The Requirements for Long-run Fiscal Sustainability Bob Buckle Victoria University of Wellington Affording our Future Conference 10 December 2012
What is fiscal sustainability? • Can Governments in the future: – Continue to provide the range and type of public services currently offered, – without incurring excessive and unsustainable levels of taxes and/or public debt? • Can governments afford in the future what governments are offering today?
Why does it matter? • Levels of Government debt can influence: – Inflation and the real exchange rate, – Risk premium on borrowing, – Risk of sudden reversals (of foreign lending), – Scope for governments to “income smooth out” in response to adverse shocks (recessions, financial crises, natural hazards). • Taxes have efficiency, growth, distribution effects. • Inter-generational effects (high debt today ⇒ higher taxes tomorrow).
The GFC has highlighted these risks 120 Government Debt, Ireland 2006-2012 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012
High Government Debt can be costly 1600 1400 5-year sovereign credit default swaps 1200 1000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 UK Germany Ireland
Finite-horizon inter-temporal budget constraint • Returning to “What is fiscal sustainability?”. • Budget conditions required to achieve an acceptable level of govt. debt in the future (See Fig. 4 in the paper): Inherited level of Sum of future primary public debt plus sum balances (t-g) and Target future public = - of interest paid on interest paid (or debt to GDP ratio that debt over the earned) on those future. balances.
What is a suitable debt target? • Several possible fiscal targets or anchors. • Many governments, including NZ, target debt: – Doesn’t presume an optimal size or role of Govt. – May be a weak discipline on spending when tax revenue growth is high. • In NZ, Public Finance Act requires government to manage total debt at “prudent levels”. • “Prudent” will depend on: Who holds the debt, level of private debt, reputation, risk appetite.
Recent NZ Govt debt and targets
How does NZ’s level of Govt debt compare? % GDP 250 200 150 100 50 0 (2011) General government gross debt as % GDP
Projected Govt revenue and expenses (as % of GDP) Source : Treasury
Projected Govt debt and net worth (% GDP) Source : Treasury
Which parts of the budget are expected to change? Δ % of nominal (GDP) 2010 2020 2030 2040 2050 2060 (% points) Health 6.9 6.9 7.9 9.1 10.1 11.1 4.2% Superannuation (NZS) 4.4 5.3 6.5 7.2 7.3 8.0 3.6% Education 6.2 5.2 5.1 5.1 5.1 5.2 -1.0% Other Op. Allow. Covered (eg. Justice) 8.3 7.4 7.4 7.5 7.5 7.6 -0.7% Non-NZS Welfare 6.8 5.0 4.3 3.8 3.3 3.0 -3.8% Debt-financial Costs (DFC) 1.2 1.9 2.4 3.8 6.0 9.5 8.3% Total Expenses 33.9 31.5 33.5 36.4 39.3 44.4 10.5% Revenue (majority tax) 30.2 32.3 32.6 32.5 32.5 32.6 2.4% Operating Balance (R-E) -3.7 0.8 -1.0 -3.9 -6.8 -11.8 Balance excluding DFC -2.5 2.7 1.4 -0.1 -0.8 -2.3 Source: Treasury
Operating balance with and without a debt target 6% 4% 2% 0% 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059 -2% -4% -6% -8% -10% -12% -14% Operating balance, Cost pressure scenario Operating balance, Sustainable debt scenario Source : Treasury
What’s influencing these projections? • Assumptions about tax revenue as % GDP. • Interest rates on Govt. debt. • Assumptions about indexation of welfare payments. • Impact of ageing, income growth, expectations on welfare, health services, etc. • Demographic and labour force projections.
Demographic Projections for NZ 1960 2010 2060
Fiscal reform has happened before • Welfare reforms after two world wars and the 1930s depression. • Growth of education after post- war “baby boom”. • Institutional reforms post-1985 . • And in the future, role of the state could be impacted by: – Changing preferences as real incomes rise and technology changes, and – Demographic change due to lower fertility rates and people living longer.
Fiscal sustainability is a concern to many developed economies • NZ concern over sustainability reflected in – Public Finance Act in 2004. – Two previous Treasury Long-Term Fiscal Statements (2006 and 2009). • Fiscal sustainability assessments by OECD, IMF and by other countries. • Population ageing is a common concern, but not the only influence on fiscal sustainability.
Population ageing across the OECD Percent of the Population Older than 65 as a Share of Population Aged 15-64 Source : OECD
Population ageing, rising incomes and the fiscal position • Population ageing is a “good news” story: – People living longer; labour participation amongst older age groups rising. • Will have economic and fiscal effects. • Treasury captures some of these and other effects using their Long-term Fiscal Model. • A range of government expenditures are age- and income-related, e.g. public health care and superannuation.
Timing of policy reform • Timing and pace of adjustment important. • The future and fiscal projections are uncertain. • May be benefits to waiting for more information before committing to fiscal reform. • But, there may also be costs to waiting: – Size of fiscal adjustment may rise as total debt and debt servicing costs rise. – Reform may get harder as more voters move into the older age brackets.
Illustration: Delaying fiscal adjustments • If fiscal adjustment starts in 2015: – Need annual operating balance surpluses of 1.9% of GDP for a decade to pay down debt to 20% within a decade. • If fiscal adjustment starts in 2020: – Need annual OB surpluses of 2.2% of GDP for a decade to pay down debt to 20% within a decade.
Conclusions and conference issues • Fiscal sustainability matters. • Population ageing, rising incomes and expectations will influence fiscal futures. • Governments have to decide on: ‒ Suitable fiscal anchor (or debt target), ‒ When to act, ‒ Whether to act - public services and/or tax rates, ‒ How to reform public services (health, superannuation or other services). ‒ Decision framework to assess benefits and costs of the options.
Recommend
More recommend
