Volume 9 – Issue 4 – November 2013

SPECIAL ISSUE Affording Our Future Statement of New Zealand’s Long-term Fiscal Position The Role and Importance of Fiscal Challenges and Changing Patterns of Need Long-Term Fiscal Planning for Health and Long-Term Care in New Zealand Jonathan Boston and Rebecca Prebble 3 Nicholas Mays, John Marney and Erin King 35 Fiscal and Other Risks over Window of Opportunity to Deliver Better the Long Term Justice Sector Outcomes over the Long Term Simon Upton 9 Paul Sherrell 47 The Political Economy of Long-Term Fiscal Engaging Youth on New Zealand’s Planning from a Social Democratic Long-Term Fiscal Position Perspective Susie Krieble and Finn O’Dwyer-Cunliffe 53 Michael Cullen 15 Long-Term Challenges and Opportunities Making Big Decisions for the Future in the Natural Resource Sector Colin James 21 Miriam Chaum 57 The Future Costs of Retirement The New Zealand Transport Agency’s Income Policy and Ways of Transport Appraisal Framework Addressing Them Ernest Albuquerque 66 Nicola Kirkup 29 A Brief Reply to Ernest Albuquerque Michael Pickford 71 Editorial Note This issue of Policy Quarterly explores the Treasury’s transparently representative citizen’s assembly might recently released report, Affording Our Future: be the most promising option. Statement on New Zealand’s Long-Term Fiscal Nicola Kirkup, in her contribution, addresses the Volume 9 – Issue 4 – November 2013 Position, and some of the major policy issues raised long-term fiscal challenge posed by the design of New by this significant document. To set the scene, the Zealand superannuation (which provides a universal, Policy Quarterly (PQ) is targeted at readers first article (which we have co-authored) examines the taxable pension to all those aged 65 years and over). in the public sector, including politicians and nature of long-term fiscal planning, why it is important With the proportion of the population over 65 steadily their staff, public servants and a wide variety of and why making it a legal requirement is desirable. increasing, the fiscal cost of the current scheme will professions, together with others interested in We also explore some of the common objections to, or inevitably increase, rising from around 4% to almost public issues. Its length and style are intended concerns about, long-term fiscal planning. While noting 8% of GDP by mid-century. Accordingly, her paper to make the journal accessible to busy readers. the need for caution when trying to assess the likely explores the various options for reducing these costs The journal welcomes contributions of policy preferences and values of future voters, we and assesses their respective merits. While views about 4,000 words, written on any topic argue that long-term fiscal planning can be very helpful on which approach is ‘best’ are bound to differ, it is relating to governance, public policy and in highlighting the kinds of spending pressures on the critical that the debate is informed by the best available management. Articles submitted will be horizon and how policy makers might best respond. For evidence and clarity over the implications of the reviewed by members of the journal’s Editorial New Zealand, critical issues over the longer-term will different options. Board and/or by selected reviewers, depending include the funding of pensions, health services and Funding public health care has always been a on the topic. Although issues will not usually long-term care. The article concludes by considering challenge, and the future will be no different. In their have single themes, special issues may be the case for extending the requirement for long-term contribution, Nick Mays and his colleagues discuss the published from time to time on specific or fiscal planning to other important policy domains, most nature and scale of the fiscal challenges posed by rising general themes, perhaps to mark significant notably the social and environmental spheres. health expenditures and how these might be addressed. events. In such cases, and on other occasions, Simon Upton, in the next contribution, argues that They advocate a shift in priorities away from acute care contributions may be invited from particular the Treasury’s review of the long-term fiscal outlook towards a greater focus on primary care. people. should be viewed as an exercise in managing a wide Paul Sherrell’s contribution scrutinises the Subscriptions: The journal is available in PDF range of risks under conditions of significant uncertainty. conclusions in Affording Our Future with particular format on the Institute for Government and He focuses specifically on the risks associated with reference to the justice sector (especially prisons). He Policy Studies (IGPS) website: http://igps. demographic change (especially population ageing), notes that while the justice sector has experienced victoria.ac.nz/publications/publications/list/10. global environmental pressures (especially natural a rapid escalation of costs over the past decade or Readers who wish to receive it by email should disasters and climate change), and financial crises. so, some of these cost pressures are now easing. In register as PQ subscribers [email protected]. While maintaining that long-term fiscal reviews should particular, the fall in the crime rate and the number of This service is free. enable ‘a more measured trimming of the fiscal sails people entering the criminal justice pipeline provides For all subscription and membership in advance of acute challenges arising’, he observes the sector with a chance to modernise service delivery enquiries please e-mail [email protected] or that New Zealand’s relative security has contributed models and free up underutilised resources for post to Institute for Government and Policy to long periods of policy stagnation. Accordingly, he redistribution to priority areas. Hopefully, the sector Studies, P.O. Box 600, Wellington. encourages policy makers to act pre-emptively rather can seize this opportunity and thereby reduce New Electronic Access: The IGPS directs than waiting until they have no choice but to respond Zealand’s disturbingly high imprisonment rate. interested individuals to its website: www.igps. due to fiscal pressures – when their options may well The next article provides a youth perspective on victoria.ac.nz where details of the Institute’s be much more limited. New Zealand’s long-term fiscal position by exploring publications and upcoming events can be Sir Michael Cullen’s contribution is significant, not the responses of 27 young people (participants in found. least because he served as finance minister for nine the 2012 LongTermNZ workshop) to the Treasury’s Permission: In the interest of promoting debate years and oversaw the passage of the Public Finance statement. Written by two of these students, it explores and wider dissemination, the IGPS encourages Amendment Act which ushered in the requirement for how the Treasury can better engage young people in use of all or part of the papers appearing in long-term fiscal planning. He analyses some of the main a conversation surrounding the long-term health and PQ, where there is no element of commercial conclusions in Affording Our Future, giving particular viability of the New Zealand economy and outlines some gain. Appropriate acknowledgement of both attention to the greatest opportunities for long-term of the policy conclusions reached by the participants in author and source should be made in all cases. fiscal adjustment, not least the options for raising the LongTermNZ workshop. The IGPS retains copyright. Please direct additional revenue and the possible ways of reforming The penultimate article, by Miriam Chaum, explores requests for permission to reprint articles from New Zealand’s current retirement income provisions. the long-term fiscal challenges and opportunities this publication to [email protected]. His various suggestions with respect to pensions generated by New Zealand’s diverse natural resource Editors: Jonathan Boston and Bill Ryan policy deserve careful scrutiny and debate. Above sector. The paper focuses on three important and Guest Editor: Rebecca Prebble all, he urges policy makers not to leave our children controversial policy issues: the mining of fossil fuels; Editorial Board: Guy Beatson, David Bromell, and grandchildren with harder choices than we are freshwater management; and mitigating climate Valentina Dinica, Don Gray, Gerald Minnee, prepared to make ourselves. This means engaging now change. In each case, there are major challenges for Mike Reid and Andrea Schollmann. in intelligent debate on how to meet future challenges – policy makers. Failure to address these challenges ISSN: 1176 - 8797 (Print) not wait another decade or more. successfully will have profound implications – and not ISSN: 1176 - 4325 (Online) Colin James’ contribution considers how merely of a fiscal nature; at stake is the well-being of Volume 9, Issue 4 – November 2013 adjustments for the future might be made in a countless generations. Copy Editor: Rachel Barrowman representative democracy where politicians are subject Finally, in the interests of stimulating debate on Design & Layout: Aleck Yee to frequent elections and intense short-term pressures. important contemporary policy matters, this issue Cover Photography and Design: In so doing, he examines the likelihood of generating a of Policy Quarterly includes a response by Ernest Aleck Yee/Alltex Design parliamentary consensus on the handling of long-term Albuquerque to an earlier article by Michael Pickford Production: Alltex Design issues, as well as alternative modes of decision-making, on state highway investment. We are also publishing Proof Readers: Vic Lipski and Kezia Bennett namely extra-parliamentary mechanisms for reform. a short comment by Michael on Ernest’s response. More specifically, he discusses the possible merits We will leave it to readers to assess the merits of their of citizen initiated referenda, national conventions, respective arguments. parliamentary petitions and other formal and semi- formal mechanisms of reform. He concludes that a Jonathan Boston and Rebecca Prebble

Page 2 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Jonathan Boston and Rebecca Prebble

The Role and Importance of Long-Term Fiscal

It is also obliged under the act to ensure Planning that ‘all significant assumptions underlying any projections’ are included in the statement. Aside from these parameters, the act is silent on the matters to be Many countries now require the regular publication of long- covered, giving the Treasury considerable flexibility over the process employed to term fiscal projections, looking at the potential long-term produce such documents, including the costs of government spending programmes (see Anderson nature and extent of any consultation with external experts, the wider policy and Sheppard, 2009). In New Zealand, section 26N of the community and interested stakeholders. Since the requirement for such statements Public Finance Act 1989 (as amended in 2004) requires was introduced in 2004 the Treasury the Treasury to publish a Statement on the Long-Term has published three reports. The most recent of these – Affording Our Future Fiscal Position at least every four years. Under the act, such – was released in July 2013. Against this 1 backdrop, this article considers: statements must look out at least 40 years. Their contents are • the nature of long-term fiscal the responsibility of the secretary to the Treasury (rather than planning; • why long-term fiscal planning is the minister of finance), and the Treasury is required to use important; ‘its best professional judgments’ in assessing the fiscal outlook • why a legislative requirement for such planning is desirable; and potential risks. • whether long-term fiscal planning actually achieves its goals; Jonathan Boston is a Professor of Public Policy at Victoria University of Wellington. Rebecca Prebble • some of the uncertainties involved in is a Senior Analyst at the New Zealand Treasury and worked on the Treasury’s 2013 Statement on long-term fiscal planning; and the Long-Term Fiscal Position. The views, opinions, findings, and conclusions or recommendations expressed in this article are strictly those of the authors and do not necessarily reflect the views of • the potential for long-term planning any organisation, including the New Zealand Treasury. in areas beyond fiscal ones.

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 3 The Role and Importance of Long-Term Fiscal Planning

What is long-term fiscal planning? provide guidance on projected trends in fiscal management that governments This article uses the expression ‘long-term aggregate levels of public expenditure. should, when formulating fiscal strategy, fiscal planning’ as a general term to refer The Treasury also includes assumptions ‘consider its likely impacts on present and to the Statements on the Long-Term Fiscal about revenue, assuming a relatively future generations’. The aim of the new Position that the New Zealand Treasury constant revenue stream (as a share of principle is to ensure that governments publishes as well as similar reporting GDP), based on average historic tax takes consider the long-term implications of requirements in other jurisdictions. relative to GDP. The combination of ‘no their fiscal policies and explain those ‘Planning’ is a word that can mean dif- policy change’ scenarios on both the implications. ferent things in different contexts, of spending and revenue side give a sense of course. Perhaps most commonly, it whether, and the extent to which, current Why is long-term fiscal planning important? tends to imply a clearly sought outcome policy settings on either the spending Long-term fiscal planning often reveals along with steps to get there. However, or revenue side (or both) may need to that the long-term costs of some we use ‘planning’ in a looser sense here. change in the future to avoid a funding government spending programmes are Hence, long-term fiscal planning includes gap. quite different – often more expensive3 – projecting what the future might hold given In New Zealand there is no explicit from their short-term costs. A programme a number of reasonable assumptions; it is requirement for the government to respond that might have been relatively cheap not restricted to mapping out what steps to the Treasury’s regular Statements on when it was introduced can have features that mean its costs increase over time. A programme that becomes more expensive And changes that are planned well in in the future implies that other spending areas will need to be squeezed or more advance and follow an informed public revenue will need to be raised if the debate tend to be less disruptive – and programme is to continue. Increasing revenue or squeezing other spending less prone to reversal later – than sudden areas might not reflect the preferences of the electorate. In that case, changes will be changes. necessary to alter the long-term trajectory of the programme at issue. In a sense, simply the fact that changes to a programme will eventually might be necessary to reach a particular the Long-Term Fiscal Position. In practice, be necessary is not a reason for long- outcome. however, governments do tend to respond term planning. After all, changes can be Long-term fiscal planning attempts in some fashion. For example, Bill made when they become necessary and to get a sense of possible future demands English, the current minister of finance, not before. But often the kinds of policy on government resources. It involves released a press statement in response to changes necessary will require some looking at current spending programmes the Treasury’s 2013 statement (English, lead time to give people time to plan for and assessing their potential future 2013). More formally, it has become possible new arrangements. In addition, costs. The methodology for the New practice for the Fiscal Strategy Report, a government that acknowledges that Zealand Treasury’s production of regular the government’s primary document for changes will be needed sends a signal Statements on the Long-Term Fiscal communicating the details of its fiscal to lenders, households, and firms that it Position involves assuming that current strategy,2 to contain a section addressing can be trusted to address fiscal pressures legislative and policy settings will remain long-term fiscal pressures as described in appropriately, giving people confidence the same and that historic per capita the most recent Statement on the Long- in that government’s future solvency. And growth rates in different spending areas Term Fiscal Position. These sections help changes that are planned well in advance (both operating and capital) will continue. readers marry the outlook for the next and follow an informed public debate These assumptions are combined with 40+ years with the more medium-term tend to be less disruptive – and less prone other assumptions about likely future focus of Fiscal Strategy Reports. to reversal later – than sudden changes. demand for different government As noted above, alluding to the The desirability of long-term planning spending areas in the future. Factors Treasury’s long-term fiscal projections in is particularly clear in the case of state like the performance of the economy Fiscal Strategy Reports is not mandatory. pensions. The Treasury’s 2013 Statement and the age structure of the population But a recent addition to the fiscal on the Long-Term Fiscal Position affect that future demand. Together, responsibility principles in part 2 of the projects that if current policy settings these assumptions give a picture of how Public Finance Act ought to reinforce remain the same, the government will go different spending areas might grow or the practice. The Public Finance (Fiscal from spending just over 4% of GDP on shrink in the future if current policy Responsibility) Amendment Act 2013 New Zealand Superannuation in 2010 to settings do not change. Additionally, they introduced a new principle of responsible about 8% of GDP in 2060.4 It does not

Page 4 – Policy Quarterly – Volume 9, Issue 4 – November 2013 necessarily follow that we should expect expenditure as desirable, at least relative future. Governments can then come to see policy changes – after all, many to the alternatives. But in that case they under pressure to say what they intend to OECD countries already spend more will need to make trade-offs elsewhere, do about these rising costs – an issue that than 8% of GDP on state pensions.5 But either by accepting higher taxes or governments might prefer to avoid. assuming that changes to New Zealand by reprioritising within the existing A legislative requirement to carry out Superannuation policy were deemed fiscal pool. If the public is reasonably long-term fiscal planning on a regular to be desirable, governments should well-informed about long-term fiscal basis both makes sure that work happens introduce reforms slowly and after an pressures, it ought to be easier to judge even when there are more immediately informed public debate.6 People rely and debate what sorts of trade-offs might pressing issues and also removes the on having a more or less certain stream accord best with society’s preferences. temptation to prevent publication of income when they decide to stop for reasons of political convenience. working and make decisions about how Why is a legislative requirement for long- Accordingly, it provides for greater much to save over the course of their term fiscal planning considered desirable? certainty and is likely to increase the working lives based on that reliance. Any While New Zealand’s requirement for the overall quality of public debate. changes to New Zealand Superannuation, therefore, would need to be signalled well in advance of actually coming into effect. Long-term fiscal planning also allows A core assumption underpinning long- time to build consensus around what kinds of changes are best, leading to less term fiscal planning is that if the facts likelihood of policy reversals. In relation to public health care, the about possible future trajectories are other main area in which the Treasury’s known, people will make short-term long-term fiscal projections show significant pressures,7 the benefits of decisions that ought to lead to better early warning are less cut and dried. Even if we decide as a society that the long-term outcomes. increases in public health care spending the Treasury projects are undesirable, it is not immediately obvious what we might do to avoid them. There are some regular production of a Statement on the Does long-term fiscal planning work? possibilities, like increasing the use of Long-Term Fiscal Position was introduced A core assumption underpinning long- patient co-payments and limiting the in a 2004 amendment to the Public Finance term fiscal planning is that if the facts coverage of the public system, as well Act, the New Zealand Treasury has in fact about possible future trajectories are as trying to find more efficiencies, but had a model capable of producing long- known, people will make short-term the fiscal impacts of these options are term fiscal projections since well before decisions that ought to lead to better difficult to quantify.8 And the impacts 2004, and from time to time either the long-term outcomes. But this rationale that such changes might have on any one Treasury or the government has published encounters some practical problems individual’s circumstances are impossible such projections (for example, Janssen, and is open to a number of objections. to know in advance. Having said that, an 2002). A legislative requirement is useful, The most significant problem is that the understanding of what the public health however, for making sure that long-term people responsible for making short- system is likely to look like in the future fiscal planning actually happens. Politics term decisions are often not those who could well affect people’s short-term and policy analysis are often taken up will eventually experience the long-term decisions, such as whether to buy health with urgent issues, leaving little time outcomes of those decisions, e.g. 20–40 insurance. or resources for long-term thinking. years later. Taking the interests of people While their role of helping individuals Despite the usefulness and importance in the future into account often involves plan for the future is more limited, of long-term planning, time and resource some cost to voters now. Even with better projections for future health care constraints can mean that it will not information, voters do not necessarily spending serve the important task of necessarily happen. have incentives to support measures that putting current and future governments Furthermore, governments might have they perceive to be against their own on notice that policy changes will be incentives to avoid confronting the issues interests. necessary if they do not want to see that long-term planning uncovers. In This problem has been described as public health care spending growing the context of long-term fiscal planning, a political asymmetry – an imbalance of significantly as a share of the economy. often the planning process reveals that political power between political actors.9 Of course, some governments may certain government spending areas are There are different kinds of political see proportionately higher health care likely to become more expensive in the asymmetry. For instance, a voting

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 5 The Role and Importance of Long-Term Fiscal Planning

Figure 1: Projected New Zealand elector count by age group (% of total) policies: initiatives to reduce the likely magnitude and impacts of human- induced climate change tend to require sacrifices on the part of current voters, 18-24 with the benefits (in the form of reducing ecological damage and lower adaptation costs) being felt by future generations. In 25-34 such contexts there is legitimate room for scepticism about the extent to which just providing information can be effective. Indeed, with respect to climate change, the international evidence thus far is that 35-44 very few governments have been willing to impose significant short- to medium- term costs – via some kind of market- based instrument (e.g. an emissions tax or an emissions trading scheme) 45-54 – on current voters in order to reduce greenhouse gas emissions. However, in the area of long-term fiscal planning, the problems of political asymmetry might be over-stated. The 55-64 time horizon over which countries carry out long-term fiscal planning is actually not that long: it is 40 years in New Zealand, and most other countries 65+ take comparable time periods. Many of the people who will bear the cost of any short-sighted decisions made in the near 2010 2020 2030 2040 2050 term are already both alive and voting.

Source: Treasury (2013), using data from Nolan et al (2012) The current cohort of people aged 18–30 is aware of long-term fiscal issues and is asymmetry is essentially the fact that as many over-65s pay significant amounts making its views felt: Susie Krieble and young people and people not yet born of tax.) And any adjustments to New Finn O’Dwyer-Cunliffe’s article in this cannot vote, so their views are not directly Zealand Superannuation realistically Policy Quarterly issue is an example. Even taken into account in a democracy, yet (if not legally) have to be made well in voters who are unlikely to be significant such people will be directly affected advance, meaning that a cohort of people taxpayers in 40 years’ time still have in various ways by the choices of those must vote to reduce what will eventually reasons to care about those who will be who are currently able to vote and make be their own entitlements, without large taxpayers in future decades. Voting decisions on public policy matters. In necessarily any offsetting personal gain. now for policies that, for example, imply many situations a cost-benefit asymmetry The projected age profile of voters in much higher taxes for future taxpayers may also be in evidence – namely, the fact New Zealand out to 2050 (see Figure is risky. Future taxpayers are likely to that the costs and benefits of different 1) gives little comfort in this regard. have many options other than living in policies may fall on different groups Simon Upton’s and Michael Cullen’s New Zealand, so there is no guarantee (and/or over different time periods).10 contributions to this issue of Policy that such people will stay and keep Together, these asymmetries have obvious Quarterly also make this point. paying taxes they perceive to be unfair. implications for long-term fiscal policy. The case of New Zealand A New Zealand that loses a chunk of its Superannuation policy is a particularly Superannuation can be extended to workforce will be unable to maintain high good example. In New Zealand, current long-term fiscal planning more generally. transfer payments, regardless of whether superannuation payments to those aged ‘Doing something’ about long-term fiscal a large proportion of the electorate would 65 and over are funded by the current pressures might involve asking a group vote for them. Thus, even a very narrow- cohort of taxpayers: that is, the people of voters to accept some cost – perhaps minded voter who cares only about what who receive superannuation payments not a huge cost, but still one that people he or she personally pays to and receives are by and large a different group of will notice – for a future gain which may from the government should consider the people from the group who pays for largely be enjoyed by others. We can draw impacts the policies they favour might them. (There is some overlap, of course, an analogy with climate change mitigation have on others.

