Fighting fit? Assessing New Zealand’s fiscal sustainability, NZIER Public Discussion Paper 2013/5

24 October 2013

New Zealand must learn lessons from US shutdown

This new report by NZIER highlights the unprecedented fiscal challenges that New Zealand politicians will face in coming decades.

NZIER recommends that tough decisions around taxes and government spending need to be taken now, and stuck to, in order to avoid a US-like situation in the future when the economic and political costs of correcting debt levels become dangerously high. A bipartisan agreement on funding superannuation costs would be a good starting point.

The report – Fighting fit? Assessing New Zealand’s fiscal sustainability – shows that over the past century, fiscal policy has generally worked well in New Zealand.

NZIER Senior Economist Dr Kirdan Lees said “Our research shows that over the past century, New Zealand governments have reacted to high public debt levels by changing tax rates and spending levels. They haven’t let dangerous debt imbalances persist. Today, New Zealand’s fiscal position is sound – our public debt is low compared to OECD peers. We have room to adjust tax and spending in the face of any future shocks.”

“But the fiscal future is very different. Our ageing population will put the government’s finances under huge pressure. Without significant changes, government debt will be almost twice New Zealand’s GDP by 2060, compared to 26.3% of GDP now. That is simply not affordable” said Dr Lees.

“That means the approach we take to fiscal policy needs to change. The current government has done a good job in getting the books back in order after the Global Financial Crisis and the Christchurch earthquakes. But it now needs to shift its focus. Postponing the fiscal adjustments required to cope with an ageing population raises the cost of future adjustment.”

“The recent US shutdown highlights the risks of poor fiscal management. Delaying the necessary adjustments ratchets up the political costs of change. Politics can then hijack the process and dominate the economics of the right course of action. So we need to start making changes now” he said.

NZIER recommends that:

  • The government better manages expectations about what New Zealand can afford in the future by mapping out the types of spending and taxation policies that will change.
  • Taxes and government spending are changed soon to start spreading the costs of the ageing adjustment over several years. Broadening the tax base and reorienting welfare back to those most in need are good starting points.
  • Political parties seek a bipartisan agreement on addressing New Zealand’s future superannuation costs.

For further information please contact:
Dr. Kirdan Lees
Senior Economist, Head of Public Good Research
021 264 7336

Each year NZIER devotes some of its resources to undertake and make freely available economic research and thinking aimed at promoting a better understanding of New Zealand’s important economic challenges. The preparation of this paper was funded from those resources.