Balancing the books not enough any more

This month the Treasury will publish its third long-range fiscal projections. They will be one reflection of the fact that we are in a period of great social, and therefore political — and fiscal — change.

There will be three main elements to the projections, which go out to 2060.

First, the change now under way in the age structure of the population — proportionately more older and fewer younger people — poses significant revenue and spending challenges, starting this decade.

Second, starting to address those challenges now will allow a smoother adjustment than a panic response from the mid-2020s or so. It would spread the load more equitably across generations.

The third follows from the first two: changes will be more timely and spread better if a debt target is agreed and stuck to, with allowance for fluctuating economic circumstances.

The target the Treasury is likely to propose is the one adopted in the 2013 budget of net debt of 20 per cent of GDP. That would be low enough, the Treasury calculates, to allow a temporary rise to cope with a shock without requiring crisis policies to build fiscal surpluses to bring debt back down to 20 per cent. Conversely, in buoyant times, the figure would logically fall, as it did in the mid-2000s when it reached zero.

But to keep to a 20 per cent average will require some complex spending and revenue decisions.

Older people have more chronic health conditions, which cost money to manage, and they will need pensions and because there will be more of them the bill will go up. In addition, new health technologies drive up demand and so costs. Rough figures on current policies suggest health will go from 6.9 per cent of GDP in 2012 to 11 per cent in 2060 and national superannuation from 4.4 to 8 per cent.

Options to manage pension costs: tax rises, a higher qualifying age, personal savings schemes like KiwiSaver and private schemes and lower pensions.

Options to manage health costs: cost-reducing technologies, dignified dying in place of aggressive near-end-of-life interventions (likely as people die older), personal payments and insurance, tax rises, diverse delivery mechanisms and rationing.

The Treasury assumes education costs will fall proportionately as the proportion of young people falls — by 1 percentage point from 2012 to 2060. To that might be added the likely cost-effective digital supply of much material right up to tertiary undergraduate level.

But massive changes in the global economy are changing the nature and distribution of work. So if New Zealanders are to be well paid and therefore pay enough tax the education system will have to change from a 120-year-old factory system inculcating “skills” to one in which “professional” — highly qualified, well paid — teachers develop children’s and students’ personal capabilities. Education could get much more expensive instead of cheaper.

There might also need to be larger redistribution costs to maintain social cohesion than the Treasury projects.

Next: the physical environment and ecosystem services, which underlie all economic activity. Sustaining ecosystems been seen as a public cost. If climate change goes as the United Nations scientists project, there could be large additional costs by 2050-60.

But if, as some multinationals are doing, businesses fully cost their use of ecosystem services, that cost will be moved from governments to markets — that is, privatised. How will the Treasury handle that in its projections?

That points to another major shift under way, from seeing the private and public sectors as distinct and separate, as social democrats and neoliberals do, to seeing them as inseparably joined, with “public” services devised, delivered and consumed in much more diverse ways than now. That will change longer-term fiscal trajectories.

Add this all up: managing the budget is far more complicated than balancing the books. Fiscal futures are complicated — and set to become much more so.