Page 6 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Furthermore, the picture of a narrow- In fact, to some extent that is the whole The difficulties in projecting future minded voter who cares only about what point of such planning. public health care spending are a specific he or she personally pays to, and receives Having said that, in the process of example of a more general difficulty: that from, the government is, in our view, an projecting the potential future fiscal is, there are many things that might affect overly pessimistic representation of most impacts of current policies, long-term future demand for spending, whether on people. Most people care about people fiscal planners need to make some education, welfare, law and order or other other than themselves – they care about predictions about what might happen in areas, that we simply cannot predict. Thus their children and grandchildren, for the future.11 In the case of the potential the Treasury’s projections have significant example. There are also many instances future path of spending on public health uncertainty bands around them. in history of societies making decisions care and New Zealand Superannuation, that seem to go against the short-term modellers need to incorporate predictions Should we be better at long-term planning in interests of most people in those societies. about factors that affect demand for areas beyond the fiscal? Colin James, in his paper to the Affording that spending. Here is one place where Most of the arguments in favour of long- Our Future conference, gave the examples uncertainty creeps in. term fiscal planning apply equally well to of the abolition of the slave trade, and the British Reform Act of 1832 widening the franchise (James, 2012). The point is that with enough information, people can ... long-term fiscal planning in New and do make what seems to them to be Zealand is relatively well-established the right decision even when it appears to be contrary to their own interests. with the legislative requirement for the That is essentially the rationale behind the publication of long-term fiscal Treasury ... long-term planning in other planning documents. Simply providing areas is more piecemeal. information does not force anyone to do anything about what the information reveals. But providing information gives people the opportunity to consider what Projecting future demand for New long-term planning in general. We might problems are on the horizon, what policy Zealand Superannuation, assuming not be very good at predicting the future options are available to address these current policy settings, is relatively accurately, but by thinking about what it problems, and what the long-term impact mechanical: it is driven by the number might bring we give ourselves options. But of their choices could be. of people aged 65 and over in each year whereas long-term fiscal planning in New between now and 2053 (although the Zealand is relatively well-established with Is long-term fiscal planning accurate enough Treasury’s projections actually go out to the legislative requirement for the Treasury to be useful? 2060). All of the people who will be 65 to produce Statements on the Long-Term Long-term fiscal planning can be criticised or over between now and 2053 are already Fiscal Position, long-term planning in on the basis that the time horizons it alive. Certainly, some of those people will other areas is more piecemeal. involves – four decades in New Zealand’s die before the end of that period, and we Two areas where better long-term case – are too long for it to produce any do not know exactly how many, but we planning might be useful in New Zealand useful information. After all, consider how have a pretty good idea of the general are social trends and environmental many unexpected things have happened range. trends. Neither kind of long-term planning over the last 40 years, and how much they Projecting the future costs of public would be exactly like long-term fiscal have changed the course of our lives. Given health care involves more uncertainty. planning, but they could be beneficial the inherent unknowability of the future, The Treasury’s projections of the possible all the same. Long-term social planning can long-term fiscal planning really say fiscal path of public health care rely might look at current social trends and anything useful about what might happen heavily on the rate at which spending on their likely future impact, assessing how over the next 40 years? public health care has grown in the past. the future role of the government might This critique, however, misunder- The future might be quite different from need to change in order to respond to stands the purpose of long-term fiscal the past. Technological changes might them. Long-term environmental planning planning. Such planning does not make it easier to treat more people more could look at a range of possible long- attempt to predict the future, but rather cheaply; alternatively, some new forms of term environmental outcomes, some aims to show the likely long-term fiscal health treatment might be very expensive, of which might depend on actions we implications if current trends continue. and/or medical conditions such as obesity take now. Long-term thinking in these The fact that policy settings might may become more common across the areas is admittedly challenging, and change, so that those projections do not population, thus generating significant risks being wrong, but it is possible. The eventuate, is explicitly taken into account. additional demand for health services. OECD, for example, recently published

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its Environmental Outlook to 2050, which ‘much less good at thinking about the 2 The government publishes a Fiscal Strategy Report along with each Budget. Fiscal Strategy Reports are required by looks at key social, demographic and long term and the various dimensions of section 26J of the Public Finance Act 1989. 3 It is not the case that all spending programmes become more economic trends and what these are likely that’ (Rennie, 2013). Thinking about long- expensive over time, however. For example, as discussed in to mean for the natural environment term issues does not necessarily require Paul Sherrell’s contribution to this issue of Policy Quarterly, current projections show expenditure in the justice sector (OECD, 2011). formal or regular reporting, but examples declining as a share of GDP if current trends continue. 4 This number is simply gross New Zealand Superannuation It is arguable that recent changes to the from other countries or multinational payments; it does not include KiwiSaver contributions from State Sector Act 1988 nudge government organisations can give some guidance the government and does not net off the tax people pay on New Zealand Superannuation payments. departments towards taking a more long- about how to give effect to a stewardship 5 For example, the Euro area average was around 10% of GDP term view. Departmental chief executives culture.12 in 2010 (Upton, 2012). 6 Nicola Kirkup’s contribution to this Policy Quarterly issue are now responsible for ‘the stewardship describes and assesses some potential changes to pension policy. of a department ... including its long- Conclusion 7 Treasury’s 2013 Statement on the Long-Term Fiscal Position term sustainability, organisational health, Looking at long-term fiscal issues is a projects public health care spending to grow from 6.8% of GDP in 2010 to 10.8% (approximately) in 2060. capability, and capacity to offer free and well-established practice in New Zealand. 8 Mays et al., 2013, in this Policy Quarterly issue, elaborate on the difficulties of predicting the actual impacts of ‘cost frank advice to successive governments’ Long-term fiscal planning gives us saving’ public health care measures. For example, increasing (section 32(1)(d)). ‘Stewardship’ is defined warning about what kind of spending the use of co-payments could discourage people from seeking certain kinds of care, meaning that they need more expensive as ‘active planning and management pressures might be on the horizon and care later as their health deteriorates. of medium- and long-term interests, what we might do about them. Admittedly, 9 The concept of political asymmetry is explained in Boston and Lempp (2011). along with associated advice’ (section ‘doing something’ about future spending 10 The voting and cost-benefit asymmetries are two of four democratic asymmetries identified by Wolf (1987). The other 2). The introduction of the notion of pressures must confront a political two are the interest group asymmetry and the accounting ‘stewardship’ recognises that while asymmetry problem, as the people asymmetry. 11 A ‘prediction’ or ‘forecast’ is the forecaster’s best guess about government departments must act making the decisions are not necessarily what will probably happen over a particular time period. While forecasters are aware that reality will probably be primarily in accordance with the wishes the same as those who will feel the effects somewhat different from their forecasts, and maybe wildly of the government of the day, they also of those decisions. But there is reason to different, a forecast is still intended to be a prediction of what will actually happen, given what we know now. In have broader responsibilities to the hope that long-term fiscal planning can contrast, a projection merely states what would happen if country more generally, both now and still be effective. An emerging opportunity certain assumptions turn out to be true. A projection need not bear any close resemblance to what actually unfolds and in the future. Making sure that they are for New Zealand will be incorporating the it is not a criticism of a projection that it turned out to be ‘wrong’ (whereas a forecast could be criticised on that basis). ready to address the issues of tomorrow broad techniques employed for long-term 12 The controller and auditor-general currently has a work as well as today is part of that broader fiscal planning into thinking about the programme that involves helping the public sector plan for New Zealand’s future needs, with particular reference role. future more generally. to a changing demographic structure but also taking into account other ways in which the future might be different Giving effect to these new stewardship from the present. So far the auditor-general has produced 1 The expression ‘long-term’ can have a number of different three reports as part of this work programme: Commentary requirements will probably require meanings. Forty years makes sense in the context of the on Affording Our Future: Statement on the Long-Term Fiscal Statement on the Long-Term Fiscal Position, being a long changes to current practice. As Iain Position, Public Sector Financial Sustainability and Matters enough time period to get a sense of potential future costs arising from the 2012-2022 Local Authority Long-Term Rennie, the state services commissioner, of different programmes, but not so long as to make any Plans. These reports are available at www.oag.govt.nz. projections meaningless. Even within the Public Finance Further publications are planned for 2013. has pointed out, departments are ‘very Act, ‘long-term’ has different definitions, reflecting different good at responding to the demands of purposes. For example, section 26J requires governments to set out their ‘long-term fiscal objectives’ in the annual Fiscal ministers and the here and now’ but Strategy Report, where ‘long-term’ means at least ten years.

References Anderson, B. and J. Sheppard (2009) ‘Fiscal futures, institutional budget New Zealand, New Zealand Treasury working paper 02/04, reforms, and their effects: what can be learned’, OECD Journal on Wellington: Treasury Budgeting, 2009/3 Nolan, P., L. Thorpe, and K. Trewhitt (2012) Entitlement Reform, Boston, J. and F. Lempp (2011) ‘Climate change: explaining and London: Reform think tank solving the mismatch between scientific urgency and political inertia’, OECD (2011) Environmental Outlook to 2050, Paris: OECD Accounting, Auditing and Accountability Journal, 24 (8), pp.1000-21 Rennie, I. (2013) Speech of head of state services and state services English, B. (2013) ‘Government on track to keep debt under control’, commissioner at the IPANZ state sector legislation launch media realease, 11 July, www.national.org.nz Upton, S. (2012) ‘Long-term fiscal risks: New Zealand’s case in the James, C. (2012) ‘Making big decisions for the future’, paper presented context of OECD countries’, paper presented at the Treasury/Victoria at the Treasury/Victoria University of Wellington Affording Our Future University of Wellington Affording Our Future conference, December conference, December Wolf, C. (1987) ‘Market and non-market failures: comparison and Janssen, J. (2002) Long-term Fiscal Projections and Their Relationship assessment’, Journal of Public Policy, 7 (1), pp.43-70 with the Intertemporal Budget Constraint: an application to

Page 8 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Simon Upton

Fiscal and Other Risks over the

Long Term political or biological disaster (and those cannot be discounted), it will also be the After 13 years’ absence from any involvement in public life in most mobile world ever, raising profound questions about identity. We all know this New Zealand it has been a welcome challenge to re-immerse but we don’t really understand what it will entail, which is why I feel instinctively myself in issues with which I used to be familiar. I’d like nervous about telling people that we can to focus this article on why we should see the Treasury’s engineer particular outcomes. review of the government’s long-term fiscal outlook as an Global environmental pressures Geopolitical, social and environmental exercise in managing a wide range of risks under conditions trends mean that the world in which of significant uncertainty; and how, from a political point future taxes and dividends are struck will differ significantly from the context of view, one might seek to stop the need for fiscal prudence in which current entitlements have been sliding off the radar screen.1 established. While we can describe the plausible direction of a number of these Managing risk and uncertainty how unfamiliar the future might be. The trends, the risks around them are not Demographic transition world has never experienced ageing on sensibly quantifiable. That doesn’t mean The issue of retirement income places the scale we’re about to live through.2 they can be ignored. the demographic transition we’re Demographic ageing is not just a A much larger economy will place undergoing into sharp relief. The fact developed-country phenomenon. China increasing pressure on the planet’s that the trajectory of ageing can be so will shortly start to age, before ever capacity to absorb waste and supply precisely quantified, and the impacts having fully developed. That ageing vital ecosystem services.3 Needless to modelled, lends a misleading sense will occur in the most urban world we say, New Zealand will become an even of certainty to this whole debate. The have ever experienced: from 30% urban, more vanishingly small element of a phenomenon is painted as inexorable, 70% rural in 1950 we will by 2050 have much less familiar geopolitical world. No quantifiable and manageable. In one exactly reversed those proportions country will be immune from the global sense it is, but we should also reflect on (United Nations, 2011). Excluding environmental pressures of such a world, the impacts of which will be transmitted The Rt Hon Simon Upton is the Director of the Environment Directorate of the Organisation for directly (as in the case of climate Economic Co-operation and Development (OECD) in Paris and was formerly a minister of the Crown in the National-led governments between 1990 and 1999. In 2012-2013 he was a member of the change) or indirectly (through declining Treasury/Victoria University of Wellington Long-Term Fiscal External Panel. environmental quality affecting global

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 9 Fiscal and Other Risks over the Long Term supply chains for goods and services).4 In need to mention this after the Canterbury will be encountered either adapting to some cases (notably airborne pollution) earthquakes. Natural disasters have the the consequences or trying to limit their the ageing profile of OECD populations potential to impose economic shocks that extent are likely to weigh on future growth. will place them at particular risk. knock New Zealand’s growth prospects This places a further question mark over As an open economy, New Zealand and thereby undermine the government’s future growth scenarios based on benign can expect to feel the consequences ability to raise tax revenue. Prudentially, assumptions about the physical world. of rising resource scarcity and New Zealand’s geological endowment environmental damage through trade requires the government to run its Financial crises linkages and directly experience the local finances on the basis that it will have to One other class of risk to smoothly consequences of globally-induced climate face recurrent fiscal burdens in the same advancing prosperity deserves comment: change. Depending on the severity of way countries like the Netherlands face financial crises. The financial sector is environmental pressures, New Zealand water management expenditures, or capable of delivering shocks with every bit could become an increasingly desirable other countries face significant defence as much impact as natural disasters. Such destination for migrants, as well as benefit expenditures for geopolitical reasons. A shocks can swiftly impose constraints on from demand for the biological output of similar reasoning applies to New Zealand’s a government’s fiscal position for many its resource base in a world needing more relatively high exposure to biological risk years. food. given the biological base of the economy. Economic crises are not rare events. A recent study estimates that since 1970 there have been a total of 147 banking One specific source of economic crisis, 218 currency crises and 66 sovereign debt crises. As the world is now vulnerability for New Zealand is its well aware, this is not just an emerging external indebtedness position and the markets phenomenon. Thirty-one of the 34 current OECD members have risk of a ‘sudden stop’ in capital inflows experienced at least one systemic banking crisis since 1970, and 32 have experienced if foreigners turn off New Zealand as an at least one of a banking, currency or investment destination. sovereign debt crisis over that period (Laeven and Valencia, 2012). Against this backdrop New Zealand is fortunate not to have been among The global scale of potential climate While not a ‘natural’ disaster in the those having experienced a banking change has reinforced the impression that same sense, anthropogenic climate change crisis, although this may be as much environmental change is the most likely poses unknown but potentially significant a consequence of prudent Australian source of catastrophic risk. This may not economic risks within the horizon under regulation governing our largely be so. For a carefully measured assessment consideration. Significant climate change Australian-owned banking sector as of of the relative orders of magnitude that is already locked in and global emissions local conditions. Serial failures by other can reasonably be attached to known trajectories suggest that the chances New Zealand financial intermediaries risks, Smil (2008) is essential reading. of holding average global temperature over the last 30 years have destroyed a On the basis of a rigorous assessment of increases to 2 degrees are fast dwindling. significant share of private savings, which the known statistical level of exposure The global community faces a choice in suggests that New Zealand has lacked to risk of fatality caused by large-scale the next decade of either acquiescing in important management skills and has catastrophic events, Smil identifies only significant climatic disruption or costly failed to regulate appropriately. There is one risk emanating from the natural adjustment because of the failure to take no room for complacency. world – a viral pandemic – to which comprehensive measures over the last 20 One specific source of economic a high probability of mortalities in years. vulnerability for New Zealand is its the region of 100,000 can be attached As with many countries, New external indebtedness position and the within the next 50 years. He ascribes a Zealand’s stated acknowledgement of risk of a ‘sudden stop’ in capital inflows similar level of probability to a mega-war the risks is not matched by actions that if foreigners turn off New Zealand as an (defined as a ‘potentially massive armed can significantly reduce those risks. investment destination. Encouraged by confrontation’). While the costs of placing economies at New Zealand’s economic performance a competitive disadvantage from acting and prospects, sound institutions and Natural disasters and climate change unilaterally are prominently advertised, policy settings, foreign investors have been Then there are natural hazards. New the costs of a collective failure to act are willing to fund New Zealand’s sustained Zealand’s vulnerability to seismic and discounted. This is a long-run challenge current account deficit. This has seen the volcanic events is well known. I barely that will not go away, and the costs that net international investment position

Page 10 – Policy Quarterly – Volume 9, Issue 4 – November 2013 expand to a net liability of over 70% of the oil shocks of the 1970s, the crisis of taxes relies on expenditure decisions GDP (Statistics New Zealand, 2012a). of public finances New Zealand faced that will be voted by elected officials Good management and a bipartisan track was exceptional. Structural reform to far in the future, no one can say with record of taking unpalatable political promote growth played into a global certainty how a future parliament will decisions when required has shielded New economic outlook that, while difficult, regard any intergenerational bargain Zealand from greater investor scepticism. was not plagued by the synchronised purportedly made on its behalf decades However, investor sentiment cannot be resort to austerity measures currently before its own election. Encouragement assumed to be unshakeable. A significant being experienced. There was room for of savings provides a way for people to and sustained negative reappraisal of New a small open economy to exploit growth spread the risks by relying not just on Zealand’s risk profile could see GDP and opportunities in a global marketplace future taxpayers but on returns from employment fall as activity contracts and that was expanding as trade barriers fell. privately-invested capital. But again this the fiscal position deteriorates. Only our Difficult structural adjustments could is not without risk. Thirty or forty years institutions (like the policy debate this be pursued in a less demanding global from now, as savers set out to call in their article is contributing to) and political climate. Many of New Zealand’s OECD annuities they will, with retirees around probity keep those prospects at bay.

Policy institutions Retirement income is only one driver of New Zealand policy makers are not alone in pondering what long-run trends mean the emerging fiscal pressures and it would for fiscal sustainability. The demography of OECD countries coupled with the rapidly be unfortunate if the debate around increasing economic weight of emerging economies means that they are beginning New Zealand’s long-term fiscal outlook to face competition for capital, resources became all about retirement income. and skills from a much less advantageous position than they have been accustomed to. What distinguishes New Zealand from many OECD countries is the fact that this partners still had relatively strong national the world, find themselves in competition enquiry is not taking place in response to balance sheets. with relatively fewer workers whose an immediate fiscal or economic crisis but In addition, a demographic ‘window’ bargaining position will be stronger, and as part of an institutionalised process of was opening in which the demand for the owners of industry whose views about periodic review. This, combined with the spending on the school-age cohort was dividend payments may not match those relative intimacy of New Zealand society moderating without any immediate of pension fund managers. and its less polarised political landscape, increase in the population of retirees. A more numerous retired population should enable a more measured trimming Reversing an exceptionally low age might be expected to seek to secure the of the fiscal sails in advance of acute of pension entitlement also managed election of a parliament that broadly challenges arising. to defer the worsening of the old-age represents its interests. But elections Whether or not this happens is, of dependency ratio (see note 2) by seven or are an extremely imperfect mechanism course, another matter. New Zealand’s eight years. That window has now closed. for securing particular preferences. In relative security has led to long periods New Zealand faces the need to keep public deciding on the level and incidence of of policy stagnation which, nevertheless, debt levels under control and ensure that taxation, politicians are at the centre seem able to be surmounted when a sound policy supports continued access of a contest between the (partially crisis threatens. The crisis of the 1980s led to global capital markets by New Zealand overlapping) interests of the owners to a remarkable policy response and the businesses against the backdrop of the of capital (seeking dividends), workers expenditure of a large amount of political worst global economic recession in two (seeking remuneration) and voters. The capital (in terms of trust in political generations and worsening demographic outcome of the particular forces at work institutions). Rebuilding that trust has trends. in some future economic and political been a slow, hard-won business. setting is simply unknowable. All one The temptation now is to consolidate Retirement income can say is that for today’s working-age rather than take action. But the future is A changing demographic structure population to assume that rising claims less accommodating than it was 30 years presents a number of challenges in terms on taxpayers will be met in the future on ago. New Zealand was one of the first of what the state provides, to whom, and the basis of current sentiment would be OECD economies to promote a radical whose taxes fund it. Retirement income – very risky. break with the postwar mixed economy primarily New Zealand Superannuation5 The most cautious way to minimise consensus. While all OECD countries – has been a particular lightning rod. these risks would be through a phased faced difficulties in the aftermath of Because the decision to pay pensions out increase in the age of eligibility for

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 11 Fiscal and Other Risks over the Long Term

New Zealand Superannuation to match for more food on the part of a growing that are inevitably ad hoc and brutal. increasing life expectancy. A more global middle class can only play to New New Zealand has, for the moment, the ambitious approach would, in addition, Zealand’s strengths as a food producer. opportunity to act pre-emptively on its consider an element of targeting. In that case, the rents from increasingly own terms rather than in response to It might even seek to progressively scarce soil and water might be sufficient external pressures. That relatively benign establish a somewhat lower level of to sustain rising living standards for position will not last. The opportunity payment in relation to prevailing wages. the foreseeable future. The interesting should be grasped so that change is not Communicating the desirability of political economy question is whether precipitate and citizens and taxpayers can savings is an essential element of any food producers should be allowed to keep adjust their circumstances with time to such rebalancing of taxpayer risks, the full benefit of those rents. The case for spare. although I do not support making saving taxing the rents that soil, water and other If that is to happen we have to turn compulsory and I worry about the resources provide cannot be ignored in a deaf ear to some apparently ‘easy’ practicalities of targeting. a world in which capital and labour are solutions. Over the years a variety of so mobile and resources potentially more ‘painless’ remedies have been offered as Other emerging fiscal pressures and potential scarce. alternatives to either curbing expenditure opportunities To this optimistic outlook might or raising taxes (or both) to generate the Retirement income is only one driver of be added New Zealand’s geopolitical surpluses needed to reduce the stock of the emerging fiscal pressures and it would proximity to the region where the largest debt. The most seductive is to advocate be unfortunate if the debate around New growth prospects are clustered, China higher rates of economic growth which will lift all boats, including government revenues. There are two problems with The review of the government’s long- this approach. In the first place, there is no historic track record of the New term fiscal position being led by the Zealand economy sustaining a rate of growth higher than 2%. But even if such Treasury has been both sophisticated in an economic growth rate were achieved, its reach and ecumenical in its invited there is no way of ensuring that a significant share of higher tax revenues participation. could be devoted to debt retirement. Economic growth brings with it rising expectations and ensuing distributional claims. Zealand’s long-term fiscal outlook became and East Asia. It seems reasonably safe An alternative remedy often advocated all about retirement income. It is the wider to assume an ongoing rise in Chinese is a much more aggressive inward bundle of services that needs to be influence in both economic and security migration policy. There is a belief that a considered, and the resilience of the spheres. But how far that influence will much larger population would underwrite economy and the tax system to meet the extend, and with what consequences higher productivity. To the extent that claims that are likely to be made of elected for a tiny trading country like New we could count on large numbers of officials. Taking a wider view would lead Zealand, is impossible to say. China faces (younger) skilled migrants of working one to focus as much concern on the a multitude of long-term challenges age, a more productive workforce might apparently inexorable increase in foreign which place a question mark over the seem a plausible outcome. But again, claims on output (through accumulating inevitability of its ascent, including ‘an there are no guarantees. New Zealand balance of payments deficits) as on parti- extraordinarily aberrant gender ratio, cannot assume that it will be able to cular government expenditure trends. As serious environmental ills, the increasing attract the people it thinks it wants – we net borrowers, New Zealanders face the inequality of economic rewards, and its have had 25,000 or more net migrants in real possibility not only that governments weak soft-power appeal’ (Smil, 2008). only four of the past 60 years (Statistics may not deliver the social dividends they These risks and uncertainties provide New Zealand, 2012b). New Zealand does hope for but that access to the capital a compelling rationale for placing not occupy a global crossroads and so needed to generate new streams of income public finances on a more resilient it cannot position itself as some sort of may be significantly limited. basis. The Treasury’s 2013 review of the global emporium. Many other economies An optimistic forward-looking government’s long-term fiscal position can offer higher densities of intellectual scenario would see global demographic is well timed. New Zealand is neither capital and more exciting opportunities. trends as ultimately playing into New so rich (like Norway) that it isn’t under Human capital is for me the Achilles Zealand’s hands. A world with two billion pressure, nor so fragile that it is forced heel of New Zealand’s future ability to more inhabitants within little more than to take precipitate action. Many OECD stay afloat. Currently we are managing a generation and widespread demand countries are being forced to take steps to cover the outward migration of skills

