Brian Fallow in The Herald summarises the take-home messages from the latest Treasury report:

Future written in red ink

Want to cheer yourself down? Take a look at the Treasury’s newly updated projections for the long-run outlook for the Government’s finances.

What the Treasury officials do is take existing policy settings as given, then make projections about big drivers like the age structure of the population and labour productivity growth. They assume the tax take relative to the size of the economy will remain about where it is (29 per cent of gross domestic product).

Then they extrapolate forward, to see what happens to big fiscal numbers like the primary balance (revenue minus spending, excluding interest costs) and the size of the public debt.

It is OK for a few years and then it gets ugly.

Right now, the primary balance is slightly in the black and net Government debt about 25 per cent of GDP.

But if nothing changes on the policy front, and if the projection’s assumptions hold good, we would be looking at a primary deficit of 4 per cent of GDP in 30 years’ time and net debt of 94 per cent of GDP.

By 2060 the deficit will have widened to 6.3 per cent and the debt will exceed 200 per cent of GDP.

And it is worth remembering that the primary deficit excludes the interest bill on the Government’s debt. In reality, it would have to borrow not only to cover the primary deficits, but to pay interest on the growing stock of debt as well. By 2060, on these projections, that would push the operating balance into the red to the tune of 16 per cent of GDP.

That sort of trajectory is not remotely sustainable, especially when most NZ government debt is held by non-residents and the household sector is up to its nostrils in debt.

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Some assumptions may be conservative. The projections assume that the net migration gain will revert to a long-run average of 12,000 a year. It is over 70,000 now.

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The projections also assume labour productivity will improve at an average annual rate of 1.5 per cent. Unfortunately, the average over the past decade was just 0.9 per cent. The difference between 1.5 and 0.9 per cent gets pretty material if it continues, compounding for 30-40 years. …