Bill English is about to get another reminder from the Treasury of the challenges ahead if the country is to stay fiscally prudent. And with it will come a prod to start thinking long-term about big decisions some government will have to make sometime.
The reminder will come in the Treasury’s second 40-year fiscal projection. This first was in 2006.
This is strictly a Treasury document. English will get an advance look but he doesn’t sign it off.
What’s the point? Forty years is so far off that the accidents and deviations of history will falsify any projections. If you doubt that, think back 40 years and imagine how powerful a crystal ball policymakers would have needed to plan for the 1973 and 1979 oil shocks, the 1980s economic policy revolution, the fall of communism, the transformative power of silicon chips and the financial bubble and bust of the past 15 years — not to mention the rise of China, the remix of our demographic profile and the Treaty of Waitangi’s revival.
So it can be taken as read that unpredictable events will skew the economy and the fiscal projections long before 2050.
Moreover, 2050 is so far off that today’s politicians can just shrug their shoulders — as the government has done in blandly asserting its watery greenhouse gas emissions trading scheme is consistent with meeting its target of a 50 per cent emissions cut by 2050.
Ministers don’t even really have to bother about the agreement with ACT to close the income and wealth gap with Australia by 2025. English and John Key will have long gone by then.
Even 2020 is safely distant. Nick Smith will not be in the chair if the 2020 greenhouse gas emissions target is missed (assuming it is still relevant). English is unlikely to be Minister of Finance when the budget is supposed to return to balance late next decade.
So why bother doing a 40-year fiscal projection — especially since it presumes a continuation of present policies and activities, with today’s projections for population growth and technology and productivity assumed to change at recent rates?
The value in the long-range projection is that it flags the deeper implications of present policies, tells us we can’t expect magical solutions and invites us to take early action to steer clear of landmines and quicksands.
The 2006 report highlighted the serious long-term difficulty in meeting health care and superannuation costs. It projected government health care costs doubling from 6 per cent of GDP to 12 per cent over 40 years and government-paid superannuation going from 4 per cent to 9 per cent. The response of the government of the day was to spend more on both.
The 2006 report also concluded that the country cannot grow its way out of this by expanding the economy. History says that as resources grow demand on those resources grows: we eat our gains. The multifaceted expansion of government health, education and social programmes in the past 40 years is witness to that.
Moreover, faster productivity growth in the private sector — the present government’s primary aim — pushes up wages and salaries in the government sector.
So over time people either have to curb their demand or pay more taxes or get less from the government. Even though the 2006 projections for some spending showed a fall as a percentage of GDP and noted other offsets, the health and superannuation projections would force a sharp rise in tax without policy change.
A higher tax take limits funds available for private sector economic activity and so reduces the speed of growth of GDP.
Stir in the dramatic fiscal turnround from the actual and projected surpluses of 2006-15 to the actual and projected deficits of 2009-18 and the health and superannuation projections take on an air of fantasy.
There is another lesson: the longer business as usual is business as usual, the harder the eventual correction is and the harder the crunch on taxpayers and those who depend on government help and services.
Governments from the mid-1960s to the mid-1980s did not adjust their claims on the country’s resources to the big fall in the terms of trade. That forced a much tougher eventual adjustment.
English flagged that adjustment message in the budget in May. That budget billed $3 billion of new spending, justified as a cushion against the recession, but flagged spending constraint to come, now showing up in some cuts in services and staff.
His tax working group is designed to present an option for a deep overhaul of the tax system to make it work better for the economy and for raising revenue.
But then? There are no plans to rethink the fundamentals of health services and funding. Key has staked his prime ministership on not changing the eligibility age or amount of superannuation.
The message from next month’s 40-year projection will be that both will have to change and the sooner we start the less the pain. How English and Key respond will tell us a lot about how serious they are about reform.