Page 12 – Policy Quarterly – Volume 9, Issue 4 – November 2013 with a matching inflow (Ministry of ‘firepower’ necessary to respond to participation. But it has, inevitably, Economic Development et al., 2011). Very costly, unforeseen disjunctive events; engaged a policy-literate élite and the simply, if the human capital pipeline • expenditure control and tax Treasury, which serves the government were disrupted, all bets are off. Even if increases, in whatever proportions, of the day, cannot be on permanent we could significantly out-compete other are the only certain ways of referee duties. For that reason it might be countries for human capital, it is not a generating the surpluses needed worth entrusting the ‘guardianship’ of the sustainable answer. Migrants cannot be to bring the stock of debt down debate to an independent entity which held at arm’s length from the matrix of to a level at which that sovereign can comment directly on the consistency expectations and services that drive public ‘firepower’ can be protected; of policy settings, with the agreed need to expenditure. Migrants will demand health • returning to fiscal balance and keep debt and expenditure on sustainable and education services like everyone else. reducing debt is best done outside tracks. They will also age. A larger, more vibrant of a crisis context, and agreement on That need not be an expensive or population would very likely contribute a trajectory and timetable need not cumbersome business. The Treasury to productivity growth, but whether it preclude a vigorous debate about could, through an amendment to the would be sufficient to reverse the public how to stay on that trajectory; and Public Finance Act 1989, be charged debt trajectory is another matter. • given that policy changes are with annually assessing the trajectory of

So, how do we make progress from here? The political conditions for making ... the current exercise provides more progress will be optimised if the factual boundaries of the policy debate can be than enough evidence that prudence broadly agreed upon and internalised. demands credible and durable These cannot encompass strongly normative considerations. A very large responses to the fiscal consequences of element of public policy debate is about the distributional consequences of policy demographic, financial and geopolitical change. This is as true of debates over trends. regulatory reform and property rights as it is of taxing and spending decisions. Those debates are evergreen. But it should be possible to agree that any solution set likely to hold spending and policies currently in place against pre- cannot ignore certain facts. Elected officials taxing consequences that differ agreed criteria for fiscal sustainability. could make a constructive contribution across generations, being able That analysis could be made available to New Zealand’s future by accepting to communicate a clear long- to an independent ‘Fiscal Sustainability that policy options are constrained by the term trajectory is not only more Committee’, whose job it would be to following propositions: economically efficient; it is also fairer provide a public commentary on the • without policy change, demographic to be transparent rather than leave compatibility of policy settings with momentum will drive the current the future permanently veiled in desired long-run outcomes. fiscal imbalance even further from uncertainty. The terms of appointment, tenure balance, with a consequent build-up and public outreach of such a committee in the stock of public debt; If a multi-party consensus around to secure its independence and authority • recourse to policies designed to ‘boundaries’ of this type could be agreed, is beyond the scope of this article. New enhance productivity, however New Zealanders could then turn their Zealand’s record as a public policy desirable, cannot alone be relied minds to the range of policy alternatives innovator gives some confidence that upon to close the spending gap; on offer from political parties, confident new approaches could be found given • there are sufficient risks, nationally that their long-term security, if not the will. That said, politicians have been and globally, to assert that the guaranteed, was at least being argued jealous about infringements on the climate for fiscal consolidation in the within responsible bounds. exercise of executive power. The fact future is unlikely to be more benign; But what are the chances of agreement that New Zealand remains a unicameral • recent events confirm that sovereign on ‘boundaries’ today being respected in system with far fewer moving parts than borrowers enjoy no special immunity debate tomorrow? It is here that some most democracies is evidence of this. The from the requirement of everyone institutional innovation might be useful. control of fiscal policy lies at the heart to live within their means, and The review of the government’s long- of executive power in New Zealand, and that low debt levels are essential term fiscal position being led by the going beyond formal scrutiny to some if governments are to retain the Treasury has been both sophisticated in form of limitation or review would its reach and ecumenical in its invited indeed be novel.

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 13 Fiscal and Other Risks over the Long Term

Let me conclude by saying that the New Zealand’s case in the context of OECD countries’, is by 2050), a further 10% decline in biodiversity by 2050, available at http://www.victoria.ac.nz/sacl/about/cpf/events/ and more than double the number of premature deaths current exercise provides more than affording-our-future-conference-2012/papers. The Treasury’s from airborne pollution (particulate matter and ground level 2013 long-term fiscal review is available on the Treasury ozone). enough evidence that prudence demands website: http://www.treasury.govt.nz/government/longterm/ 5 New Zealand Superannuation is a fortnightly payment credible and durable responses to the fiscalposition/2013. from the government for people aged 65 years and over. 2 The old-age support ratio, which is the number of people For further information about the policy see: http://www. fiscal consequences of demographic, of working age (20–64) per person of pension age (65+), workandincome.govt.nz/individuals/a-z-benefits/nz- across OECD countries is projected to decrease from 4.2 in superannuation.html. financial and geopolitical trends. We 2008 to just 2.1 by 2050. The old-age support ratio in New don’t need more papers on the dynamics Zealand is projected to decrease from 4.7 in 2008 to 2.4 by 2050 (OECD, 2011). Acknowledgements: that compel this conclusion. We need 3 The baseline case (with no policy change) for the OECD sustained attention to the conditions that Environmental Outlook to 2050 (OECD 2012) projects the The author would like to acknowledge global economy to almost quadruple by 2050, from $75 Michelle Harding and James Beard from will permit our political institutions to trillion to $300 trillion. The OECD’s share of the global economy will decline from a little over half of global Gross the OECD in Paris (both formerly from the deliver those responses. Domestic Product (GDP) (54%) to less than a third (31%). 4 The OECD outlook’s baseline case projects that the world New Zealand Treasury) for their assistance 1 This article is adapted from a presentation given to the is on course for a 3–6 degree increase in global average with the cross-country comparisons used Affording Our Future conference held at Victoria University temperature by the end of the century (2–3 degrees by of Wellington, 10–11 December 2012. The full paper 2050), a 55% increase in demand for water (with 40% of in this article. contributed to the conference, ‘Long-term fiscal rules: the world’s population living in areas of severe water stress

References Laeven, L. and F. Valencia (2012) Systemic Banking Crises Database: an Statistics New Zealand (2012a) Balance of Payments and International update, IMF working paper WP/12/163, Washington, D.C.: IMF Investment Position: June 2012, http://www.stats.govt.nz/browse_for_ Ministry of Economic Development, Treasury and Statistics New Zealand stats/economic_indicators/balance_of_payments/BalanceOfPayments_ (2011) 2011 Economic Development Indicators, Wellington: New HOTPJun12qtr.aspx Zealand Government Statistics New Zealand (2012b), ‘International Travel and Migration OECD (2011) Pensions at a Glance 2011: retirement-income systems in – Permanent and Long-term Migration Key Series (Annual–Dec)’, OECD and G20 countries, Paris: OECD, http://dx.doi.org/10.1787/ Infoshare pension_glance-2011-en United Nations (2011) World Urbanization Prospects: the 2011 revision OECD (2012), Environmental Outlook to 2050, Paris: OECD highlights, UN Economic and Social Affairs, http://esa.un.org/unup/ Smil, V. (2006), Global Catastrophes and Trends: the next fifty years, pdf/WUP2011_Highlights.pdf Cambridge, Mass: MIT Press

Apply now! There is still time! Enrol online for our 2014 programmes. School of Government Postgraduate certificates, diplomas and degrees in: • Public Management • Public Policy Online enrolment is open now: www.victoria.ac.nz/study/apply-enrol • E-Government The standard admission criteria is a Bachelor’s degree + two years relevant Contact the School of Government for Course work experience. and Timetable information Applications will be considered from those without a degree who have the necessary Email: [email protected] – Telephone: (04) 463 6599 professional background. www.victoria.ac.nz/sog

Page 14 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Michael Cullen

The Political Economy of Long-Term Fiscal Planning from a Social Democratic

Perspective cycle. The self-interest of individuals and groups frequently creates barriers to Long-term fiscal projections sustaining a longer-term focus. In the modern world of general Great care and intellectual power have gone into the process political debate a healthy scepticism has 1 been replaced all too often by a pervasive of producing the Treasury’s 2013 long-term fiscal projections. low-grade cynicism which attributes Those projections will, no doubt, create some controversy. base motives to nearly all activities (except those of political commentators, The assumptions will be open to challenge, as will, even more bloggers and the like, of course). In such so, some of the policy conclusions that the Treasury may a world any of the conclusions arising out of such an exercise as this are too draw from the exercise. Yet no one should be in doubt that easily sensationalised and/or dismissed as we return to discussing whatever the this process has been a much more open and considered one immediate itch of the day is. And if than its predecessors. I enjoyed participating in the Treasury’s the possible conclusions of the exercise look too worrying, then people may Long-Term Fiscal External Panel and have been impressed by simply turn away and avoid them since the calibre of the officials involved.2 it is all well into the future anyway. Most importantly, most people have enough To engage in producing long-term fiscal one year, let alone 50. Moreover, both the to worry about already and just want to projections which push out the forecasts technical assumptions and any assumed get on with their lives. We always have to of revenue and expenditure 50 or even policy responses to developing issues are, remind ourselves that ‘policy wonks’ are 100 years might seem an exercise in of course, deeply intermeshed with the not the normal run of humanity, any more either hubris or self-delusion, given the realities of politics, as well as the changing than monks were in the Middle Ages. inevitable frailty of whatever assumptions nature of the surrounding society and Given those realities, it is not surprising are made. That is especially so when we economy. Most political discourse occurs that the attitude of many politicians can remember that fiscal forecasts are often within a relatively short time frame, which be summed in that famously apocryphal well in error even after as short a period as is not simply a function of the electoral saying: ‘What has posterity done for me?’ Or, as the prime minister of Luxembourg The Hon Dr Sir Michael Cullen is the Chair of New Zealand Post Ltd and was formerly Minister of recently put it, ‘We all know what to do, Finance and Deputy Prime Minister in the Labour-led governments between 1999 and 2008. In we just don’t know how to get re-elected 2012-2013 he was a member of the Treasury/Victoria University of Wellington Long-Term Fiscal External Panel. after we’ve done it.’

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 15 The Political Economy of Long-Term Fiscal Planning from a Social Democratic Perspective

Despite all of these issues, this is major fiscal adjustment to a crisis in the which then forces drastic corrections is no reason to give up. The exercise of last generation or so in which those at antipathetic to such values. Security is producing long-term fiscal projections the bottom of the heap, and those in the obviously threatened, but so too for many is an important one which may yet middle, did not come out a lot worse off is opportunity. Even in New Zealand we contribute to intelligent debate about than those at the top. Revolutions can be can still see in such places as Murupara some of the long-term challenges we face different – but these are not envisaged in and Minginui the results, 25 years on, of as a nation and how best to meet them. the Treasury’s long-term projections. rapid change unaccompanied by well- The projections are not a prediction In the nature of things such drastic managed transitions. of what will actually happen. They are adjustments are seldom well thought Thus, there is an inherent conflict projections of what would happen if through, and are driven by a ‘crash likely between the longer-term focus, certain reasonable assumptions based through or crash’ mentality which pays which is likely to be welfare-maximising largely on current policies, economic little regard to the human consequences, from a social democratic perspective, assumptions around growth, inflation or even to evidence-based policies and what might be called the mañana principle which tends to dominate much political discourse: never do today what ... we should not leave to our children you can put off until tomorrow. This is even more so in the very areas that are and grandchildren harder choices than central to the long-term fiscal challenges: we are prepared to make ourselves. health and retirement income.

Health, education, income transfers and the justice sector Health and so on and demographic trends are as opposed to ideologically-driven This brings me to a few comments on allowed to flow through into the fiscal ones. There are people who glory in the Treasury’s projections themselves numbers. We may question some of those the possibilities of such crises, casting and some of the assumptions underlying assumptions, but it would be a foolish themselves in the role of a kind of fiscal them. In the case of health, the historic person who would argue that any of them Abraham Lincoln remarking that the trends in the growth of expenditure are are unreasonable. The results therefore occasion is piled high with difficulty. clear. What is also clear is that attempts need to be taken seriously. They need reminding that that was in the to deviate sharply from those trends have context of a brutal civil war. fairly quickly come unstuck. In the early Fiscal adjustment from a social democrat The conclusion I would draw from 1990s, for example, strong constraint on perspective this is two-fold. The first part is that we spending growth led in the first instance The main, and entirely expected, should not leave to our children and to the growth of deficit spending, or what conclusion of the long-term fiscal grandchildren harder choices than we are came to be called the ‘second chequebook’. projections is that on the current path prepared to make ourselves. The second This was followed by a significant New Zealand will eventually experience part is that gradual adjustment over time expansion of the budget allocation which an unsustainable increase in the level of is preferable to big bang pyrotechnics, put public health expenditure back on government debt which will, presumably, however much that may appeal to the the trend line. The same process occurred require drastic corrective action, either odd ‘pyrotechnician’. It is far more with greater rapidity in the early 2000s. voluntarily or imposed from without. likely that most people, particularly the The combination of demographic From the perspective of a social democrat more vulnerable, will be able to cope transition, new drugs and procedures, this matters deeply. At one level it matters under a scenario of gradual adjustment, rising expectations, and international because such crises usually mark a especially if transitional assistance is competition for staff all point to significant loss of economic sovereignty, provided where desirable. Moreover, inexorable upward cost pressures in the as we are seeing in parts of Europe at the the Treasury’s projections also say that health sector. Stronger economic growth present time. gradual adjustments over time should be may help with the costs of staff pressures, For me, this is less important than sufficient to avoid any kind of doomsday but will at least in part be offset by the for some social democrats since absolute scenario. relationship between health spending and economic sovereignty in the modern At a deeper level this all matters gross domestic product (GDP) per capita. world is perhaps no more than an illusion. because for social democrats the twin And for those tempted in that direction, What is more important is what happens concepts of security and opportunity lie at there is little evidence that shifting in such rapid adjustments to a fiscal the base of political thought and action. spending to the individual actually saves crisis. The distributional consequences It does not take much consideration much for the government, while it all but are nearly always severe and can often be to see that a policy of allowing a crisis ensures greater inequality of outcomes. long-lasting. It would be hard to find a to develop over a long period of time In the absence of remarkable changes

Page 16 – Policy Quarterly – Volume 9, Issue 4 – November 2013 in health technology, which cannot be reaffirmation of economics as the dismal Rather, the rhetoric seems to be more discounted, it seems probable that the science is to be expected, if disappointing. about producing scary numbers about the fiscal risks are still on the upside from In my view, the projected ‘demographic long-term costs of current beneficiaries current projections. dividend’ in education ignores some as a prelude to measures which are Because this is an area with so much powerful countervailing factors. The predominantly negative in relation to uncertainty it is also one in which it is next half century will see increasing beneficiaries. The simple and enduring nigh on impossible to think in terms competition to improve both the quality truth is that the most effective way of of specific long-term pre-funding or and quantity of education. That will cutting the costs of benefits is to reduce insurance approaches. Given that there mean further time spent in education and unemployment, but not at the cost of a is always unmet need, or at least unmet further increases in participation rates at race to the bottom in terms of wages and demand, any surpluses built up in the most expensive end of the system. If conditions. advance would come under intolerable pressure to be spent. My rather dismal conclusion is that the best we can aspire The Treasury data is quite clear that the level of to is to try to restore a greater emphasis on public and preventative health, in increase in revenue as a proportion of GDP needed particular spending on the young and the most disadvantaged. That is already over the next 50 years to keep within a reasonable increasingly difficult because of the debt constraint, however defined, is well within the ageing of the population. What is often forgotten, somewhat surprisingly, is levels reached within the last ten years. that the demographic transition is also an electoral transition. Given the quite strong correlation between age and the propensity to vote, it is possible that the we are to seek greater efficiencies, a more The greatest opportunities for long-term proportion of those actually voting who positive approach to education would be fiscal adjustment: raising revenue and will be aged 65+ will be as high as 40% in taking a more active role in ensuring retirement income provision by 2060. If we divide the electorate into that the skills we produce better match That leaves two big areas: retirement three blocks – 18–39, 40–64 and 65+ – the the opportunities available while avoiding income provision and revenue. For some last will be possibly be the largest group the trap of an overly narrow vocational the latter remains an ideological no-go of those voting and certainly the most approach to education. zone, a slough of despond in which whole focused on a narrow range of common economies disappear, or at least, like some interests. Income transfers and justice kind of science fiction stargate, enter To put it another way, a political party Before turning to the two areas where I from the First World and emerge into the focused on the interests of the elderly will see the greatest opportunities for gradual Third. Perhaps it is time in New Zealand only need to capture about a fifth of the long-term fiscal correction, let me touch to abandon this kind of Tea Party silliness, votes of that group to be in a powerful very briefly on income transfers and justice. which belongs in the realms of creationism position as a power broker under a The former will continue to be significant and global warming rejection. proportional electoral system such as for the simple reason that we cannot foresee mixed member proportional (MMP). an economic transformation which will Raising revenue It will thereby be able to protect the change the tendency of a market economy The Treasury analysis tells us two things. interests of the elderly, if need be at the under conditions of rapid technological The first is that while the Treasury still expense of other groups. development to create widening income argues that there are strong reasons for gaps. Those developed countries with believing that a higher level of revenue has Education greater equality of outcomes maintain a negative impact on economic growth, it This might suggest that the Treasury’s much higher revenue and expenditure has to accept that the empirical evidence optimism that a demographic dividend levels than seem to be acceptable in New for this is weak. The second reinforces will be able to be garnered from the Zealand. the first. The Treasury data is quite clear spending on education due to the As for justice, we may reap a that the level of increase in revenue as a decreasing proportion of young people demographic dividend but only if two proportion of GDP needed over the next in the population is well founded. Indeed, things happen. One is a move away from 50 years to keep within a reasonable debt the Treasury has suggested that the the last generation’s desire to see an ever constraint, however defined, is well within proportion of GDP spent on education more punitive system. The second is a the levels reached within the last ten years. could be reduced by increasing class very large upfront investment in remedial Those levels are well below those of many sizes and shifting more of the cost of measures, which, despite some rhetoric, other developed countries with higher tertiary education to the individual. This there is no sign of being implemented. GDP per capita than New Zealand.

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 17 The Political Economy of Long-Term Fiscal Planning from a Social Democratic Perspective

Such an increase can be achieved the expenditure side are heavily on the increase in the age of eligibility at some in a number of ways. The easiest is by upside, I think that would be unwise. point seems inevitable. An initial phased allowing for some element of ‘fiscal increase in the age of eligibility for NZS drag’, which is removed from the long- Retirement income provision with ample notice followed by periodic term fiscal projections. Simply assuming This brings me to the one large remaining reviews seems the most sensible way to personal income tax brackets are adjusted area: the funding of retirement income make this policy change and the most upwards in line with the consumers price provision. Clearly, there is any number likely to win broad acceptance. index (CPI) rather than GDP achieves of ways of specifying the objectives of The other two suggestions, of lowering substantially higher revenue to GDP over retirement income policy. I think nearly the level of the NZS payment or income time, and indeed allows room for further all social democrats would begin with the testing the payment, have little merit. Any ad hoc adjustments in tax brackets. desire to ensure security; that is, to take significant reduction in the relationship The second is by way of broadening out away the fear of poverty in old age. Along of NZS to other incomes will throw many the tax base. We like to describe our system with that, economic considerations would elderly people below the poverty line. Its as broad-based, but in a number of ways suggest that the nature of state support political half-life would be something the base has been narrowed over the last 20 should, at the very least, not discourage under three years. In any case, the current years or so. Obviously, capital gains tax is one savings or continued participation in relativity is not some tail on the donkey option. The Treasury favours a land tax for the labour market. This is essentially the affair but well rooted in past experience efficiency reasons, but I have grave doubts opportunity element. The third element and studies. about its practicality given the resentment would be fiscal sustainability; the fourth As for income testing, it did not survive the first MMP election and would not survive a future one. It clearly It is worth [noting] that the Australian discourages work participation and savings, even more because an income superannuation scheme is both compulsory test without an assets test, especially for the elderly, would not be very effective in and 9% of income, soon to rise to 12%, paid for reducing the cost of NZS. by a payroll tax on employers ... [h]owever, the Option 1: Enhanced KiwiSaver scheme Australian scheme ... can be withdrawn as a lump The most fruitful avenue to explore, other than raising the age of eligibility for NZS, sum and all spent. is to reduce the cost of NZS without reducing the standard of living of the elderly. This change could be brought that local body rates already cause. There broad societal acceptance of the fairness about through the interaction of an is also the very considerable problem that and durability of the arrangements; and enhanced KiwiSaver scheme and NZS.4 it shares with a tax on unrealised capital the fifth as much simplicity as possible. It is worth beginning with the fact that gains that the amount due may bear a small Obviously there may be trade-offs the Australian superannuation scheme is relation to the ability to pay. between these elements. New Zealand both compulsory and 9% of income, soon Greater use of ‘hypothecated taxes’, Superannuation (NZS)3 scores well on to rise to 12%, paid for by a payroll tax such as taxes tagged to particular spending poverty avoidance and simplicity and on employers. However, the Australian areas, like health expenditure, could reasonably on savings and labour market scheme is coming under criticism for the also be considered, since these may be participation. Any changes should fact that while their pension is income- regarded differently by people than other preserve these as much as possible. and asset-tested, their compulsory forms of taxation given a direct relation But it scores much less well on fiscal superannuation can be withdrawn as to benefits they can expect to enjoy. It sustainability and societal acceptance of a lump sum and all spent. Now that the would be interesting to look further at durability. scheme is maturing, the dynamic instability the considerable overseas experience with Various proposals have been made to this creates is becoming obvious. hypothecated taxes in that regard. address this situation, particularly raising New Zealand’s current arrangements The essential point is that there is the age of eligibility for NZS; lowering the present the same issue in a different ample scope to close at least part of the level of payment over time, in particular way: KiwiSaver may make many more longer-term gap between revenue and by changing the indexation measure independent of NZS but has no impact expenditure on the revenue side. It is from wages to prices; or reintroducing on the cost of NZS. With the number tempting to suggest it all could be, quite some form of income testing. Of these, of KiwiSavers already far higher than easily, based on the Treasury projections. only raising the age of eligibility for NZS forecast, it is not a long step to make However, given my view that the risks on meets the criteria I have outlined. With the scheme compulsory, tighten some life expectancy continuing to rise, some of the criteria, and, over time, gear it up

