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Commentary on He Tirohanga Mokopuna: 2016 Statement on the Long-Term Fiscal Position.

A regular and wide-ranging assessment of the factors that could affect the Government's long-term financial position can help clarify what is important for the future of New Zealanders. It also provides current and future governments with the information they need for long-term financial management and decision-making.

Long-term financial management and stewardship requires an outlook that considers future uncertainties and plausible scenarios. It is about good planning, not perfect prediction.

New Zealand is fortunate that the Treasury has the statutory authority and independence to take such a long-term outlook. The Treasury considers the long-term fiscal statement as a central part of its stewardship role.

The Treasury's latest long-term fiscal statement, He Tirohanga Mokopuna: 2016 Statement on the Long-Term Fiscal Position (the 2016 Statement), was published in November 2016 and continues to evolve in positive ways from previous statements. In particular, the discussion has become more wide-ranging and reflects the Treasury's framework for higher living standards as well as feedback from consultation with the public.

The 2016 Statement and the background papers published alongside it contain important information about the many challenges and opportunities that New Zealand might face in the future. However, the supporting financial projections focus primarily on demographic change and the consequences for future superannuation and healthcare spending. Although these are important matters, New Zealand and the Government are facing a more uncertain future and a broader set of challenges than just a changing demographic.

As we found in our review of the previous long-term fiscal statement in 2013, the financial projections provide little insight into the size, timing, financial effect, or interconnectedness of any other potential challenges and opportunities – individually or as a set of scenarios. Important concerns, such as the financial consequences of further shocks (including natural disasters), are not presented or analysed. As well as this, some projection assumptions, such as excluding New Zealand Superannuation Fund assets from the calculation of net debt, are questionable.

As a result, the financial projections can be too easily dismissed by current and future decision-makers, reducing the value of the 2016 Statement. Better projections would have allowed useful analysis and insights for planning and managing the uncertainties that surround the Government's long-term financial position.

The Treasury has progressed its thinking and analysis about whether improving social outcomes provides financial benefits as well as improving living standards. However, it acknowledges that its financial projections do not include many significant factors that could affect the long-term financial position of the Government. Further work is needed to prepare long-term financial projections based on a set of plausible scenarios of different futures for New Zealand, the public sector, and the Government.

I consider that, in preparing future long-term fiscal statements, the Treasury should:

  • prepare a set of plausible scenarios in support of its financial projections;
  • establish a clear rationale and uniform approach to projecting these scenarios;
  • reassess the consistency and reasonableness of the key projection assumptions;
  • reconsider the rationale for excluding New Zealand Superannuation Fund assets from the primary financial sustainability indicator of net debt;
  • explore different approaches to measuring financial sustainability; and
  • obtain expert financial modelling advice.

These improvements should better align the financial projections with the positive work the Treasury has done with the wider narrative of the 2016 Statement. It would also help people to better understand the dynamic relationship between the well-being of New Zealand and the financial sustainability of the Government.

I thank the Treasury for helping my team with this review. I also thank Professor Norman Gemmell, Chair in Public Finance at Victoria University of Wellington, for his expert advice and help.

Signature - GS

Greg Schollum
Deputy Controller and Auditor-General

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CoverCommentary on He Tirohanga Mokopuna: 2016 Statement on the Long-Term Fiscal Position

ISBN 978-0-478-44269-4