Since he was elected in 2008, the Prime Minister has told his advisers and the public to 'talk to the hand' on the issue of reforming New Zealand Superannuation to make the Government's finances sustainable in the long term.
Treasury did just that yesterday because it is legally obliged to issue a fresh set of Long Term Fiscal forecasts once every four years. And yet again it suggested a series of options for closing the long run budget deficit gap of around 6% of GDP per year by the middle of the century.
Those options included lifting the age of eligibility for New Zealand from 65 to 67 and indexing payments to CPI inflation rather than the average wage.
But these options are both off the political agenda for the foreseeable future because John Key has promised to resign if either were changed and Andrew Little has abandoned Labour's 2014 pledge to progressively lift the retirement age. Winston Peters, who is set to be the kingmaker in next year's election, is opposed to changing either of the key settings for New Zealand Superannuation.
To get a sense of how effectively the debate has been shut down by that 'talk to the hand' stance, Treasury's Long Term Fiscal Position report (He Tirohanga Mokopuna) was not covered at all in today's New Zealand Herald and was not on Radio NZ's Checkpoint last night or Morning Report this morning. Key has yet to be even asked about the latest advice.
So, for the record, Treasury forecast (page 60) that the Government's net debt would rise to 204.8% of GDP by 2060 if it did not change its historical spending patterns, including the current settings for New Zealand Superannuation. That is up from the 198.3% forecast in the last Long Term Fiscal statement published in 2013.
There were some new elements in Treasury's latest statement, including a discussion about another option for closing the 6% of GDP fiscal deficit gap. It proposed using the social investment approach to improve social outcomes such as lowering unemployment, reducing family violence and reducing recidivism rates. Treasury estimated benefits equivalent to between 5-6% of GDP by 2060 (see page 67).
The Prime Minister's response to the repeated warnings is to say that stronger economic growth will solve the problem, which would be a credible response if New Zealand had sustainably lifted its growth rate in real output per hour worked.
One of the most notable features of this Long Term Fiscal report is the chart on page 18 showing New Zealand's real output per hour worked has stagnated since 2011 and has fallen behind most of its small advanced country peers over the last 35 years. Treasury's forecast assumes New Zealand labour productivity growth of 1.5% per year from the 2020s onwards, which it says is broadly in line with historical averages, but is actually above the experience of the last decade.
One risk is that the surprising slowdown in productivity seen all around the developed world over the last decade continues on over the next couple of decades as ageing populations and slowing growth in emerging economies drags it ever lower. Treasury modelled 1% and 2% productivity growth rates in its sensitivity analyses, but did not include a Robert Gordon-style 'End of Growth' option of flat productivity growth, which is what most of the developed world has seen for most of the period since the GFC.
New Zealand's real output per hour worked has been flat since 2011 and the economy has grown because of a higher participation rate, more hours worked and through much faster-than-normal population growth through high net migration.
'Decisions will be made in the long run'
Despite the current Prime Minister's embargo on changing New Zealand Superannuation's options while he is Prime Minister, Treasury Secretary Gabriel Makhlouf told a news conference to launch the document he was confident Governments would address the issues over the longer term, referring to a 40-50 year time horizon.
"We're going to have choices to make, and on the track record of the past 20 odd years, those choices will be made," he said.
"My observation is that Governments have taken this stuff seriously and have made decisions."
I challenged Makhlouf on whether that was the case given Key's embargo on addressing the issue directly since 2008, and the potential for this to remain in place for at least another four years, and possibly longer.
Makhlouf questioned whether the PM would be there for another 40 years. I said Key was still young at 55. The labour force participation rate for people over the age of 65 is forecast to rise to 26% by 2060 from 22% now, and 6% in 1990.
"In all fairness, decisions are being made all the time. The decision to take net debt down to 20% by 2020 was a decision that supports the long term fiscal position," Makhlouf said.
However, the consequences of the Government's decision to suppress spending growth in health, education and housing at rates slower than inflation and population growth is having unintended and longer-term consequences -- an almost inverse way to the Government's social investment approach.
The essence of the Government's response was illustrated in the recent exchange between Diane Maxwell and Paul Goldsmith over the issue of New Zealand Superannuation. Goldsmith said the Government's response was to suppress the size of Government as a percentage of GDP. See more in our October 25 Hive News.
1,000 extra prisoners 'like the earthquake'
The consequences of not dealing with the long term social issues around child poverty, housing poverty, mental health problems and drug problems has been evident in the recent announcement of the need for an extra 1,000 prison beds, which Bill English has estimated could cost the Government an extra NZ$2.5 billion in the long run.
English spoke yesterday to the fourth data hui in the Beehive on these issues around social investment and data collection.
He illustrated the scale of the prison beds decision by comparing the cost of it to the repairs needed after the Kaikoura earthquake.
"The cost of the uplift in the prison forecasts will be around the same as the Kaikoura earthquakes over the next five years," he said.
"1,000 beds cost the same as a 7.8 earthquake."
Another state house sale plan abandoned...
In another blow for the Government's Social Housing Reform programme, Bill English announced the Government had decided not to proceed with a plan to package and sell 249 Housing NZ properties in Foxton, Levin and Shannon with 115 Horowhenua District Council pensioner flats.
The Government also abandoned plans to sell properties in Southland because it could not agree with the identified buyers.
English cited problems getting Iwi agreement because Iwi had yet to settle Treaty of Waitangi claims, and that this was going to throw up too much uncertainty for those tenants. He said he expected the District Council to embark on its own sales process early next year and he encouraged those Community Housing Providers who had bid to approach the Council.
Phil Twyford called on the Government to abandon the state house sales programme as a costly and bureaucratic failure. "It should move on, and focus on building more state houses to ease the acute shortage of affordable rentals," he said.
In other financial and economic news...
Statistics New Zealand reported a cut-down version of its monthly tourism and migration figures, which showed net migration rose to a record high 70,300 in the year to October. Permanent long term migrant arrivals rose around 6,000 to 126,000, while permanent departures fell around 2,000 to 55,800.
Reserve Bank Deputy Governor Geoff Bascand delivered a speech last night in Canberra on the changing dynamics of household spending behaviour. Bascand said there had been a weaker relationship between wealth rises and consumption in recent years as New Zealanders retained more of their windfall gains in home equity, which the Reserve Bank was now including in its forecasts.
Quote of the day:
Retired Marine Corps four star General James 'Mad Dog' Mattis, who is favoured to be named US Secretary of Defence by President Elect Donald Trump, advising soldiers in Iraq:
"Be polite, be professional, but have a plan to kill everybody you meet."
Have a great day