Page 18 – Policy Quarterly – Volume 9, Issue 4 – November 2013 to a level far closer to that planned in Figure 1: Enchanced KiwiSaver scheme Australia. At that point the relationship between KiwiSaver and NZS becomes 12% one for serious discussion. As an example 10% of what could be considered I have had a number of options modelled. 8% The models all start from KiwiSaver becoming compulsory from 1 July 2016, 6% with all people signed up as they turn 18 and the opt-out provision on auto- 4% Percentage of GDP of Percentage enrolment removed. All remaining adults would be enrolled on 1 July 2020. The 2% contribution rates would be lifted back 0% to 4% of income for employees, matched by 4% from employers, also from 1 July 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110 2016. Employer contributions would then Baseline Means test annuity, 6% employer contribution increase by half a per cent per annum Means test annuity, 8% employer contribution until reaching either 8% in one set of models or 6% in the other. As a matter of Figure 2: Tax on KiwiSaver withdrawals practicality and individual affordability it may be desirable to begin new entrants 12% on a lower personal contribution rate, say 2%, and gear up over time, but as this has 10% no significant impact on costs or effects 8% over the long term it has been ignored in the modelling. 6% All of the modelling assumes that, however it is made up, retired people will 4% Percentage of GDP of Percentage continue to enjoy a guaranteed retirement income at least equivalent to that of 2% NZS based on the current wage relativity 0% formula. Two basic ways of reducing the fiscal cost over the long term of meeting this 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110 criterion have been explored. In the first, it Baseline 10% tax, 6% employer contribution 15% tax, 6% employer contribution was assumed that half of the accumulated 10% tax, 8% employer contribution 15% tax, 8% employer contribution KiwiSaver savings would have to be accessed by way of annuity. Where this was less than the guaranteed retirement income it would KiwiSaver accumulations being taken by post-tax income, then the income those be made up to that level. In effect this means way of annuity. contributions earn while they are in the that for many people the shift from state fund is taxed, but withdrawals are tax- funding to private funding would result Option 2: Tax on KiwiSaver withdrawals exempt. The new KiwiSaver withdrawal in half of their KiwiSaver savings being An alternative which has significant tax would apply to those permanently income-tested away. advantages in terms of simplicity and emigrating or to the accumulated savings This could prove difficult to establish fairness is to deal with the KiwiSaver/ at maturity (assumed to remain at age 65). and maintain as an acceptable policy NZS interface on the revenue side rather The tax would only apply to accumulations position, even though it would certainly than the expenditure side. Under this starting with the introduction of the have a substantial impact on the long- proposal, the current NZS scheme would compulsory scheme. term fiscal costs of NZS. It also has the be maintained as is, with the exception Such a scheme would be usual problems of applying an income of an initial adjustment to the age of administratively much simpler than the test fairly. However, the fiscal outcomes eligibility to 67 being phased in starting in, first option and avoids the difficulties are impressive. Under either higher say, 2020. The revenue offset would come of income testing, but by the end of this contribution rate modelling the cost of from a withdrawal tax being imposed on century would reduce the projected net NZS falls to under 2% of GDP by 2050, all accumulated KiwiSaver savings of either cost of NZS by about 5% or so of GDP, but vanishing by the end of the century. 10% or 15%. Currently, KiwiSaver is taxed- having kept that net cost at about 5% of Remember, that is based on only 50% of taxed-exempt, or ‘TTE’, which means GDP over the second half of the century. that contributions come out of people’s Could such a scheme be politically feasible?

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 19 The Political Economy of Long-Term Fiscal Planning from a Social Democratic Perspective

The answer to that is that anything in this In the much longer term, some further 1 The Treasury’s 2013 long-term fiscal projections are available on the Treasury website: http://www.treasury.govt. area is fraught with difficulty for obvious increase in the age of eligibility for NZS nz/government/longterm/fiscalposition/2013. 2 For more information about the Treasury’s Long-Term Fiscal reasons. But it does seem to me to have beyond 67 will probably be required, External Panel see: http://www.victoria.ac.nz/sacl/about/ at least as much chance of success as but there is no reason to have to address chair-in-public-finance/events/long-term-fiscal-external-panel. 3 New Zealand Superannuation is a fortnightly payment any of the other options that have been that now or for some considerable time from the government for people aged 65 years and over. For further information about the policy see: http://www. discussed publicly. to come. I mentioned earlier that we workandincome.govt.nz/individuals/a-z-benefits/nz- In order to establish a clear relationship should not leave to our children and superannuation.html. 4 KiwiSaver is a voluntary work-based savings initiative. with maintaining the affordability of grandchildren harder decisions than For further information about the policy see: http://www. NZS two simple changes could be made. we are prepared to make ourselves. kiwisaver.govt.nz/. 5 The New Zealand Superannuation Fund is a government fund One would be to name the tax ‘NZS Tax’. The reverse of that is that we do need that was established to partly pre-fund the future costs of The other would be to pay the proceeds to recognise their right to make some NZS. of the tax directly into the New Zealand decisions and not try to predetermine Superannuation Fund.5 posterity, even though, as we say, we can Acknowledgements Another change which would help do more for posterity than it can do for This article is adapted from a speech given secure confidence in the future of NZS us. to the Affording our Future conference would be to transfer the remaining For me, the crucial point remains, held at Victoria University of Wellington, state asset shares into a holding as it has been for a long time, not just 10–11 December 2012. The author would company owned by the New Zealand making NZS sustainable but convincing like to thank Lucas Kengmana and Superannuation Fund. This would, in people that it is. For that, decisions do Chris Ball from the Treasury for their effect, bring forward the resumption of have to be taken before too long, despite assistance in modelling some of the policy government contributions, at a lower rate the reluctance of decision-makers to suggestions made in the article. than previously, but also bring a welcome make them. focus on long-term wealth creation with respect to the assets.

Upcoming Events

Date Title Speaker Venue Wednesday 13 November Labour’s Vision for the Future Hon David Cunliffe Government Building, Lecture Theatre 1 12:30 – 1:30 pm Leader of the Labour (Access via Stout Street) Party

Friday 22 November Appetite for Destruction: Food – the Dr Gareth Morgan Railway West Wing, Level 5, Room 501 12:30 – 1:30 pm good, the bad and the fatal

Monday 25 November Community and Voluntary Sector Philip Walker, Val Goold, Railway West Wing, 2:45 – 5:00 pm Research Forum Rachel Baskerville, and Level 5, Carolyn Cordery Room 501 RSVP required

Tuesday 3 December Climate Change: The Warsaw Whys Jo Tyndall, John Government Building, Lecture Theatre 1 12:30 – 1:30 pm and Wherefores Carnegie, Jacob (Access via Stout Street) Anderson, Adrian Macey Chair: Professor Dave Frame

For further information on IGPS Events visit our website http://igps.victoria.ac.nz/

Page 20 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Colin James

Making Big

taken to offset an anticipated impact, the greater the policy Decisions change may have to be and also potentially the cost, not just in money but also in for the social cohesion if unusual intergenerational tensions develop as a consequence. But if large adjustments have Future to be made, even if over time, The Treasury’s long-term fiscal projections are designed to how might that be done in a inform present-day policy. They draw attention to existing representative democracy in trends and potential future global and national developments which the ultimate decision- in society, demography, politics, technology and the makers, the politicians, are economy, and the fiscal implications of continuing existing subject to frequent elections policy unchanged through those changes over the next 40 in which political folklore years and beyond. They highlight that the later action is tells us the determinant issues are proximate and Colin James is a political columnist and analyst. In 2012–2013 he was a member of the Treasury/ Victoria University of Wellington Long-Term Fiscal External Panel. This article is a cut-down version of ‘courageous’ leaders are a paper he presented at the Treasury/Victoria University of Wellington Affording Our Future conference in December 2012. The full paper is available at www.colinjames.co.nz and also at http://www. sacrificed to short-term voter treasury.govt.nz/government/longterm/fiscalposition/2013. The author would like to thank Jess Booker for assisting with the research for this article. self-interest?

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 21 Making Big Decisions for the Future

In fact, major policy changes have been There are continuities and trends, such outside, much as a tsunami does; or made here and in other countries of our as the changing nature of the ‘family’ and results from a sudden breakdown of sort in which voters have submerged their the constitution of households, the role order in the complex system that is individual interests in the national interest of women, and the nature of education in human society. Afterwards, the social and or in the interests of overall economic response to the changing nature of ‘work’. economic landscape looks different, often performance or social cohesion, or for Unless there is high inward migration very different, and while much of what is altruistic, ethical or moral motives. To be similar to that which occurred after 1840, on the landscape looks familiar, it, too, is successful and durable a policy change or there is a highly destructive pandemic often deeply changed. must be underpinned by consensus, or at or other disaster (both possible), the The standout example in the past 100 least broad public acquiescence amounting proportion of older people will likely years was the First World War, which far to consensus by default. Thus, any policy rise. The geopolitical and geo-economic exceeded contemporaries’ expectations settings, including fiscal policy settings, rebalancing of the past 30 years following and resulted in the destruction of four must be resilient: that is, have a strong the marketisation of the Chinese economy empires, the serious weakening of a fifth, core which endures through shocks and is likely to continue, with changes of the killing of about 10 million soldiers, a surrounding flexibility which enables direction and speed, and that rebalancing and the transformation of war, the rise of communism and fascism and a second destructive world war. A second example - was the 1929 financial crash which A Maori in 1813 could not have predicted caused worldwide economic depression the disjunctive Treaty of Waitangi, and any (contributing to the rise of fascism), drove governments to actively manage their New Zealander in 1973 might have imagined but economies and reduce social disparities with far-reaching tax, education, health, not predicted the resurrection of the Treaty of housing and income support policies, Waitangi and the invention of biculturalism. and led to the creation of the Bretton Woods system of fixed-exchange rates, the International Monetary Fund and the General Agreement on Tariffs and Trade shocks to be absorbed, responded to and will set fiscal and other economic and to guard against a repetition. Others are transcended or survived, and enables social parameters. the 1973 oil price crisis, which ended adaptation to changing conditions. the Bretton Woods regime, the collapse A 40-year projection is also Disjunctive and transformative events of communism in 1989, which radically by definition multigenerational But long-range projections must also changed the world order, and the recent (transgenerational and intergenerational). assume the possibility, even probability, global financial crisis. Making multigenerational policy is not of another shock of the size and impact Why do these occur? Historian Niall straightforward. In a democracy, future of the global financial crisis, after which Ferguson, among others, has argued that generations – those not yet born and the global and local social, economic human society is a complex system, akin those still children – do not vote, except and political landscape is qualitatively to a biological system. Such systems, to the extent that living generations take different. The history of the past century he argues, are ‘made up of a very large them into account and vote on their or so suggests that in the next 50 years there number of interacting components behalf (a sort of ‘virtual’ vote). Past will be another such disjunctive event. that are asymmetrically organised’ and generations – those who have died – also In addition, one or more transformative ‘operate somewhere between order and do not vote, except to the extent that events are likely, which will also affect disorder – on the edge of chaos’; they tradition influences the votes of living the context for policy. These events are seem to be in equilibrium until ‘there generations (another ‘virtual’ vote). unforeseen and unpredicted, though comes a moment when they “go critical” Among the living and voting generations historians in retrospect habitually discern … a very small trigger can set off a “phase there are different and competing values observable forces and pressures preceding transition” from a benign equilibrium to and priorities, and thus expectations and a disjunctive event and a transformative a crisis’ (Ferguson, 2012, p.22).3 hopes of, and needs from, fiscal settings, event may be theorised, imagined or A transformative event is a scientific which in a representative democracy fantasised in advance. discovery or technological, political, shape and constrain politicians’ decisions A disjunctive event suddenly business, organisational or way-of- on policy and can overweight the present accelerates social, political and economic thinking innovation. It changes the at the expense of the future and generate change, rather as an earthquake suddenly quality of life or the way people live or perceptions of intergenerational inequity.1 repositions tectonic plates after a long see the world around them, often for Some see this as a breakdown of an build-up of pressure and reshapes better but sometimes for worse. Positive implied social contract or partnership.2 the surface landscape; or irrupts from transformative events are the work of

Page 22 – Policy Quarterly – Volume 9, Issue 4 – November 2013 what United States economist Richard otherwise, as do the Canterbury types of policies can be applied to prepare Florida has called the creative class earthquakes. Anticipating that there are for and manage through uncertainties: (Florida, 2002, 2007). They can contribute outlier possibilities enables contingency ‘no-regrets initiatives’, ‘hedges against key to or trigger disjunctive events. planning, which in turns improves risks’, ‘boundary or handrail issues’ and Transformative events in the 40 resilience in the face of the unpredicted. ‘core bets’ (Baker et al., 2012). years after 1913 included the discovery Over recent decades it has become more The BCG paper is not the first or of penicillin and DNA’s double helix; common for firms and some government last word. But it illustrates the decision- the splitting of the atom; the invention agencies to scan the possibility of major making context for long-term fiscal of the transistor and the computer; and disruptive – disjunctive or transformative projections: to prepare for the most likely a fashion event, the bikini (a symbolic – events and to have thought about it, eventuality well before it happens, and indicator of deep changes in mores to so that if one happens at least some also to keep in mind the possibility of come).4 All had profound, unpredicted contingency planning has been done.5 shocks and think about how to manage and unpredictable effects on economic At the same time, wise firms and them if they occur. and social life. Digital technology – the governments also work out what they The usual default position, by transistor-computer-internet-newmedia- most expect to happen over three, five, contrast, is to take no action until forced robotics-3D evolution – may only now in this decade be beginning to realise its true transformative influence on economic, ... an OECD study of major decisions on pensions social and political/security trajectories. A New Zealand forecaster in and health services ... found that those made in 1913 would have been star-gazing or response to a crisis, while easier to promote at the daydreaming to predict within 40 years aerial topdressing, social security and time, are likely to endure only if there are quick a national state health system, and 14 years of a Labour government, all pay-offs ... transformative. A Mäori in 1813 could not have predicted the disjunctive Treaty of Waitangi, and any New Zealander in 1973 ten or 20 years. They can then take to by a crisis. But an OECD study of might have imagined but not predicted early action to counter adversity or take major decisions on pensions and health the resurrection of the Treaty of Waitangi advantage of opportunity. Government services (detailed in James, 2012, pp.19- and the invention of biculturalism. in essence is about risk management and 20) found that those made in response The point for policy makers is that, the risks to be managed are distant and to a crisis, while easier to promote at the while there are trends in the evolution proximate, known and unknown, natural time, are likely to endure only if there are of societies, political systems and and societal. quick pay-offs (OECD, 2010). The OECD economies, there are also occasional warned that while a crisis opens a window events which distort, divert, accelerate Risk management and anticipatory policy of opportunity,6 that might as a result or stall those trends or open new and change come when there is less financial scope out-of-the-ordinary possibilities. Such One way of looking at this is suggested in to meet upfront costs to ensure reforms events in the next 40 years might be a recent paper by the Boston Consulting work, can obscure long-term needs and generated by the likes of climate change, Group (BCG). The paper argued that: objectives and can lead to capture by water shortages, turmoil in the Middle ‘Governments have become flexible about some agencies. East, a virulent pandemic, a new twist what they should do but rigid about how That suggests durable major reforms in hyper-globalisation, upsets in China to do it. Good strategy in government reflect some combination of deeper and elsewhere in Asia, the collapse of involves doing the opposite: being clear currents – demographic, economic, social, multilateral rules-based systems such about goals but flexible about how to psycho-sociological, intellectual, political- as the World Trade Organisation, new deliver them.’ Societies, BCG argued, ‘are sociological, or external (geo-economic, medical technologies and practices, identical neither to machines, which can be geopolitical or bilateral-national). That new production methods, a radical engineered’ – by inference the presumption was so in major policy changes in Britain generational shift, and New Zealand that underlay the interventionist, planned through the 19th century and New becoming a highly desirable place to live. welfare state – ‘nor to biological systems, Zealand in the 1890s, 1930s and 1980s That might suggest focusing on the which evolve by themselves. Instead, they (detailed in James, 2012, pp.11-18). There predictable short term and not trying combine aspects of both and hence need a were a number of drivers, with a different to plan for or make allowance for more mixture of direction and adaptation’. BCG mix in each case: deep change in the distant events that might or might not instanced foresight and scenario planning demographic or class structure of society happen. Actually, the whiplash in the techniques, which ‘can’t predict the future and/or in the economy or commercial fiscal parameters in 2008–09 suggests but can prepare you for it’; then different practice; social distress and humanitarian

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 23 Making Big Decisions for the Future concerns, including as a result of positive endorsement (see further James, out to be accurate, or too low or high? economic depression; fear of disorder 2012, pp.22-4). Will the fact of more older people add if no action is taken and/or reaction to Climate change is not the only issue to health care costs, or might near-end- disorder; a major shift in the prevailing which poses the question of whether of-life health costs fall because baby- intellectual wisdoms or fashions, picked policy should be anticipatory. Others boomers have lived a better-fed, healthier up by and advocated by political parties include (and this is only an indicative and less physically wearing childhood and and/or officials; courage, leadership or list): resource sustainability here and working-age life and will be healthier for political will and/or strategic thinking abroad, especially of water (and so food longer, and thus physicians may intervene and/or visionary ambition exhibited by production) and minerals; the impact less vigorously near end of life? Will new leading public figures; interest group of new forms of economic globalisation technology go on driving up health care pressure, especially if there is a change on the distribution of work; the impact options and costs, or might technology, in the balance of interest groups; fiscal of 3D printing and other new forms of coupled with workforce organisational pressure; and momentum once action production technology for goods and change and price-reducing innovation in was initiated. services; the geopolitical and security ‘emerging’ countries, reduce health care The OECD study also suggests that implications of the rise of China; and the costs in net terms and reverse the current for major reform to be durable it must implications of gene technology, among net-positive effect? Will 70 be the new 65 either give effect to, anticipate or build other emerging forms of treatment of and so will more people continue in paid consensus, or at least majority support. illness, disability and physical inequalities. work, thereby lowering pension costs, or Most policy change is incremental, and All have the potential to profoundly alter might rising capital accumulation costs either builds consensus or a majority the fiscal trajectory over the next 40 increase pension costs? progressively with each increment, years. These sorts of questions, unanswerable in advance, underline that any long- term fiscal path chosen or foreshadowed Increasingly, the public ... expects to participate at raises issues of transgenerational and intergenerational equity and some times in decisions on some things in some sustainability: transgenerational as between the generations at any point way or to some degree, or expects at least to be in the 40 years, and intergenerational listened to or acknowledged. as between a particular generation’s experience a generation hence and their corresponding age cohort now. Today’s cohort of politicians is trapped in short-term electoral cycles, and their or gives effect to an already existing Particularly pertinent to that fiscal officials are bound to carry out their consensus or majority. Major policy trajectory is the ‘ageing’ of the population lawful decisions. In that sense officials are reform will endure if it evokes or reflects – a higher proportion of older people ‘state’ servants. But those same officials a pre-existing latent consensus, as for dependent on a smaller proportion of are also ‘public’ servants, bound to keep social security in the 1930s. But if the ‘working-age’ people. The presumption in mind, to develop and redevelop and to reform is unexpected or unforeshadowed is that health costs and income support promote a long and broad view on behalf – that is, a shock – or is in anticipation of (superannuation) for this larger ‘aged’ of the public. events not yet experienced by or evident group will rise to the point that they to the majority (as with climate change), are too onerous for those who will be of Participation and leadership the reform will endure only if consensus ‘working age’. This dimension of officials’ brief can be constructed as the reforms are The policy argument for anticipatory highlights that in a modern liberal done or shortly afterwards. Consensus policy change is that it is less onerous to democracy parliamentary representation was slow to develop after New Zealand’s take early action than to change policy is not sufficient.7 Increasingly, the public radical 1984–92 deregulatory reforms: only when the costs begin to mount, (more accurately some of the public) the vote for MMP was essentially a vote and that policy change made deliberately expects to participate at some times in against both the Labour and National and over time is also more likely to be decisions on some things in some way or parties for departing from their social durable than policy made under fiscal to some degree, or expects at least to be democratic and moderate conservative pressure or in crisis. The policy argument listened to or acknowledged. Increasingly, roots respectively. A quasi-consensus did against anticipatory policy change is that mechanisms are being constructed, tested eventually develop, but it was by way of action may not be necessary because and used to develop, refine and validate gradual acquiescence to the new policy circumstances might change and there policy change. Without that validation, settings because Labour and National is an opportunity cost in taking needless policy change may not be durable (King offered no alternative, rather than action. Will population projections turn et al., 1998).

Page 24 – Policy Quarterly – Volume 9, Issue 4 – November 2013 This doesn’t diminish the importance accurately or completely than through national convention tends to be of the of leadership. Any durable major policy political parties. Nor are all Mäori ‘great and the good’.8 change, including anticipatory change, represented by iwi leaders, who in any A parliamentary petition can involve requires leadership, either by political case have direct access outside the forum the wider public, if many sign. This leaders or as a result of their responding (and any other channel) to negotiate still leaves the decision in the hands of to leadership from outside the formal with senior ministers as the ‘Treaty (of the politicians, but can at times force political system through one of a number Waitangi) partner’. their hand, as in 1970 over the proposal of mechanisms. The most promising of An alternative is a binding referendum. to raise Lake Manapouri as part of a these mechanisms entail some public Switzerland has the most developed hydroelectricity project. Public opinion involvement. Politicians themselves referendum system, deciding a wide range polls and focus groups are extensively have generated it through opening up of matters at federal, canton and local used by political parties and interest access to information (via the Official level that way, with extensive programmes groups to gauge public opinion, and, Information Act), making Cabinet papers to inform the public on each issue within limits, mould it. But polls are in public and consulting on proposed policy (though this can hold up progress, as in effect referendums without responsibility in a variety of ways, including discussion the fact that women did not get the vote and usually based on limited knowledge. papers, parliamentary select committee in all elections until 1990). In many states Moreover, it is becoming increasingly hearings, meetings with the iwi leaders in the United States there are binding difficult to assemble a fully random forum, and advisory and working groups citizens-initiated referendums (known as sample of voters. A focus group is a (tax, welfare). propositions), some of which have had sort of ‘jury’: an issue is discussed for This growing expectation is not unintended consequences. Here, citizens- one or two hours, with information a linear growth. People get involved sporadically, issue by issue, and many still never get involved. But there does appear Public opinion polls and focus groups are to be a trajectory. This suggests that leaving long-term fiscal matters to officials extensively used by political parties and interest and politicians (though politicians do the final sign-off of any policy) will not groups [but] ... there is a wide variety of other generate the underpinning consensus formal and semi-formal mechanisms. needed to address those matters durably and to enable adjustments through time.

