also lead to a wider discussion about what combinations of net debt and tax rates become unsustainable and what is prudent today. It could also mean considering a wider range of options to manage shocks and crises in the future – for example, building up financial resources, insurance, and/or automatic tax adjustments.

Test and challenge the reasonableness of underlying assumptions

In our commentary on the 2016 long-term fiscal statement, we looked at the reasonableness of the assumptions underlying the LTFM projections. We suggested that the Treasury needed to do more work to improve the consistency and realism of some assumptions.

Although the NCGM is helpful, there is still more work to do. When looking 40 years ahead, financial projections can be sensitive to these assumptions and, if not well tested, can raise questions about the reliability of the resulting policy advice.

Some examples of important assumptions include:

  • the use of New Zealand’s slower average productivity growth in the 10 years since the global financial crisis over the entire projection period; and
  • assuming the long-run growth rate of the economy is expected to almost always be below the real interest rate on borrowing.

The Treasury emphasised to us that a balance needs to be struck between illustrating the sensitivity of projection assumptions and complicating key messages. We agree that quantifying the implications of the projections in a simple way is desirable, but we consider that readers still need to be convinced about the robustness and reliability of those simple messages.

50: Boston, J, Bagnall, D, and Barry, A (2019), Foresight, insight and oversight: Enhancing long-term governance through better parliamentary scrutiny, Institute for Governance and Policy Studies, Victoria University of Wellington, page 22.

51: Boston, J, Bagnall, D, and Barry, A (2019), Foresight, insight and oversight: Enhancing long-term governance through better parliamentary scrutiny, Institute for Governance and Policy Studies, Victoria University of Wellington, page 22.

52: The New Zealand Government (2021), Wellbeing Budget 2021: Securing our recovery, page 12