Greek tragedy

Matt Burgess
Insights Newsletter
9 July, 2021

Treasury’s report this week on long term fiscal position does not make easy reading.

Based on historical trends, the analysis shows government spending will consume 43% of GDP, up from 33% currently, by 2061. Healthcare and superannuation for an ageing population drive most of the new spending.

Higher costs lead to permanent deficits. By 2061, the government’s net worth will fall to negative $1.7 trillion. Public debt will reach $2.6 trillion.

That is more than $400,000 per person.

To put that in perspective, debt per person in Greece, the most indebted country in the world relative to income, is NZ$55,000. New Zealand will pass that figure in the early 2030s.

New Zealand’s Greek tragedy could be a little more than a decade away.

If anything, Treasury’s figures are optimistic. Interest payments on debt will consume more than 7% of GDP in 2061. But that is based on a generous-looking interest rate just above 4%.

At 6% interest, a rate more in line with past trends, interest payments will exceed spending on health.

Thankfully, these findings from Treasury are not realistic. They are not intended to be. They show what could happen if governments continue down the current path without correction.

And that is the point of the long-term fiscal report: to spark the correction.

We have options. The report shows debt can remain manageable at less than 50% of GDP if the government raises taxes or contains spending.

But the adjustment could be brutal. Tax revenues would need to rise from 29% of GDP currently to 38%.

Alternatively, spending on health care or superannuation would be capped at their current share of GDP. Which means roughly 40% less spending on one of those items by the 2060s compared with the forecast track.

Treasury’s analysis reminds us budgets are finite, even in a world awash with savings and zero interest rates. That should prompt the government to up its game on investment.

Is a new Auckland harbour bridge for a few thousand cyclists each day the best use of $685 million?

Is Auckland light rail worth its potential $10 billion price tag?

Do we really need to spend ten times more than necessary to achieve our ambitious emissions targets, as the Climate Change Commission says?

With limited budgets, bang for buck is vital. Yet, cost-benefit analysis has become a four-letter word under this government. That must change.

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