Extra-parliamentary mechanisms for reform initiated referendums are non-binding, progressively inserted into the discussion There is a wide range of extra- and no government has yet acted on one, so that over time the group comes to a parliamentary mechanisms, ranging as the current government has signalled more considered opinion than is possible from populist through experimental to will be the case if the referendum on in a poll. But focus groups are not prototype. asset sales goes against sales. Otherwise, representative. One experiment initiated by ministers referendums are still rare, though it is There is a wide variety of other for- was the Land and Water Forum to now close to a constitutional convention mal and semi-formal mechanisms.9 One develop the basis for water policy through that major constitutional or electoral survey lists citizens juries, planning cells, ‘collaborative governance’. In 2009 this change must be decided by referendum. deliberative polling, consensus confer- brought together all 58 organisations with Critics say complex issues cannot ences and citizens panels (Abelson et an interest in allocation and management be reduced to the simple form in which al., 2003). Another lists focus groups, of water and mandated them to reach a referendum question must be stated, citizens juries, consensus conferences, consensus on the foundations of policy. and that it is impossible, or at least cooperative discourse, dialogue groups, That took three and a half years and the impracticable, to sufficiently educate stakeholder workshops, participatory ex- government is now broadly implementing the general public to elicit an informed pert workshops, reflection forums, delib- its report. Labour and the Greens have decision. The complexity of issues erative interviews, voluntary agreements, backed it, too. Its virtue was the broad involved in long-term fiscal projections eco-audits, policy simulation exercises, buy-in by all interest groups, including by suggest that the necessary decisions deliberative foresights, concerted envi- iwi, so iwi cultural, economic and other would not fit a referendum format. ronmental management, mediation, reg- perspectives and needs were explicitly An alternative is a national convention, ulatory negotiation, consultative forums, incorporated. as used to draft the original United deliberative conflict resolution processes But collaborative governance of this States constitution, and, in February and environmental negotiations (Van sort does not involve the general public, 1998, in Australia to draft a referendum den Hove, 2006). whose views are not wholly expressed on whether Australia should abolish the through interest groups any more monarchy in favour of a republic. But a

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 25 Making Big Decisions for the Future

‘Deliberative’ and ‘participatory’ reform on a national issue. Again, they are not wide reading, which resulted in ‘these In those lists there are two important words. used to make decisions, but they do ordinary citizens’ acquiring ‘an extensive One is ‘deliberative’. One commentator present much more considered positions knowledge and understanding of electoral argues that ‘[t]he essence of democracy on significant topics: for example, in systems’; a consultative phase during is now widely taken to be deliberation, as Britain on crime, the monarchy, the which members went out to public opposed to voting, interest aggregation, future of Europe and the health service. hearings in 50 meetings, some attended constitutional rights or even self- A Japanese deliberative poll involving by politicians, coupled with a website government’ (Dryzek, 2000, p.1, as quoted 127 people (from a random nationwide which received written submissions and in Abelson et al., 2003). This involves, sample of 3000) at Keio University on 28– proposals; then deliberation. The process according to another, ‘a particular sort of 29 May 2011 on the topic ‘Pension system, culminated in a recommendation to the discussion – one that involves the careful a generational choice’ first met in small parliament, which put the question to a and serious weighing of reasons for and groups with experts, then in a plenary, referendum which was narrowly defeated against some proposition’ (Fearon, 1998, totalling ten hours of deliberation. (it required 60% to pass and the vote was p.1, as quoted in Abelson et al., 2003). Among the conclusions were that ‘the 57.7%). Polling found members of the public trusted the assembly as being more like themselves than politicians (though ... electoral systems, while complex, are not as indigenous and ethnic minorities were heavily under-represented). The other complex as fiscal issues, especially long-term two assemblies also resulted in no change, for other reasons (Hayward). fiscal issues. How useful could these mechanisms be in reaching decisions on major policy change, especially anticipatory policy The other important word is consumption tax should be increased and change? One assessment of the British ‘participatory’. Citizens juries and used for social security’ and ‘we should Columbia assembly found that ‘citizen planning cells have been used in the take future generations into account political decision-making appeared United States and Germany respectively more than the current generation’ to be of a remarkably high quality’ to examine an issue and present a (Nemoti, 2011). Support for both of (Vander Ploeg, 2003, p.222, as quoted conclusion to the media, interested those propositions was greater when in Hayward) and showed that citizens groups or a sponsor. Variations have been participants were asked after deliberation ‘have the capacity to shed their apathy, tried in emerging-economy countries and than before. A Victoria University survey overcome their ignorance and reason developing-economy countries. But a of attitudes to climate change-driven sea- conscientiously about an unfamiliar and criticism is that the juries do not parallel level rise found that different responses complex political issue’ (Warren and actual courtroom juries: they involve were elicited according to whether any Pearse, 2008, p.6, as quoted in Hayward). only the jurors and witnesses and do not information was given, and, if so, whether After all, politicians are amateurs, too. feature lawyers contesting evidence or a reference year of 2050 or 2100 was used But assemblies have not yet been judges. and whether projections were moderate widely tested on national issues, and all Consensus conferences in Denmark or extreme, ‘though effects were usually three on electoral systems did not result inquire into scientific or technical issues small’: ‘People were generally more in change. Moreover, electoral systems, and have been used to develop clinical concerned and more supportive when while complex, are not as complex as guidelines. The goal is ‘not to reach a they received information’ (Evans et al., fiscal issues, especially long-term fiscal kind of objective scientific truth but to 2012, p.3).10 issues. Hence one observer’s assessment feed into the political channels and clarify A more ambitious version of citizen that, ‘While in theory deliberative public opinion’. They have been running deliberation is the citizens assembly. processes could be designed to guarantee for 20 years, ‘have received due political Citizens assemblies have been used binding decisions, in reality the stakes are recognition ... are closely followed by the in British Columbia and Ontario in often too high to delegate this authority media, there is always a great attendance Canada (mandated by the provincial to a group of citizens and the public may of public and a lively public discussion parliaments) and in Holland (mandated not care to assume this level of decision- about the issue and the recommendations by the government) to come up with making authority’ (Abelson et al., 2003, of the panel afterwards’ (Zurita, 2006, recommendations on electoral reform.11 p.247). If they were to be effective on p.21). But note that they are used for The British Columbia assembly followed long-term fiscal issues, they would need tightly defined issues, not large, multi- the most exhaustive process of the three, development. decadal issues. over 11 months: near-random selection Where this approach does seem to get Deliberative polling assembles a large, of 160 people, one male and one female closer to decision-making is at the local representative, random sample who from each riding; a learning phase over level. Citizen commissions are widely deliberate over two to three days, usually six weekends, involving experts and used in Switzerland to resolve differences

Page 26 – Policy Quarterly – Volume 9, Issue 4 – November 2013 over such matters as where to site a waste (the government and/or individuals levels. That will require New Zealand to disposal plant or infrastructure projects saving and accumulating funds to address recalibrate its assessment of the optimal, (Anonymous, 2012). A New Zealand current and future service expectations desirable and possible levels of taxation example that attracted international and liabilities). New Zealand has for and state spending against a different, academic attention was a planning many decades favoured PAYGO, though and less generous, set of comparator project in Wanaka in 2002 to develop a the New Zealand Superannuation Fund, countries (see, among others, Tanzi, 2005 plan for 2020 (Bond and Thompson- KiwiSaver and the Accident Compensation and 2011, and McRae, 2011 (reviewing Fawcett, 2007). Corporation’s future liability funding are Tanzi, 2011)).13 Nevertheless, even if a citizens public examples of SAYGO. In a democracy these questions assembly (or jury) is not yet a proven Related to that is intragenerational are resolved, one way or another, by vehicle for decision-making at national equity. The balance between funding the people, usually through the crude level, could it be useful in shaping public services from taxes and from private mechanism of elections, the rise and fall opinion? If the media were to take an funding has obvious implications for of political parties and their ideologies, interest, that might generate wider public the spread of income and wealth and the interplay of interest groups, pressure interest, and if the assembly was seen so personal well-being (that is, for groups and politicians, and, occasionally, to be representative and not beholden to any political party or interest group, its deliberation and recommendations Of all the mechanisms canvassed ... , the most might get traction. At the least, an assembly could open a channel for better promising would be either a national convention or communication of, and better education about, policy issues and decisions, at a citizens assembly: a transparently representative the same time requiring more rigorous citizens assembly would be more appropriate explanation to citizens. An assembly is probably not enough because more democratic. on its own and would need reinforcing. There is a risk that it could be misused by politicians and officials to co-opt or persuade (Roberts, 1997).12 It can be ‘inequality’), and therefore for social mass public action. When affairs are going costly, may not actually engage citizens cohesion at any given time and potentially, smoothly these adjustments go fairly beyond those directly involved, and may if not addressed, over time. Tied up with smoothly too. But in crisis, or (as now) not be any more representative (and this is intergenerational equity, the equity after a disjunctive shock or facing loom- perhaps be less representative) than between generations at any one time. ing major geopolitical, geo-economic or politicians, since the vocations of those Related to that is transgenerational national changes, some predictable, some involved don’t depend on the outcome equity, fairness of contribution and unknowable, there is arguably value in and might (as with politicians) produce access to services as generations age and developing the means to discover and a result reflecting the preoccupations new generations arise. Is it right to have develop public consensus and, with that, or emotions of those who get involved. sudden shifts between SAYGO and PAYGO resilience. Given New Zealand’s past One checklist of settings for effective and or in intragenerational equity, or should capacity for inventive policy, in three efficient citizen participation is: ‘careful any necessary changes be smoothed over periods of major change and in a range selection of a representative group of time? A liberal-Enlightenment approach of policy innovations between those stakeholders; a transparent decision- based on the primacy of individual periods, there is no compelling reason making process to build trust among the liberty and sanctity might argue that it is, why it cannot develop the model for 21st- participants; clear authority in decision- that generations and cohorts are separate century democracy. making; competent and unbiased group and costs should lie where they fall. A Of all the mechanisms canvassed facilitators; regular meetings; and conservative, Burkean notion of ‘contract’ above, the most promising would be adequate financial resources’ (Maitlis and or ‘partnership’, binding generations to either a national convention or a citizens Ozcelik, 2004, p.390). each other, might take the opposite view. assembly: a transparently representative Deciding these matters will be in a citizens assembly would be more Addressing the policy tensions context in which the countries with which appropriate because more democratic. If a citizens assembly did address long- we trade and compete will increasingly Even though fiscal matters, being very term fiscal issues, it would have to wrestle be those which have far less developed complex, may be thought beyond the with three major tensions. One is the social support systems and which, as capability of ‘ordinary’ citizens, analysis balance between PAYGO (paying for they do build those systems to offset suggests that there is no compelling reason government services out of current tax unsustainable inequalities, are unlikely to why a well-constituted assembly could revenue and borrowing) and SAYGO expand them to ‘western’ economies’ peak not gain a good understanding of the

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 27 Making Big Decisions for the Future

issues and produce a sensible, politically due to their posterity, should act as if they were the entire both had some relation to recent actual events. So, too, did masters, that they should not think it among their rights another 25% probability: ‘Significant earthquake in less saleable and sustainable outcome. to cut off the entail or commit waste on the inheritance by populated area’. destroying at their pleasure the whole original fabric of their 6 Roger Douglas as finance minister used to talk explicitly of But there would be no point to calling society, hazarding to leave to those who come after them a the window of opportunity, a financial squeeze opened for ruin instead of an habitation – and teaching these successors the 1980s policy changes which he spearheaded. In the a citizens assembly unless it was of high as little to respect their contrivances as they had themselves wake of the 1987 stockmarket crash he thought he had quality in its selection, the commitment respected the institutions of their forefathers ... Society another window of opportunity, this time for a flat tax, but is indeed a contract ... the state ... is ... a partnership Prime Minister David Lange, backed by a (silent) majority in of its members, the information it was not only between those who are living but between those the Labour caucus, shut the window. who are living, those who are dead and those who are 7 This may be a partial explanation for declining election given and the way that information is to be born.’ Ferguson applied the quote to ‘the enormous turnouts over the past 50 years (though there is no hard intergenerational transfers implied by current fiscal policies’, research evidence that this is so). Voting is more a delegation debated, and its connection with the which he saw as ‘a shocking and perhaps unparalleled of authority than a form of participation. wider citizenry. Political parties would breach of precisely that partnership’. 8 This distinguishes a national convention from an unofficial 3 Ferguson continues (p.25): ‘The political and economic gathering called a ‘convention’ (such as the women’s need to commit to taking its findings structures made by humans share many of the features of convention in New Zealand in the 1970s). complex adaptive systems ... Whether the canopy of a rain 9 Valentina Dinica of the School of Government, Victoria seriously. Logically, such an assembly forest or the trading floor of Wall Street, complex systems University of Wellington, assisted with some pointers in this would also not be a singular event but share certain characteristics. A small input to such a system section of the original paper. can produce huge, often unanticipated changes – what 10 Evans et al. (p.3) go on to note that ‘When focused on repeated every ten years or so. By the end scientists call the amplifier effect ... Causal relationships extreme projections, people anticipated greater sea level are often nonlinear, which means that traditional methods rise, felt that sea-level rise was a more serious problem for of 40 years, if the process worked well, it of generalising through observation (such as trend analysis them personally, and showed greater support for adapting and sampling) are of little use. Some theorists of complexity to climate change and for individual adaptation options, would likely become a workable fixture. ... say that complex systems are wholly non-deterministic, such as accommodation and retreat. They also perceived That is a very tall order. It would meaning that it is impossible to make predictions about their sea-level rise as a nearer-term threat when information was future behaviour based on existing data. When things go framed to focus on 2050 and the more extreme projections. amount, in short, to setting an wrong in a complex system the scale of disruption is nearly Importantly, more “extreme” information always resulted in impossible to anticipate.’ more concern and support from respondents.’ international standard, a big challenge 4 If we look out 47 years from 1913 to 1960 (the span from 11 The British government used what it billed as a 2013 to 2060), there were also the launching of the first citizens assembly to build initial support for raising the to politicians’ and officials’ capacity for space satellite in 1957 and the contraceptive pill (approved superannuation age. But informal comments to me from a leadership. for use in 1960). participant indicate it was managed by the government and 5 In an environmental scan looking out ten years I did with so does not warrant description as a citizens assembly in the Statistics New Zealand through the second half of 2006, sense it is used in this article – certainly not on the British 1 Bull (2012) presents an interesting discussion of this point in I rated as a 25% probability: ‘Imbalances unwind messily; Columbia model, where politicians kept at arm’s length the context of climate change. recession or sharp slowdown in US triggers world recession’, except in some of the public hearings. 2 For example, Ferguson (2012, p.43) quotes Edmund Burke: and as a possible ‘shock’ ‘a full-scale world recession, 12 This could be said of the British example cited above. ‘one of the first and most leading principles on which the triggered by terrorism, a messy unwinding of the imbalances 13 Tanzi has argued an optimal taxation level of 35% of GDP. commonwealth and the laws are consecrated is, lest the or natural/medical disasters’. Other possible shocks included: This compares with around 25% in New Zealand in 1973, a temporary possessors and life-renters in it, unmindful of ‘The Middle East explodes/implodes and/or revolution in difference which raises questions about the value of setting a what they have received from their ancestors or of what is Saudi Arabia’, and ‘Major earthquake devastates Wellington’; precise number on taxation.

References Abelson, J., P.-G. Forest, J. Eyles, P. Smith, E. Martin and F. Gauvin King, C.S., K.M. Feltey and B.O. Susel (1998) ‘The question of (2003) ‘Deliberations about deliberative methods: issues in the participation: toward authentic public participation in public design and evaluation of public participation processes’, Social administration’, Public Administration Review, 58 (4), pp.374-93 Science and Medicine, 57 (2), pp.239-51 Maitlis, S. and H. Ozcelik (2004) ‘Toxic decision processes: a study of Anonymous (2012) ‘Let’s Make a Deal’, Pictures of the Future, Spring emotion and organisational decision-making’, Organisation Science, 2012, pp.50-3 15 (4), pp.375-93 Baker, C., J. Purnell and M. Reeves (2012) Adaptive Strategy in McRae, H. (2011) ‘One for the masters of the universe’, Independent, 10 Government, Boston Consulting Group October Bond, S. and M. Thompson-Fawcett (2007) ‘Public participation and new Nemoti, S. (2011) ‘New method to intensify democracy’, Asahi Shimbun, urbanism: a conflicting agenda?’, Planning Theory and Practice, 8 5 June (4), pp.456-9 OECD (2010) Making Reform Happen: lessons from OECD countries, Bull, M. (2012) ‘What is the rational response?’, London Review of Paris: OECD Books, 34 (10), pp.3-6 Roberts, N. (1997) ‘Public deliberation: an alternative approach to Dryzek, J.S. (2000) Deliberative Democracy and Beyond, Oxford: Oxford crafting policy and setting direction’, Public Administration Review, University Press 57 (2), pp.124-32 Evans, L., T.L. Milfont and J. Lawrence (2012) Perceptions of sea-level Tanzi, V. (2005) ‘The economic role of the state in the 21st century’, rise in Wellington City and Kapiti Coast districts, Wellington: Victoria Cato Journal, 25 (3), pp.167-38 University of Wellington Tanzi, V. (2011) Government Versus Markets, London: Cambridge Fearon, J.D. (1998) ‘Deliberation as discussion’, in J. Elster (ed.), University Press Deliberative Democracy, Cambridge: Cambridge University Press Van den Hove, S. (2006) ‘Between consensus and compromise: Ferguson, N. (2012) The Great Degeneration: how institutions decay and acknowledging the negotiation dimension in participatory economies die, London: Allen Lane approaches’, Land Use Policy, 23 (1), pp.10-17 Florida, R. (2002) The Rise of the Creative Class: how it’s transforming Vander Ploeg, C.G. (2003) ‘Constituent assemblies as vehicles for work, leisure, community and everyday life, New York: Basic Books change’, in G. Gibson (ed.), Fixing Canadian Democracy, Vancouver: Florida, R. (2007) The Flight of the Creative Class: the new global Fraser Institute competition for talent, New York: Harper Collins Warren, M.E., and H. Pearse (eds) (2008) Designing Deliberative Hayward, J. (undated) Unpublished paper, University of Otago Democracy: the British Columbia Citizens’ Assembly, Cambridge: James, C. (2012) ‘Making big decisions for the future’, paper presented Cambridge University Press at the Treasury/Victoria University of Wellington Affording Our Future Zurita, L. (2006) ‘Consensus conference method in environmental issues: conference, December relevance and strengths’, Land Use Policy, 23 (1), pp.18-25

Page 28 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Nicola Kirkup

The Future Costs of Retirement Income Policy and Ways of Addressing Them New Zealand Superannuation (NZS) is a universal pension Options for reducing the future cost of NZS areexamined in more detail, paid at a flat rate. It is effective at poverty prevention among and compared to present settings, in a Treasury background paper, Future Costs the elderly, relatively inexpensive and simple to administer. of Retirement Income Policy, and Ways of However, with the proportion of the population aged over Addressing Them, which was published at the same time as the statement. This article 65 years set to increase rapidly over the next 50 years, there takes the analysis in that background is expected to be a steep rise in the costs of the scheme. The paper as its base. future cost of NZS is therefore a major driver of New Zealand’s Assessment criteria The assessment is based around the Longer-term Fiscal Challenge. The Treasury’s statement on Treasury’s Living Standards Framework New Zealand’s long-term fiscal position (Treasury, 2013a) (Treasury, 2012). The present approach and four broad possible alternative examines ways of addressing this cost, as well as other possible approaches to retirement income policy are considered here in terms of their responses to the broader fiscal challenge such as higher likely impact on the components of that taxation or reductions in other areas of public spending. framework. Retirement income policy can, to a greater or lesser extent, affect outcomes under each of those components: Nicola Kirkup is a Senior Analyst at the New Zealand Treasury. The views, opinions, findings and conclusions or recommendations expressed in this article are strictly those of the author and do not • sustainability for the future: via reflect the views of any organisation, including the New Zealand Treasury. impacts on direct fiscal costs;

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 29 The Future Costs of Retirement Income Policy and Ways of Addressing Them

• economic growth: via impacts on level of payment or the universal, proposed reform goes. However, there is a labour force participation and flat-rate nature of NZS. clear difference in the paths by which the national (private and public) saving; • Changing the way in which NZS different approaches reach future reduced • increasing equity: via impacts on levels are indexed to slow down costs. old-age poverty rates and inter- and the rate of increase would reduce Where there is a single new age of intragenerational distribution; the relative value of individual eligibility, the fiscal cost eventually settles • social infrastructure: via confidence NZS entitlements over time, while on a path parallel to and below the engendered by the dependability retaining the flat-rate, universal current projection. This pattern would be of political reform, and via public nature of the payment. Effectively repeated whatever eventual age and rate and private administrative and NZS is currently linked to wage of change were adopted. An approach compliance costs; inflation; we model shifts to price based on longevity indexation would be • reducing risks: via the potential inflation and to a composite index. more likely to continue to diverge from impact of private savings levels • Making private saving compulsory the current projected path. on New Zealand’s high levels of and later using some of that saving Where the indexation methodology is international indebtedness, and to part-fund an individual’s own changed, the total cost reduces indefinitely the impact of different approaches NZS would effectively involve as a proportion of GDP despite the to pension funding on individual applying a means-test to NZS, within expected increase in the number of longevity and investment risk. a specific and narrow definition of pensioners. In practice it is likely that ‘means’. Voluntary savings, including political pressure arising from increasing levels of old-age poverty as the real value of NZS reduced would at some point ... transitional generations pay both for some prompt a reversion to wage indexation or upward ad hoc adjustments in the level proportion of their own pensions and for the of NZS. In both cases, reductions in the total cost of NZS would be likely to be full cost of the pension entitlements of earlier offset to some extent by an increase in the cost of other welfare benefits claimed generations. by over-65s unable to fund their living costs through continued work, savings or reliance on family resources.1 Reform options those already accumulated under A key feature of any transition New Zealand’s present approach is a KiwiSaver, would not be included in towards SAYGO is that economy-wide government-arranged PAYGO (pay-as- this approach to means-testing, nor costs will initially increase before they you-go) system, using current tax revenue would income earned from other decrease. In the early years, existing to finance the pensions of current NZS sources, in view of the administrative pensioners continue to be paid their recipients. Any option that shifts away from complexity and unproductive NZS entitlements on a PAYGO basis, that approach must move it towards either avoidance behaviours that broader while working cohorts must at the same a privately-arranged PAYGO approach, means-testing is likely to entail. time make contributions to the SAYGO under which an individual would need to • Communal saving could be fund. Effectively, transitional generations earn more of his or her own keep at later undertaken through further pay both for some proportion of their ages, or towards a SAYGO (save-as-you- extension of the New Zealand own pensions and for the full cost of go) approach, which involves building up Superannuation Fund over and above the pension entitlements of earlier funds in advance which are later used to the contributions already intended. generations. The higher the required fund pension costs. This, and the investment returns saving rate, the faster and the higher are Broadly, then, four options are that the fund would earn, would the eventual cost savings achieved. identified for reducing the demand subsequently be used to cover all, A private SAYGO scheme leads to on future taxpayers to fund future or part, of the costs of NZS, which savings for the government but increases pensioners. would continue to be paid at the the costs faced by individuals, who must • Raising the age of eligibility for same level and on the same universal, reduce either their consumption or their New Zealand Superannuation would flat-rate basis. voluntary saving rate, during a transition reduce the overall future cost of NZS, period. The subsequent offset to NZS compared to what it is currently Comparing the options means that this is in part a real cost, expected to be, by reducing the Fiscal sustainability not simply a redistribution from earlier number of individuals that NZS The extent of the reduction in future to later in an individual’s life. Fiscal would be payable to. On its own this PAYGO costs by any given future date savings from this approach may be offset policy change would not affect the would in each case depend on how far the to the extent that the government finds

Page 30 – Policy Quarterly – Volume 9, Issue 4 – November 2013 it necessary to offer tax breaks or other A transition towards a SAYGO system, in higher-risk growth-oriented assets, forms of incentives to encourage saving. whether on an individual or a communal whereas individual accounts face A communal approach intended to basis, would be expected to cause income proportionately higher fees and may be fund only the flat-rate universal NZS to be diverted from current consumption more conservatively invested in view of might be cheaper. This is because if to saving to meet future retirement costs, individual investors’ shorter time horizons everybody is required to contribute at the and therefore to produce a transitional (Dyck and Pomorski, 2011). On the other same rate, some individuals will contribute reduction in the consumption/GDP ratio. hand, the labour disincentive effect could more than is needed to fund their own A move to greater pre-funding may also perhaps be less in the case of a private NZS. Under a communal approach, this have a negative impact on labour force SAYGO approach. Contributions are less ‘surplus’ is then redistributed towards participation as the immediate rewards likely to be perceived as a tax, but rather meeting the shortfall for individuals who for work reduce. as an increase in individuals’ overall do not contribute enough to cover their International evidence provides lifetime wealth (Karam et al., 2010). own NZS. Under a private approach, the little conclusive evidence on the scale ‘surplus’ would remain with the high- of the increase in private saving under Reducing risks: macro income individual and shortfalls would compulsion, but suggests that it is usually A higher rate of national saving will be have to be met otherwise. directionally positive.2 The bulk of the required if the economy is to increase savings increase typically comes from overall investment without increasing Economic growth lower- and middle-income households. overseas debt. The impacts of retirement Retirement income policy can have an Higher-income households are typically income policy reforms in this area indirect effect both on national income levels and on external borrowing requirements via its impact on national ... the overall impact on national savings would savings, which is in turn the result of the interaction of private and fiscal savings. be significantly greater if the government were to However, the mechanisms are complex, depending on internal feedback loops use the fiscal savings to reduce deficits (increase and factors external to retirement income policy, such as risk premiums, interest surpluses), rather than using the savings to finance rates and the exchange rate. We look here spending elsewhere or to reduce taxes. at the likely first-order impact on national saving. Previous increases in the age of eligibility for NZS do not appear to have already saving at or above the compulsory therefore depend on how individuals had much of an impact on private saving rate, and so are more likely to respond adjust their savings behaviour in response, behaviour. From the individual’s point of to savings compulsion by redirecting and on broader fiscal policy settings. view, they now have a longer working life their voluntary saving than by forgoing We have shown that behavioural effects to save for a shorter period of retirement consumption to increase their overall may vary between different approaches, and so the amount they need to save per saving rate (Davis and Hu, 2006). but broadly we would expect that the year reduces. However, empirical evidence It is even more difficult to know to greater the reduction in lifetime income suggests that raising the age of eligibility what extent higher savings will translate expectations, the more people are likely to for NZS does seem to encourage higher into increased productive capital stock in respond by cutting back on consumption levels of labour force participation among New Zealand. But again our judgement is and increasing saving. This suggests older workers. that it is likely to be directionally positive that the impact on household saving of Reducing the real level of entitlement for capital stock as it is likely that some retirement income policy reform may not is also likely to encourage greater labour part of the higher savings will be retained depend on what the government does so force participation by older people, as within New Zealand. The effects on much as how hard it does it. they decide to make up at least some of productivity and output are uncertain. Sustained increases in private savings the shortfall by increasing their time in It is possible that a public SAYGO behaviour will contribute positively to work. However, people are more likely to approach, involving investment into reducing New Zealand’s macroeconomic need to increase their saving as well. While a single large fund, would deliver vulnerabilities. However, the overall they can work for a few more years to fill higher returns in the long run than impact on national savings would be the shortfall caused by a delay in their a private SAYGO approach involving significantly greater if the government access to full NZS, they are less likely to a large number of individual funds. were to use the fiscal savings to reduce be able to work, or rely on their families, This is because a large fund will benefit deficits (increase surpluses), rather for the whole of their retirement. from economies of scale and a longer than using the savings to finance investment horizon, enabling investment spending elsewhere or to reduce taxes.

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 31 The Future Costs of Retirement Income Policy and Ways of Addressing Them

New Zealand’s strong fiscal frameworks, None of the options directly addresses hand, and avoiding the encouragement which require the government to take the opposite risk – that individuals of inappropriately high-risk investment a long-term approach to fiscal strategy, who live fewer years after retirement approaches by individuals relying on help manage this risk. receive less NZS in total. While this risk government to rescue them if things go would ideally be addressed through wrong on the other. Reducing risks: micro policy interventions aimed directly at A publicly managed retirement The risk that individual will live longer the fundamental issue – health-related fund may be at less risk of fraud or than they had expected, and so run out of disparities in life expectancy – this is theft than individual accounts. Under savings, is particularly difficult to bear as, neither straightforward nor likely to de- this option, the Crown takes on a by the time they are aware that they will liver significant improvement in the short greater level of investment risk: the live longer than expected, it may be too term. However, it can also be mitigated to New Zealand Superannuation Fund late to do anything about it. Therefore, the extent that an individual’s retirement may, or may not, deliver the returns on it seems inappropriate for individuals wealth is his or her own to consume (or investment necessary to enable it to pay to bear the bulk of longevity risk. The bequeath) at the rate he or she chooses. future pensions to the extent intended. government, however, is well placed to Options which encourage individuals to International experience shows that large hedge individual longevity by pooling risk build up larger independent retirement funds managed on behalf of the public across entire cohorts. savings as well as, or even instead of, a do not always deliver good returns, and Raising the age of eligibility and life-long entitlement may therefore be some have suffered substantial losses. The SAYGO approaches ensure that individuals preferable from this perspective. individual is also indirectly exposed to this risk, with less scope to manage it, as the Crown is likely to pass on the cost of Under the present arrangements, younger people investment underperformance through increased taxes or reduced benefits can expect to receive more formal pension in total (Whitehouse et al., 2009). than will older people, due to the former’s higher Equity: distributional impacts Different people will experience different life expectancy. impacts on their total pension wealth under different reform options, depending on their age and their lifetime income. continue to receive at least as much as Options which increase the share Treasury has undertaken modelling to try they do under the present approach of the costs of pensions met from to quantify these impacts, but these must throughout their pensionable lives, and capital accumulation, rather than come with a heavy caveat as they are so therefore do not change the allocation from contemporary taxation, help to dependent on assumptions, and outcomes of longevity risk. Under a compulsory diversify risk away from dependence on are so dependent on many individual individual saving approach, the Crown contemporary economic growth levels. variables. may – depending on the finer details of Under compulsory private savings, Under the present approach, people the scheme – be able to transfer some of both the amount of retirement income who live longer receive more NZS overall. the longevity risk through annuitisation available to the individual and the NZS This difference remains about the same arrangements. payable by the government depend on total under an across-the-board reduction A slower-growing NZS entitlement accumulations of private savings. This in NZS entitlements under changed is still paid throughout an individual’s means that the Crown and the individual indexation. However, the difference in lifetime after the age of eligibility; but share investment risk. Individuals have lifetime expectation of pension receipts people are more likely to need additional a range of options to manage their is exacerbated if the age of eligibility is savings to supplement the reduced investment risks, and allowing them to increased. entitlement, and the consequences are manage this risk themselves will allow Under the present arrangements, worse if they are not able to manage them to select a risk level which is optimal younger people can expect to receive more those savings in a way which delivers for their individual circumstances. On formal pension in total than will older them an adequate income throughout the other hand, transferring risk to the people, due to the former’s higher life their pensionable life. Part of this risk is government allows it to be managed over expectancy. This would remain the case still retained by government also, since a greater time horizon, reducing the risks under a ‘communal SAYGO’ arrangement, individuals who run into hardship as a posed by short-term financial market which would retain the universal flat-rate result of outliving their savings, or not fluctuations. A balance would need to nature of NZS entitlements. However, the having enough to sustain themselves, be struck between protecting individuals effect is temporarily reduced if the age of are likely to turn to additional welfare from risks that they are not well placed eligibility is increased. assistance. or competent to manage, on the one

Page 32 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Under a changed method of improvement if they are forced to transfer Policy change is unlikely to engender indexation, younger individuals can resources from the short term to the long confidence and trust, and hence will expect to receive substantially less than term. not bring about the desired behavioural older people will, and less than they A communal approach to SAYGO has change, if people do not believe that the would under present arrangements; by a different intragenerational distributional change is permanent, or cannot see how the time they reach pensionable age, effect. Broadly, the effect of a shift in it will affect them well into the future. the value of the pension will be less. this direction would be to redistribute Reform therefore needs to be not only This approach would be likely to mean resources from richer people earlier in fiscally sustainable but also clear, easily that although the purchasing power of their lives, to poorer people (within the understood and seen to command broad NZS would be maintained, recipients’ same age cohort) later in their lives. Once political support. For this reason it is NZS income would fall relative to wages established, therefore, this approach is important that an approach should be earned by contemporary workers. largely progressive in the same way as capable of adaptation if outcomes are Under a private SAYGO arrangement, the present approach under which higher greatly different from expectations; but younger individuals have more time income individuals pay more through in a way which is transparent, predictable to build up their own savings and their taxes, but everybody receives the and objective so as to reduce the risk of therefore have greater retirement wealth. same annual NZS payments. politically-motivated change and the Older people would be less affected as The transitional generation, in incentive for interest groups to seek to they would not have time to build up funding part of its own pension as well as influence it. significant mandatory savings. In terms of the impact on people at different income levels, a private savings ... any system which involves different entitlements approach will establish more of a formal relationship between contributions made for different people will be more complex, and pension received, and hence be more require more individual monitoring, and so be ‘actuarially fair’ in terms of being a closer match between contributions and total more expensive to administer and more prone benefits. Notably, in view of the tendency for women to experience lower lifetime to administrative error than a flat-rate universal earnings due to their greater probability pension. of spending time out of the workforce, such an approach is likely to increase gender inequality in retirement. The upfront cost of a private SAYGO that of contemporary pensioners, would In the case of reforms to the age of approach is likely to have quite significant get a worse deal than earlier generations, entitlement, an approach objectively welfare impacts on working-age house- who funded only older people’s pensions. linked to an external factor such as holds, depending on their present However, if we act quickly and impose longevity might be more politically approach to saving. Positive welfare effects some of the transitional costs on the sustainable than a revised age of eligibility will (eventually) result from compulsion generation that is currently at middle age, set at an arbitrary level which may or may for those households who could save this generation will still get quite a ‘good not need to be changed again later. but are currently ‘under-saving’ due, for deal’ in absolute terms, because the older In the case of reforms to the way in example, to myopia or other cognitive cohort that the current generation must which NZS is calculated, one possible biases. Negative welfare effects will result fund is relatively small. variation would be a system under which for those households for which it is This point emphasises the importance the relationship between salaries and optimal to not save in financial assets. For of an early start, if this transition is to be a new pensioner’s entitlement would example, there will be some individuals made. A taxpayer who is supporting a remain the same (through continued whose lifetime income would be higher quarter of a pensioner, as current cohorts wage indexation), while pension levels for if they were to invest in a business or are doing, is better placed to contribute existing pensioners were linked to a greater in upskilling, but who will be prevented towards his or her own pension as well, extent to prices. Each superannuitant from doing so by being compelled to save compared with one who is supporting would receive weekly NZS payments set in a prescribed vehicle over their working half a pensioner, as future cohorts are relative to the average wage as it stood at lives. Similarly, some households may be likely to be doing (Coleman, 2012). the time when they personally reached better off repaying their mortgage more the age of eligibility. Over time the value quickly, rather than or before building up Social institutions of each individual superannuitant’s NZS financial assets. Low-income households Any reform is likely to be effective only payments would be indexed to keep up who are financially constrained may to the extent that the policy change is with inflation, but would decline relative also not experience an overall welfare sustained through to the long term. to the average wage. This would mean

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 33 The Future Costs of Retirement Income Policy, and Ways of Addressing Them that each cohort transitioning from work Approaches which rely more • Does greater accumulation of assets to pension would continue to experience on individuals making their own on the Crown’s balance sheet via the same impact on their living standards arrangements, either by encouraging or public pre-funding increase the as previous cohorts, rather than each making compulsory a higher personal risk of looser-than-otherwise fiscal cohort successively experiencing a greater contribution to total retirement wealth, policy? difference between wage and pensions increase the private administrative cost as • Is it acceptable to continue to on transition. However, it would mean well as the risks for those individuals. push costs forward onto future different pension levels for pensioners of generations? different ages and this may prove difficult Getting from options to a choice Treasury hopes, through the to sustain politically. While the Living Standards Framework publication of the Statement on the Long- In the case of SAYGO options, where enables a systematic comparison of Term Fiscal Position and accompanying a large public fund is built up, it may be options, it cannot on its own be used analysis, to inform and provide a difficult to sustain the ring-fencing of to determine which approach, or framework for public debate on these increasingly large amounts of resource combination of approaches, is ‘best’. and other pertinent questions of public to fund pensions if more immediate, Views on that will continue to depend on values. or politically attractive, requirements individual value judgements about what 1 About 40% of New Zealand pensioners currently have no emerge. In a system in which Parliament are the general objectives of retirement income other than NZS. See Ministry of Social Development, is sovereign and parliaments cannot bind income policy, and how they are to be 2013, section 1, ‘Income trends for older New Zealanders, 1982–2012’. their successors, it would be difficult to prioritised against other calls on public 2 Survey evidence suggests that about a third of private contributions to KiwiSaver represent savings which would not design a public SAYGO system that would resources; Questions such as the following otherwise have been made (see Law et al., 2011). avoid this risk. need to be asked. The approach to individual SAYGO • How socially tolerable is old-age described here is intended to minimise poverty, weighed against welfare for Acknowledgements avoidance opportunities and compliance other life stages? The author wishes to acknowledge and administration costs, compared to • How can the need to lean against the assistance of Chris Ball, Lucas an approach under which more or all poor individual decision-making Kengmana and David Law. The views, of an individual’s assets and income be balanced with the desirability opinions, findings, and conclusions were included in a means test. But it is of individual autonomy and or recommendations expressed in this nevertheless inevitable that any system preferences? Is there a public interest article are strictly those of the author and which involves different entitlements for in increasing private saving which do not necessarily reflect the views of any different people will be more complex, affects this balance? organisation, including the New Zealand require more individual monitoring, and • How confident can we be that rates Treasury. so be more expensive to administer and of return on investment are likely to more prone to administrative error than continue to outpace rates of growth a flat-rate universal pension. in the economy?

References Coleman, A. (2012) Pension Payments and Receipts by New Zealand Ministry of Social Development (2013) Household Incomes in New Birth Cohorts, 1916–1986, Motu working paper 12-11, Wellington: Zealand: trends in indicators of inequality and hardship 1982 to Motu Economic and Public Policy Research 2012, Wellington: Ministry of Social Development Davis, E.P. and Y. Hu (2006) ‘Saving, funding and economic growth’ Treasury (2012) ‘Improving the Standards of New Zealanders: moving in G.L. Clark, A.H. Munnell and J.M. Orszag (eds), The Oxford from a framework to implementation’, paper presented to the Handbook and Pensions and Retirement Income, Oxford: Oxford Wellbeing and Public Policy conference, Wellington University Press Treasury (2013a) Affording Our Future: statement on the long-term fiscal Dyck, A. and L. Pomorski (2011) Is Bigger Better? Size and performance position, Wellington: Treasury in pension plan management, Rotman School of Management Treasury (2013b) Future Costs of Retirement Income Policy, and Ways working paper 1690724 of Addressing Them, Wellington: Treasury Karam, P,. D Muir, J. Pereira, and A. Tuladhar, Totonto: University of Whitehouse, E.R., A.C. D’Addio and A. Reilly (2009) Investment Toronto (2010) Macroeconomic Effects of Public Pension Reforms, Risk and Pensions: impact on individual retirement incomes and IMF working paper 10/297 government budgets, social, employment and migration working Law, D., L. Meehan, and G.M. Scobie (2011) KiwiSaver: an initial paper 87, Paris: OECD evaluation of the impact on retirement savings, Treasury working paper 11/4, Wellington: Treasury

Page 34 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Nicholas Mays, John Marney and Erin King

Fiscal Challenges and Changing Patterns of Need for Health and Long-Term Care in New Zealand health per person than the OECD average, and less than many of the countries we New Zealand’s health and long-term care system plays an compare ourselves to, such as the United Kingdom and Australia. important role in society by improving the length and quality A small but significant proportion of health expenditure relates to long-term of people’s lives and providing dignity for the sick and infirm. care. This includes services provided It also accounts for a significant proportion of government to people with an enduring physical or mental disability who are dependent spending and a rising share of national income. This article on assistance with the basic activities of discusses some of the challenges that New Zealand faces in daily living, such as washing, dressing or using the bathroom. It may also include managing expenditure growth and repositioning its health lower-level assistance with activities such as housework, meals or shopping. Long- and long-term care system to deal more effectively with term care accounts for around 18% of changing patterns of disease. total public spending on health care services, being split about equally between Overview of the current system In 2011, total health expenditure in New residential care and home care, plus a As a proportion of GDP, New Zealand’s Zealand was 10.3% of GDP compared small proportion spent on day care. Taken health expenditure is slightly above to the OECD average of 9.3%. In dollar together, public and private spending on average for OECD countries (Figure 1). terms, New Zealand spends slightly less on long-term care in New Zealand stands at approximately 1.4% of GDP, close to the Nicholas Mays is Professor of Health Policy at the London School of Hygiene and Tropical Medicine. OECD average (Figure 2). John Marney is a Principal Advisor and Erin King a Senior Analyst at the New Zealand Treasury. The The need for health and long-term views, opinions, findings, and conclusions or recommendations expressed in this article are strictly those of the authors and do not necessarily reflect the views of any organisation, including the New care (its timing, duration and intensity) is Zealand Treasury. unpredictable at an individual level, and

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 35 Fiscal Challenges and Changing Patterns of Need For Health and Long-Term Care in New Zealand

Figure 1: Total health spending as a percentage of GDP, and GDP per capita to significant public financing of health in OECD countries (2011) and long-term care services in all OECD

20 countries. In New Zealand, public US expenditure accounts for 83% of total 16 health spending (Figure 3) and 92% of spending on long-term care (Figure 12 2), above the OECD average. Even in NZ OECD Australia the United States the government pays 8 around half of all health care costs, and

4 less than 10% of the population aged 65 (2011 or latest year)

Health spend, % GDP or over holds private cover for the costs 0 of long-term care. 0 20,000 40,000 60,000 80,000 100,000 GDP per capita, USD 2011 How the system performs

Source: OECD, 2013 New Zealand performs well on many commonly-used indicators of overall Figure 2: Long-term care expenditure in OECD countries (percentage of GDP, 2008) population health. For example, life expectancy has improved from 71.1 years 4.0 3.5 3.6 in 1961 to 81.2 years in 2011, around one 3.5 year higher than the OECD average 3.0 (OECD, 2013). However, it is difficult to 2.5 2.22.2 2.0 2.1 get an accurate picture of the performance 2.0 2.0 1.6 1.71.7 % of GDP 1.5 1.5 of the health system from these high-level 1.5 1.31.3 1.41.4 1.01.0 1.1 indicators. Health care is just one of a 1.0 0.8 0.4 number of factors that influence health 0.5 0.30.3 0.1 0.20.2 0.0 status. Tobias and Yeh estimate that health y care contributed around one third of the wa y orea tugal rance oland Spain K OECD Japan inland F P Austria epublic Iceland F Canada

Nor health gains made by the New Zealand Sweden Belgium r Po Slovenia Hungar Australi a Germany Denmark Netherland

Switzerland population over the 1981–2004 period Luxembourg New Zealand United States public Czech Re

Slovak R (Tobias and Yeh, 2009). Other relevant public LTC expenditure private LTC expenditure factors include individual characteristics Source: OECD, 2011 through to wider socio-economic, cultural Figure 3: Public expenditure on health, % total expenditure on health and environmental conditions (Figure 4). (2011 or nearest year) Certain indicators relate more directly to the performance of the health system. % 90 The concept of ‘amenable mortality’, for 80 example, refers to deaths that should not 70 60 have occurred given effective and timely 50 care. There is no firm consensus about 40 the list of causes for amenable mortality, 30 20 so estimated rates vary. According to 10 two recent estimates, age-standardised 0 mortality rates in 31 OECD countries ey Ital y ore a Chil e Israel Spai n K OECD Japan inland

rk Tu in 2007 ranged from from 59 to 200, ance Fr land Po Greec e Ireland Austria Mexico Iceland Estonia F Canad a No rw ay Sweden Belgium rt uga l Po Sloveni a Hunga ry Australi a Germany Denmar k or from 62 to 206, deaths per 100,000 Switzerland Netherland s Luxembourg New Zealand United States people, depending on the list used. In public Czech Re public Slovak Re United Kingdom both cases, the amenable mortality rate Source: OECD, 2013 in New Zealand (85 or 107 deaths) was the costs can be very high. Some form of of poor health, who are typically on lower close to the OECD average (95 or 104 public or private risk pooling is therefore incomes, face higher insurance premiums deaths), and had declined by more than generally considered desirable. Although where insurers are able to identify them. the OECD average over the 1997–2007 private insurance can play this role to Insurers also tend to restrict eligibility to period (Gay et al., 2011). some extent, the market tends to cater people with no pre-existing conditions, Avoidable hospital admissions provide poorly for certain groups, notably the limiting coverage. an indication of how well the health system elderly, the chronically ill and those on This creates a strong case for is working. We have low admission rates low incomes. Individuals at greater risk government involvement and has led for uncontrolled diabetes, at less than a

Page 36 – Policy Quarterly – Volume 9, Issue 4 – November 2013 fifth of the OECD average, but high rates Figure 4: The main determinants of health for both asthma and chronic obstructive pulmonary disease – in both cases at 1.6 , cultural and en ic viro times the OECD average (OECD, 2011). om nm on Living and working In addition, people with below-average c en -e conditions t io al incomes are almost twice as likely to c c o Work Unemployment o s n forgo medical care due to cost as those l environment a community d with above-average incomes (Figure 5). r nd ne it e a tw io Rates of some infectious diseases n l n e ia e o Water & c al lif style rk s are high in New Zealand compared to G o u f s Sanitation S id ac iv to other developed countries and seem to d r Education n s be increasing. There are clear ethnic and I Water social inequalities in infectious disease care rates (Baker et al., 2012). A number services of other health indicators also show Agriculture disparities in health between ethnic and food Age, sex and production groups. The gap between Mäori and constitutional Housing non-Mäori life expectancy at birth is factors 7.3 years, although this has narrowed from 9.1 years in 1995–97 (Statistics Source: Dahlgren and Whitehead, 1991 New Zealand, 2013a). Rates of avoidable hospital admission for Mäori and Pacific Figure 5: Unmet care need due to cost in eleven OECD countries people are significantly higher than the % overall rate (about double for Pacific 45 people), suggesting that access barriers 40 are greater for these groups (Ministry of 35 Health, 2012a). 30 25 Increases in health care spending 20 Government spending on health and 15 10 long-term care is an important part of 5 New Zealand’s long-term fiscal challenge 0 because it is both large and growing. New States ance Fr United United Canad a Vote Health accounts for more than a No rw ay Sweden Zealan d Australi a Kingdo m Germany Switzerland

fifth of core Crown expenditure, and Netherlands spending has been increasing faster than Above average income Below average income national income for most of the last 60 Source: Commonwealth Fund, 2010, included in OECD, 2011 years (Figure 6). The amount spent by Figure 6: Core Crown health expenditure per capita and GDP per capita, real growth government on these services has risen in real terms from $583 per person in 1950 to % change since 1950 450% $2,987 per person in 2011 (2011 dollars). As Health: 412% 400% a share of GDP, that equates to an increase 350% from 3.1% in 1950 to 6.9% in 2011. This 300% reflects an increase in both the volume of 250% services and the benefits provided, as well 200% GDP: 144% as higher unit costs. 150% Spending on health and long-term 100% care is driven by a range of interacting 50% demographic and non-demographic fac- 0% tors. Population ageing affects spending, 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 since older people tend to need more care. Source: Treasury The contribution of population ageing to past spending growth has, in fact, been mont, Grignon and Huber, 2006; OECD, to total real health expenditure growth quite small: in the international litera- 2006; Smith, Newhouse and Freeland, (excluding long-term care) in New Zea- ture, estimates range from 6.5% to 9% of 2009). Figure 7 compares the estimated land with the averages across the OECD the total over the period 1960–1990 (Dor- contribution made by population ageing and BRIICS countries (Brazil, Russia, In-

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 37 Fiscal Challenges and Changing Patterns of Need For Health and Long-Term Care in New Zealand

Figure 7: Average real annual change in health spending (1995-2009) as life expectancy increases (European Commission, 2012). It may be that New Zealand Age effect increased longevity results, at least partly, from a decline in the rate at which Other OECD chronic diseases progress, which may also cause the proportion of life spent BRIICS with serious illness or disease to stabilise Average real annual or reduce even as the proportion spent 0% 2% 4% 6% spending growth with moderate or less severe conditions

Source: de la Maisonneuve and Martins, 2013 (Table 1); excludes long-term health spending expands. Under this scenario of ‘dynamic equilibrium’, the costs associated with Figure 8: Health spend per capita and GDP per capita in different countries (2011) providing people with more years of care may be partially offset by a reduction 10,000 United States Australia in the average level of support required New Zealand (Graham et al., 2004). Korea, Rep. 1,000 Chile A country’s health spending is Mexico statistically highly dependent on its GDP Samoa per capita, regardless of institutional or other characteristics (Mendez, Tabish and 100 Vietnam India de Ferranti, 2012). This is shown in Figure 8. One explanation for this is that higher

Log Health spend per capita (USD) incomes drive higher public expectations 10 100 1,000 10,000 100,000 of the range and quality of health services Log GDP per capita (USD) that should be available and, in a broad sense, a greater willingness to pay for Source: World Bank data these. The strength of this relationship is uncertain. Older studies tend to suggest Figure 9: Health care and social assistance productivity indexes that health care is a luxury good, with 1,300 demand increasing faster than income (elasticity greater than one). More 1,200 recent studies have suggested a weaker 1,100 causal relationship, although one that

1,000 is nevertheless significant (European Commission, 2012; de la Maisonneuve 900 and Martins, 2013).

800 As national income rises, so does the 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 cost of labour, which is the major input

Labour productivity Capital productivity Multifactor productivity into health and long-term care services. Year ended March, 1996-2011 (Base 1996 = 1000) Productivity gains tend to be relatively low in labour-intensive service industries Source: Statistics New Zealand, 2013b such as this. The difference between dia, Indonesia and South Africa) over the deferred by increased longevity. There economy-wide productivity (and wage) period 1995–2009. is also evidence that the costs of death growth and the anticipated lower rate Ageing is likely to make a larger decline as age at death increases (Bardsley, of productivity growth in the health contribution to future spending increases, 2012). These factors will tend to reduce and long-term care sector is expected to particularly in areas such as long-term the contribution that population ageing push up unit costs over time. This effect care, but its overall impact is still expected makes to health spending growth. – known as Baumol’s cost disease – is a to be modest. A large proportion of If increases in longevity are major driver of the Treasury’s projections health care costs come at the end of life accompanied by an increase in the for rising expenditure over the long term (costs of dying, rather than from being number of years lived in good health, this (Treasury, 2013). old per se). In the US, older people should also help to offset demographic Evidence about the rate of public generate over a quarter of their Medicare cost pressures to some extent. The sector productivity growth is limited. expenditure in the last 12 months of their international evidence for this is mixed, Statistics New Zealand recently released its lives (Riley and Lubitz, 2010), which with recent analyses not able clearly to first productivity series for the ‘healthcare equates to approximately a third of their predict whether dependency levels by and social assistance industry’ (Statistics lifetime health care costs. These costs are age will rise, fall or remain constant New Zealand, 2013b). Figure 9 shows

Page 38 – Policy Quarterly – Volume 9, Issue 4 – November 2013 changes over time in the productivity for Figure 10: Productivity indexes for the measured sector as a whole this industry over the period 1996–2011. By way of comparison, Figure 10 shows 1,300 changes in the productivity index for the 1,200 whole measured sector (Statistics New Zealand, 2013c). Figure 9 shows strong 1,100 productivity growth in the health care and social assistance industry between 1,000 1997 and 2001 (about 20% over the period, 900 or 3.7% a year). The decline in labour and multi-factor productivity during the 800 period 2001–03 reflects slowing output 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 growth and strong growth in labour input Labour productivity Capital productivity Multifactor productivity (particularly in hospitals and residential Year ended March, 1996-2011 (Base 1996 = 1,000) care). Overall, between 2001 and 2011 Source: Statistics New Zealand, 2013c labour productivity fell by 2.4% (0.24% a Figure 11: Core Crown Health expenditure, % GDP, long-term projection year over the period, but with variations in the rate and direction of change over 12% time). The health care and social assistance 10% industry covered by these statistics is broad, 8% including both market and non-market activity in a range of different sectors. 6% Factors affecting productivity will vary 4% across the sector and changes in quality 2% may not be fully captured (Statistics New Zealand, 2013b). 0% The contribution made by 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 2022 2027 2032 2037 2042 2047 2052 2057 technological change to expenditure History & Budget forecast Projection growth is complex (Smith, Newhouse Source: Treasury, 2013 and Freeland, 2009; Thomson et al., Figure 12: Projected change in composition of government expenditure 2009). New technologies can reduce (excl. debt financing costs) costs through efficiency gains, or through health improvements that 2012 2060 reduce the need for further care. They can also contribute to higher costs by extending the scope and range of possible 21.6% 30.7% treatments, making treatment easier and thereby reducing treatment thresholds, or by replacing cheaper technologies. Medical innovations may contribute to rising costs if people live on to develop other health problems which themselves require expensive treatment. Based on past growth and assump- tions about the drivers of future Health NZ Super Other expenditure, the Treasury has projected Source: Treasury, 2013 publicly-financed health and long-term care spending to 2060, using its long- Their purpose is to allow for a better changing. While people are living longer term fiscal model (Treasury, 2013). The understanding of the scale of the fiscal and are healthier than their equivalents projections show spending continuing pressure that future governments may in earlier decades, many are living with to rise as a proportion of both national face, as a starting point for thinking long-term or chronic conditions that income and government expenditure, to about the sustainability of existing are costly to manage. The bulk of these 11.1% of GDP by 2060 (Figure 11), or 31% arrangements. conditions are accounted for by non- of all government spending excluding communicable diseases (NCDs). These debt financing costs (Figure 12). These are Changing patterns of disease include diabetes, cardiovascular disease, projections, not forecasts or predictions. Demands on the health system are chronic obstructive pulmonary disease,

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 39 Fiscal Challenges and Changing Patterns of Need For Health and Long-Term Care in New Zealand

Figure 13: Prevalence of diabetes in the New Zealand population right, diabetes is a risk factor for later strokes and heart disease. 12% A fact that has only been fully appreciated fairly recently is that many 10% people with long-term conditions suffer from more than one. In a recent 8% Commonwealth Fund international health care survey of adults with complex 6% health care needs, 34% of New Zealand respondents reported two or more 4% conditions (Schoen and Osborn, 2011). The health systems of developed 2% countries are typically not well adapted to meet the needs of people with long-term 0% conditions effectively and at reasonable Ma-ori Pacific Asian Other cost. They tend to be organised to deal best Men Women with acute, life-threatening conditions, based around hospital-focused, doctor- Source: Ministry of Health, 2012b led services. Care tends to be episodic, Figure 14: Inpatient admissions per person in England, according to age and intensity of social care reactive and delivered by individual professionals working in parallel. Patients 1.40 tend to be regarded as passive recipients of care, and their contribution to designing 1.20

r and providing their own care tends to be 1.00 under-valued, along with the role of their informal carers. 0.80 Traditionally, health systems have been organised around individual medical 0.60 specialties and the management of single 0.40 conditions. There is a growing consensus that health care systems need to be Inpatient admissions per yea per admissions Inpatient 0.20 reoriented and rebalanced to respond

0.00 better to the changing pattern of need, so No social Low-intensity Medium-intensity High-intensity High-intensity that they foster professional team-working care social care social care social care social care (home care) (home care) (home care) (home care) and closer relationships between provider 75-79 80-84 85-89 90-94 95+ organisations, support patient self-care, and place greater emphasis on preventing Source: Nuffield Trust long-term conditions developing in the first place. many cancers, dementia and arthritis. cholesterol (in both cases, a higher rate Globally, the prevalence of and share of than in 2006/7). Avoidable hospital admissions morbidity that is attributable to NCDs The diabetes rate has increased The centre of gravity of the New Zealand is rising as communicable (infectious) gradually over the last 15 years, with health system needs to continue to shift diseases decline in importance as causes around 5% of adults now diagnosed with away from acute care. Hospitals are costly, of death and morbidity. this condition, and a further 2% of adults and admission is in itself frequently The 2011/12 New Zealand Health estimated to have undiagnosed diabetes harmful, particularly in the case of older Survey (Ministry of Health, 2012b) (Ministry of Health, 2012b; Coppell et al., people with complex, multiple conditions. provides detailed information about 2013). Diabetes is more prevalent among Over a third of older people admitted to the prevalence of chronic conditions. overweight and obese people and among hospital leave in a worse functional state Arthritis, asthma and chronic pain each Mäori, Pacific and Indian ethnic groups than when they were admitted (Edwards, affect more than one in ten New Zealand (Figure 13). The prevalence of diabetes 2012). adults (15%, 11% and 16% respectively). also increases with deprivation. It is likely It is important to note that simply Five per cent of adults have been that the variation in the prevalence of shifting services from acute hospitals to diagnosed with ischaemic heart disease. diabetes among ethnic groups is linked community settings may not be reliably Sixteen per cent of adults take medication to deprivation and obesity. As well as cost-saving (Sibbald, McDonald and for high blood pressure, and 10% for high generating health problems in its own Roland, 2007). In order for such a policy

Page 40 – Policy Quarterly – Volume 9, Issue 4 – November 2013 to be successful, it is critical to select the coordinated planning at the service to a point) to protect accumulated capital correct services, retain the right level delivery level to promote health and and, in effect, facilitate future bequests by of hospital provision (which may be independence at least long-term cost. some people in long-term care. difficult to estimate), and avoid simply Those with long-term conditions should transferring costs to patients. A number be supported by multidisciplinary teams, Purchasing arrangements of New Zealand studies show that a operating outside hospitals, which DHBs function both as planners and substituted primary care-driven service include not just health workers but also commissioners of services for the can, on occasion, be as effective as but social care providers. population and as owner-operators of cost considerably less than the same New Zealand has an advantage in district hospitals. This arrangement intervention delivered in a hospital setting this regard because its health budget at weakens their incentives in the short to (Wellingham et al., 2003; Barker, Bryant national level covers both acute services medium term to reduce dependence on and Aish, 2006). Less is understood and long-term care. Public funding for hospital care since they would have to about how a health system as a whole aged residential care is allocated to district manage the consequences for jobs and would perform (in terms of demand health boards (DHBs) alongside funding hospital income. It is notable that the for hospital care and in financial terms) for health care and is not ring-fenced. most sustained local efforts to improve if significantly more care was delivered In principle, therefore, it is possible care for people with complex long-term outside a hospital environment. for DHBs to design care packages that conditions have been in places such as Most high-income countries have include both health and support services, south Auckland where the senior clinicians taken some steps in this direction, although experience has shown how hard it is to reduce hospital admissions in practice and hospital care remains an The OECD has suggested that the role of DHBs essential element in these systems. In part as purchasers should be strengthened through this is because any freed hospital capacity has to be taken out of use for savings greater operational separation of their dual to be realised and this can be politically very difficult. A sustained process of functions (OECD, 2009). change is required, with less reliance on hospitals and doctors, more specialist nurses working outside hospitals, more with a view to minimising costly hospital and managers of the local hospital flexible staff working practices, and more admissions. In many countries this would recognise that there is no possibility of joint decision-making by primary and involve complex negotiations across continuing to provide an adequate health secondary (specialist) clinicians. separate commissioning and delivery care system without reducing dependence organisations. On the other hand, there on the hospital and improving care Integration of health and long-term care are coordination issues even in New outside it. The health and long-term care system Zealand, since around half of all long- The OECD has suggested that the needs to be considered as a whole, rather term care (mainly for disability support role of DHBs as purchasers should be than as two parallel, separate systems. services for the under 65s) is managed strengthened through greater operational For example, a recent study in England centrally by the Ministry of Health. separation of their dual functions (OECD, showed (Figure 14) that people in care Residential care for the over 65 is 2009). A split between purchasers and homes made significantly less use of subsidised by DHBs, subject to an asset providers appears to perform well when all forms of hospital care than other test. The rationale for asset-testing there is potential for competition between social care users, including people using is targeted allocation of resources, providers, when providers are not tied intensive home care (Bardsley et al., 2012). particularly as people typically expect to specific purchasers, when uncertainty New Zealand shows a comparable pattern to draw down capital during retirement. and complexity are low, and when few of use. Frail people receiving high levels of Since 2005 the asset test has been economies of scale apply (Figueras, support in their own homes use hospital substantially relaxed, with the threshold Robinson and Jakubowski, 2005). New services more than those in residential for a single person rising from $15,000 Zealand’s small size and geographically- care, although their total costs of care tend to more than $213,000. This relatively dispersed population mean that these to be lower (Grant Thornton, 2010). generous approach has narrowed the conditions will often not be met. The policy implications of this sort of disparity between health services that Furthermore, good services for people research are not straightforward, but it is are ‘free’ at the point of use and means- with long-term conditions require clear that the health and long-term care tested long-term care. This reduces the coordination of care from a range sectors affect one another. This points to incentive for hospital care to be used of different providers and types of the need for these services to be managed inappropriately and inefficiently. It also professionals, rather than supplier as complements and substitutes, with means that tax revenue is being used (up competition for individual services. The

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 41 Fiscal Challenges and Changing Patterns of Need For Health and Long-Term Care in New Zealand case for a simple separation is stronger so far there has been no independent, or not to purchase formal care. Germany for services such as elective surgery, where national evaluation of the programme. and Luxembourg give people entitled to purchasers can choose between several There are currently 20 DHBs long-term care a choice between benefits providers and it is easier to see how operating as purchasers of health services, in kind or a cash payment set at a lower encouraging competition could improve as well as the Accident Compensation level (OECD, 2005). Small numbers of quality and efficiency of care. Corporation and around 30 primary younger disabled people in New Zealand The potential contribution of primary health organisations. There may be scope currently have access to individual care health organisations as purchasers to to rationalise these arrangements, by budgets. improving the allocation of resources may moving to fewer purchasers with clearer These funding models are intended to also need to be considered. Their budgets lines of accountability. As well as reducing increase consumer direction and choice. do not include large parts of primary care administrative costs, this would allow for This can have a number of different expenditure, such as primary medical more systematic planning of services and objectives, including empowerment of pharmaceuticals and diagnostics. This investment, at both national and local care users and a better fit between people’s limits their ability to shape services and level. It would also help to concentrate needs and their care packages. Another means there is a lack of clarity about where management expertise within the system. objective is to stimulate competition responsibility for primary care ultimately The case for fewer purchasers is further amongst providers, based on user choice, resides. General practices continue to strengthened if governments prefer with a view to improving quality and/ operate largely separately from the rest of national consistency in service provision or reducing costs. These arrangements the public system through a combination over local variation. may also raise the visibility of the cost of of patient co-payments and capitated A new requirement for groups of services and increase public understanding of the need for prioritisation. Critics argue that the evidence in ... the evidence in favour of individual health and favour of individual health and long-term care budgets is weak and that they are long-term care budgets is weak and ... likely to likely to increase inequalities in care by increase inequalities in care by favouring better- favouring better-off and more educated users. In the Netherlands there appears to off and more educated users. have been a loss of spending control over personal budgets, with claims increasing tenfold and spending more than fivefold subsidy. This funding model restricts the DHBs to develop regional service plans between 2002 and 2010 (van Ginneken, extent to which preventive and chronic has been introduced to encourage Groenewegen and McKee, 2012). This has care programmes can be integrated into collaboration and service integration, been attributed to raised expectations of mainstream general practice. although this has added to rather than what could be provided and difficulties In 2009 the Ministry of Health invited streamlined planning and accountability setting reliable budgets at an individual expressions of interest for what was arrangements for DHBs. At a sub- level (White, 2011). termed ‘Better, Sooner, More Convenient’ regional level, three DHBs in the lower Studies in some OECD countries have (BSMC) health care, with the aim of North Island (Hutt Valley, Wairarapa and suggested that such arrangements can providing extended primary care closer Capital and Coast) have gone further increase user satisfaction at similar cost to where people live and reducing the and merged their planning and funding to traditional models, provided they are demand for secondary care (Ministry of functions with a view to improving the properly targeted, although there seems Health, 2009). The programme includes financial and clinical sustainability of to have been less impact on the quality initiatives to co-locate a wider range of their operations (CCDHB, 2013). of care (Lundsgaard, 2005). The concept primary and community health services has been the subject of a randomised in the form of integrated family health Patient/user-directed care trial in England in relation to social care centres. Nine initiatives were selected by User-directed arrangements for long- (disability support). This showed some the Ministry of Health and funded as term care are fairly common overseas. The positive results. Those with budgets demonstration programmes (Ministry Netherlands, the United Kingdom and seemed to have slightly better outcomes of Health, 2011). The Health Research the United States all allow care recipients than those without, although relative Council recently awarded a number of to directly employ their personal care cost-effectiveness varied by patient sub- partnership grants to evaluate some of assistants, while a number of Nordic group (Glendinning and Moran, 2008). the initiatives. At this stage, however, it countries operate voucher systems to More recently, evaluations of the use is difficult to gauge whether progress is promote personal choice in the use of of both personalised care planning and being made and in which areas. Although long-term care. In Austria, all support for personal budgets in the United Kingdom there is some positive anecdotal evidence, home-based care is provided in cash, with have been published as part of a series of the recipient being able to decide whether studies looking at health system reform

Page 42 – Policy Quarterly – Volume 9, Issue 4 – November 2013 under the Labour government of 1997– obstructive pulmonary disease, diabetes or inward and outward migration. In 2010 (Mays, 2013). Care planning was heart failure (Steventon et al., 2012). 2005/06, foreign-born doctors and nurses intended to link support and services made up 25% and 29% of the workforce provided by multiple providers to people The health workforce respectively (Zurn and Dumont, 2008). with chronic conditions through a process As noted earlier, productivity gains tend of shared decision-making between the to be relatively low in labour-intensive Prevention patient and a named professional. Take- service industries such as health care. Government programmes for health up was modest and there was no sign Better use of information technology may promotion and disease prevention that the level and nature of the planning provide one way of maximising labour currently represent around 6.4% of health that took place had any impact on health productivity within the health sector. care spending in New Zealand, compared outcomes after six or 12 months of Telehealth and telecare are examples of to an average of less than 3% for OECD follow-up (Bower, 2013). Personal health this, although their impact to date has countries. There are many different kinds budgets were associated with statistically been limited. Another approach may be of preventive measure and they vary in significant improvements in the quality to adjust the skill mix of the workforce to cost-effectiveness. Some programmes – of life and psychological well-being of ensure that professional skills are put to such as vaccination against communicable recipients, although there did not appear best use. As doctors are most costly and diseases – are highly effective (OECD, to be an impact on health status or require the greatest amount of training, 2010) and can even be cost-saving mortality rates over the 12-month follow- allowing other professionals such as (Maciosek et al., 2006). Others, especially up period. The cost of inpatient care was nurses and pharmacists to perform some those requiring behavioural change, can lower for people with personal budgets, of the tasks previously performed by be difficult to implement and costly. Even but this was offset by higher spending on other services, with no significant impact on overall costs. Budgets were Government programmes for health promotion and nevertheless assessed as being cost- effective given assumptions made about disease prevention currently represent around the value of, in particular, quality of life improvements (Jones et al., 2013). 6.4% of health care spending in New Zealand, ‘Telehealth’ involves the remote compared to an average of less than 3% for OECD exchange of information between patient and professional in order to help manage countries. a condition. ‘Telecare’ is the remote monitoring of changes in a person’s physical status using alarms and sensors. Both have been widely promoted as doctors, or creating new roles, could create when preventive measures are effective ways of enhancing self-management efficiencies. The role of physician assistant, in terms of improving health outcomes and improving the quality and cost- for example, has been used in the United (and may therefore be worthwhile), effectiveness of care for people with States since the 1960s. Physician assistants they may not necessarily save money for long-term conditions. These technologies are trained for a considerably shorter time government in the long run. There is no have been slow to move into routine use than doctors and receive lower salaries. guarantee that programmes delivered due to a mix of professional and patient However, in primary care settings it has across broad population groups will be resistance. They seem to be viewed been shown that they have a ‘same task’ less expensive than subsequent targeted ambivalently by patients (Lehoux, Saint- substitution ratio of 0.86 compared with care, and people who live longer as a Arnaud and Richard, 2004; McCreadie the supervising physician, meaning that result may also develop other conditions, and Tinker, 2005). Evidence for their cost- they saw the same types of patients and generating further costs. effectiveness outside rural areas is also less rendered the same care as the physician Another approach to secondary than compelling (Barlow et al., 2007). In 86% of the time (Hooker, 2006). New prevention and cost containment involves the largest and most robust randomised Zealand is currently in the second phase risk-profiling. The basic idea is simple: evaluation undertaken to date, a of a physician assistant demonstration to identify and intervene pre-emptively programme in England has so far shown project focused on primary care and rural with those in the population who are at no significant reduction in hospital costs, hospital settings. greatest risk of developing or exacerbating still less overall net savings. However, there Workforce issues must be considered an existing long-term condition such as does appear to have been a reduction in in the context of an international labour diabetes. While such approaches may seem hospital admissions and mortality rates market in which there is likely to be common sense, only a small minority during a 12-month follow-up period increased demand for health professionals of preventable, unplanned hospital among a group of patients with chronic over the coming decades. New Zealand’s admissions are of people who are at high health workforce has high levels of risk based on their previous behaviour

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 43 Fiscal Challenges and Changing Patterns of Need For Health and Long-Term Care in New Zealand and characteristics. As a result, risk This does not mean that good-quality be achieved through good prioritisation. profiling may not be cost-effective unless care will become unaffordable, since PHARMAC decides which GP-prescribed the intervention triggered is low-cost. ‘productivity growth makes a society medicines, hospital medicines and More work needs to be done to investigate wealthier, not poorer, and able to afford vaccinations are to be subsidised by the effectiveness of risk-profiling followed more of all things’ (Baumol, 2012). government, assessing them against a by different interventions for patients at However, the extent to which spending range of economic and clinical criteria. different levels of risk of admission or continues to rise as a proportion of This approach aims to ensure that readmission. GDP depends on the choices we make New Zealanders get the maximum health As noted above, health care is just as health and long-term care services benefits from a given pharmaceutical one of a number of factors that influence become relatively more expensive. If we budget. PHARMAC estimates that its health status. This means that in some do decide to devote a greater proportion activities saved DHBs more than $5 cases it may be that the most effective of our future income to buying these billion from 2000 to 2013. It is currently interventions to keep the population services, they will form a larger part of in the process of expanding its operations healthy and out of hospital are found the national economy. We will thus need to cover medical devices, which will yield outside the health system. For example, to consider how much of this enlarged further savings to DHBs. New Zealand has relatively poor-quality activity should remain within the public Changes to the coverage of the housing. More efficient heating (in sector, and how far it can or should be public system, including decisions about particular, through better insulation) can funded by government through taxation. prioritisation, may involve difficult trade- offs in terms of fairness and efficiency. For example, co-payments may lower New Zealand achieves good health indicators at a the cost to government of a particular service and, through price signals, reduce level of spending per person that is slightly below overconsumption. However, because individual contributions are not related the OECD average, although there are some areas to income or ability to pay, except perhaps at the margins, they tend to be regressive of concern, including infectious disease rates and and may deter people from accessing ethnic disparities in health. services when they need them. They may also contribute to inefficiency. In New Zealand, co-payments do not apply to reduce cold and damp, improving health Governments make decisions about hospital services (a previous attempt to by reducing infectious and non-infectious the coverage of the public health system introduce them having been strongly disease and related hospitalisations. Two that influence spending growth. Health resisted). This difference may cause some randomised controlled trials in New services in New Zealand (as in many patients to forgo primary care in favour Zealand have shown that retrofitting OECD countries) are mostly provided of accident and emergency services, with insulation and installing non-polluting free at the point of need, although a higher cost to government and no heaters in homes are potentially effective there are co-payments for GP visits better outcomes. Patient co-payments ways of improving the health of occupants, and prescription medicines. The cost of have also been identified as an important thereby reducing the number of GP visits certain services, including optometry and barrier to refocusing the health system and hospitalisations, days off school or most adult dental care, has to be met so that chronic conditions are effectively work, and premature deaths (Howden- privately. The scope of the public system managed in the primary care sector (Mays Chapman et al., 2007; Howden-Chapman is also defined, less directly, through and Blick, 2008). People who do not et al., 2008; Chapman et al., 2009). centrally-imposed budget constraints, access care initially because of cost may which may lead to rationing of services eventually require more costly inventions The scope of the public system through waiting lists, and perhaps to that could otherwise have been avoided. Greater efficiency and better prevention reductions in quality. These parameters Restricted coverage for the public are important, but fiscal pressures will may be adjusted over time. system would lead to an increased reliance remain. As discussed earlier, wages are the Health technology assessment is a on out-of-pocket payments or private main cost input for health and long-term process by which health purchasers decide insurance, with more people choosing to care services, and they tend to rise as the which new health technologies are worth purchase additional health care or faster economy grows. Scope for productivity investing in and is now widely used by access. While this happens now to some gains is limited in service sectors and OECD countries (OECD, 2010). It is most extent, concerns about equity and access typically will not compensate entirely for well developed in the pharmaceutical could be expected to increase if the types these higher wage costs. This means that sector. New Zealand’s Pharmaceutical of services available to people on different the cost of delivering a given amount of Management Agency (PHARMAC) is a incomes, or with different risk profiles, care tends to rise over time. highly successful example of what can started to diverge significantly.

Page 44 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Growth in the private insurance Zealand. Compulsory insurance and care will constitute a significant fiscal and market may generate fiscal pressures of other hypothecated taxes may have political management issue for future its own. Policies which cover co-payments presentational advantages relative to other governments. The demands on the system can increase demand by insulating people forms of taxation, but they also conflate are changing, with chronic and long-term from the cost of services, and have been decisions about tax and spending. A conditions increasingly important as a found to increase public expenditure hypothecated levy is still effectively a tax, source of morbidity. This has important in the United States, France and Spain funding current or future expenditure, implications for the organisation and (OECD, 2004; WHO, 2004). Private and may be a less efficient and more delivery of care. The system needs to insurance may also create new incentives complicated way of raising revenue than continue to be rebalanced away from acute for providers to use the public system other forms of taxation. care, with a greater emphasis on reducing to stimulate demand for private services hospital admissions and managing (Thomson et al., 2009). This has led to Concluding remarks conditions in primary care. Even if this is a regulatory response in a number of Health and long-term care spending achieved, there will still be difficult choices countries. Canada, Sweden, Luxembourg, is projected to grow considerably over about how much of New Zealand’s future Greece and Italy all prohibit doctors from the next 50 years, driven upwards by income is devoted to health and long-term practising in both the public and private a combination of factors. All OECD care, what proportion of total spending is sectors. countries are facing similar pressures, so financed from taxation, and how to adjust Other countries have tried to manage this is not an indication of system failure in the contours of the public system in financial pressures by introducing com- New Zealand. New Zealand achieves good response to fiscal pressure. Action will be pulsory insurance schemes, particularly health indicators at a level of spending per needed on a range of fronts to ensure that in relation to long-term care. These person that is slightly below the OECD New Zealanders get the greatest health generally involve publicly-managed average, although there are some areas gains from every dollar spent and that social insurance arrangements rather of concern, including infectious disease health spending growth is sustainable for than compulsory private insurance. rates and ethnic disparities in health. future generations. The accident compensation scheme Nevertheless, it seems likely that rising provides an analogous model in New expenditure on health and long-term

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Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 45 Fiscal Challenges and Changing Patterns of Need For Health and Long-Term Care in New Zealand

Glendinning, C. and N. Moran (2009) Reformed Long-Term Care: recent OECD (2005) Long-Term Care for Older People, Paris: OECD lessons from other countries, York: Social Policy Research Unit, OECD (2006) Projecting OECD Health and Long-Term Care Expenditures: University of York what are the main drivers?, Economics Department working paper Graham, P., T. Blakely, P. Davis, A. Sporle and N. Pearce (2004) 477, Paris: OECD ‘Compression, expansion, or dynamic equilibrium? The evolution of OECD (2009) Economic Surveys: New Zealand, Paris: OECD health expectancy in New Zealand’, Journal of Epidemiology and OECD (2010) Value for Money in Health Spending, Paris: OECD Community Health, 58 (8), pp.659-66 OECD (2011) Health at a Glance, Paris: OECD Grant Thornton (2010) Aged Residential Care Service Review, Grant OECD (2013) OECD Health Data 2013, Paris: OECD Thornton New Zealand Riley, G.F. and J.D Lubitz (2010) ‘Long-term trends in Medicare Hooker, R.S. (2006) ‘Physician assistants and nurse practitioners: the payments in the last year of life’, Health Services Research, 45, United States experience’, Medical Journal of Australia, 185 (1), pp.565-76, doi: 10.1111/j.1475-6773.2010.01082.x pp.4-7 Schoen, C. and R. Osborn (2011) The Commonwealth Fund 2011 Howden-Chapman, P., N. Pierse, S. Nicholls, J. Gillespie-Bennett, H. International Health Policy Survey of Sicker Adults in Eleven Viggers, M. Cunningham, S. Free, B. Lloyd, K. Wickens, D. Shields, Countries: chart pack, New York: Commonwealth Fund M. Baker, C. Cunningham and J. Crane (2008) ‘Effects of improved Sibbald, B., R. McDonald and M. Roland (2007) ‘Shifting care from home heating on asthma in community dwelling children: randomised hospitals to the community: a review of the evidence on quality controlled trial’, BMJ, 337, pp.852-5, doi: 10.1136/bmj.a1411 and efficiency’, Journal of Health Services Research and Policy, 12, Howden-Chapman, P., A. Matheson, J. Crane, H. Viggers, M. pp.110-7 Cunningham, T. Blakely, D. O’Dea, M. Kennedy, M. Baker and Smith, S., J.P. Newhouse and M.S. Freeland (2009) ‘Income, insurance G. Davie (2007) ‘Effect of insulating existing houses on health and technology: why does health spending outpace economic inequality: cluster randomised study in the community’, BMJ, 334, growth?’, Health Affairs, 28 (5), pp.1276-84 p.460, doi: 10.1136/bmj.39070.573032.80 Statistics New Zealand (2013a) New Zealand Period Life Tables 2010– Jones, K., J. Forder, J. Caiels, E. Welch, C. Glendinning and, 12, Wellington: Statistics New Zealand K. Windle (2013) ‘Personalisation in the health care system: do Statistics New Zealand (2013b) Education and Health Industry personal health budgets impact on outcomes and cost?’, Journal of Productivity 1996–2011, Wellington: Statistics New Zealand Health Services Research and Policy, 18 (supplement 2), forthcoming Statistics New Zealand (2013c) Productivity Statistics: 1978–2012, Lehoux, P., J. Saint-Arnaud and L. Richard (2004) ‘The use of technology Wellington: Statistics New Zealand at home: what patient manuals say and sell vs. what patients face Steventon, A., M. Bardsley, J. Billings, J. Dixon, H. Doll, S. Hirani, and fear’, Sociology of Health and Illness, 26, pp.617-44 M. Cartwright, L. Rixon, M. Knapp, C. Henderson, A. Rogers, R. Lundsgaard, J. (2005) Consumer Direction and Choice in Long-Term Care Fitzpatrick, J. Hendy and S. Newman (2012) ‘Effect of telehealth on for Older Persons, Including Payments for Informal Care: how can it use of secondary care and mortality: findings from the Whole System help improve care outcomes, employment and fiscal sustainability?, Demonstrator cluster randomised trial’, BMJ, 344, doi: 10.1136/bmj. Paris: OECD e3874 McCreadie C. and A. Tinker (2005) ‘The acceptability of assistance Thomson, S., T. Foubister, J. Figueras, J. Kutzin, G. Permanand and technology to older people’, Ageing and Society, 25, pp.91–110 L. Bryndova (2009) Policy Summary 1: addressing financial Maciosek, M.V., A.B. Coffield, N.M. Edwards, T.J. Flottemesch, M.J. sustainability in health systems, Copenhagen: World Health Goodman and L.I. Solberg (2006) ‘Priorities among effective clinical Organization Regional Office for Europe preventive services: results of a systematic review and analysis’, Tobias, M. and L. Yeh (2009) ‘How much does health care contribute to American Journal of Preventive Medicine, 21 (1), pp.52-61 health gain and to health inequality? Trends in amenable Mortality in Mays, N. (2013) ‘Evaluating the Labour government’s English NHS New Zealand 1981-2004’, Australian and New Zealand Journal of health system reforms: the 2008 Darzi reforms’, Journal of Health Public Health, 33 (1), pp.70-8 Services Research and Policy, 18 (supplement 2), forthcoming Treasury (2013) Health Projections and Policy Options, Wellington: Mays, N. and G. Blick (2008) ‘How can primary health care contribute Treasury better to health system sustainability? A Treasury perspective’, van Ginneken, E., P. Groenewegen and M. McKee (2012) ‘Personal discussion document, Wellington: Treasury healthcare budgets: what can England learn from the Netherlands?’, http://www.treasury.govt.nz/publications/informationreleases/health/ BMJ, 344: e1383 doi: 10.1136/bmj.e1383 primaryhealthcare/ddd-primhealthcare-may08.pdf Wellingham, J., J. Tracey, H. Rea and B. Gribben (2003) ‘The Mendez, A.P., H. Tabish and D. de Ferranti (2012) ‘The cost disease and development and implementation of the Chronic Care Management global health’, in W.J. Baumol, The Cost Disease: why computers get Programme in Counties Manukau’, New Zealand Medical Journal, cheaper and health care doesn’t, New Haven: Yale University Press 116 (1169) Ministry of Health (2009) ‘Request for expression of interest (EOI) for White, C. (2011) The Personal Touch: the Dutch experience of personal the delivery of Better, Sooner, More Convenient Primary Health Care’, health budgets, London: Health Foundation Wellington: Ministry of Health WHO (2004) What Are the Equity, Efficiency, Cost-containment and Ministry of Health (2011) Better, Sooner, More Convenient Health Care Choice Implications of Private Health-Care Funding in Western in the Community, Wellington: Ministry of Health Europe?, Copenhagen: World Health Organization Regional Office for Ministry of Health (2012a) Annual Report for the Year ended 30 June Europe 2012, Wellington: Ministry of Health Zurn, P. and J.C. Dumont (2008) Health Workforce and International Ministry of Health (2012b) The Health of New Zealand Adults 2011/12: Migration: Can New Zealand compete?, OECD health working paper key findings of the New Zealand Health Survey, Wellington: Ministry 33, Paris: OECD of Health OECD (2004) Private Health Insurance in OECD Countries, Paris: OECD

Page 46 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Paul Sherrell

Window of Opportunity to Deliver Better Justice The criminal justice system is a pipeline. Sector Outcomes Individuals enter into the system once arrested and prosecuted, managed by the police. From there they move into over the Long Term the court system, administered by the Ministry of Justice, and potentially on to the Department of Corrections which The justice sector contributes to society by protecting civil manages offenders with prison and community sentences. Decisions by one and property rights, as well as providing a fair and effective agency, for example to prosecute more people, have significant operational and way to resolve disputes. In the criminal justice area, the sector resource impacts on other agencies in the aims to: system. Contrary to what many people might • maintain law and order, focusing on minimising harm and think, New Zealand’s recorded crime rate has been falling since the early victimisation; 1990s (New Zealand Police, 2011/12). This • bring perpetrators to justice with appropriate punishment; crime rate reduction is similar to trends around the world. We are not sure of the • provide rehabilitation for offenders to reduce reoffending. exact reasons for this fall in the crime The question is how to deliver these aims in a way which rate, although a greater focus on crime prevention may have helped. Another maximises the benefits to society and efficiency of the sector. factor that appears to be important is the changing age profile of the population. This may have greater impacts into the Paul Sherrell is a Senior Analyst at the New Zealand Treasury. The views, opinions, findings and conclusions or recommendations expressed in this article are strictly those of the author and do not future as the proportion of young men in necessarily reflect the views of any organisation, including the New Zealand Treasury. the population decreases.

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 47 Window of Opportunity to Deliver Better Justice Sector Outcomes over the Long Term

Figure 1: Justice sector operating costs and value of physical assets (measured by the last decade has been in response to the property, plant and equipment (PPE)) since 2001/02 growth in numbers entering the criminal

4,500 justice pipeline, as noted above (for 4,000 example, four new prisons have been built 3,500 since 2005). 3,000 The rise in spending over the past 2,500 decade was not due to an increase in 2,000

$(millions) recorded crime. According to the New 1,500 Zealand crime statistics for 2011/12, crime 1,000 rates actually fell 9.6% between 2001/02 500 and 2011/12. Figure 2 shows the reduction 0 in crime rate since 1995/6 (New Zealand 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/122012/13* Police, 2011/12). Total operating baselines Value of PPE In contrast, more people flowed *These costs are estimated based on the 2012/13 supplementary estimates through the justice sector pipeline. The Figure 2: Recorded crime rate per 10,000 people from 1995/6 to 2011/12 rise in costs appears to be the result of the policy and operational choices made 1,400.00 in response to crime, including:

1,200.00 • the introduction of longer prison sentences with higher hurdles to 1,000.00 achieve parole (changes to the 800.00 Parole Act 2002 have increased the proportion of sentences completed 600.00 from around 66% to 72.5%); 400.00 • increases in the number of police Crime rate per 10,000 people 200.00 officers, with downstream impacts such as higher numbers of criminal 0.00 court cases; • high fixed costs associated with an 1995-961996-971997-981998-99 2000-012001-022001-022002-032003-042004-052005-062006-072007-082008-092009-102010-112011-12 1999-2000 asset-intensive delivery model.

This crime rate reduction has only considerations need to include investing Numbers entering the criminal justice recently been translated into a reduction in interventions before people come into pipeline are now falling in numbers entering the criminal justice contact with the criminal justice sector. For the first time in a decade, the numbers pipeline and forecast prisoner numbers. For example, interventions delivered in entering the criminal justice pipeline fell But, as a result, the outlook for the justice health, housing, education and welfare slightly in 2010/11, and they are forecast to sector has dramatically improved in the could have a significant effect on the fall by 16.7% to 2022. Prisoner numbers past three years. justice sector’s goals. are also expected to fall, albeit less The Treasury’s 2009 Statement on dramatically, to around 8,100 prisoners (a the Long-Term Fiscal Position portrayed Spending on the justice sector has doubled 6.7% reduction) to 2022. Figure 3 shows a justice sector that, despite stable rates in the last ten years the turnaround in prisoner number of crime, was experiencing rapid cost Government spending on the justice sector forecasts between 2009 and 2012. escalation.1 The statement argued that (criminal justice makes up around 80% of The reduction in numbers entering the fiscal and social costs of increased total sector expenditure) rose steeply over the pipeline and the flattening of prisoner imprisonment were not sustainable the last decade, from $1.8 billion in 2001/02 numbers is a major shift from previous or acceptable. In contrast, this article to $3.9 billion in 2012/13 (based on the forecasts. presents a very different story. The 2012/13 supplementary estimates). This is The reason for the reduction in justice sector now has a window of a 66% increase when price rises are taken numbers entering the criminal justice opportunity to deliver better outcomes into account (see Figure 1) and represents pipeline is not entirely clear. However, for New Zealanders and to become over 5% of core Crown spending and about new crime prevention approaches by the financially sustainable. The key issue 1.8% of GDP. The value of the sector’s police and choices not to prosecute for facing governments and the justice physical assets (as measured by property, some types of low-level offending appear sector is how best to use the falling crime plant and equipment) has increased by to be having a big impact. Prisoner rate and numbers entering the justice 280%, from $1.3 billion to $3.5, billion numbers are forecast to ease by a smaller sector pipeline to minimise harm and between 2001/2 and 2012/13. Some of the amount than the fall in prosecutions. reduce the real costs of the sector. These increased expenditure on property over This is because many of the offences

Page 48 – Policy Quarterly – Volume 9, Issue 4 – November 2013 diverted from court are at the lower end Figure 3: The 2009 and 2012 justice sector prisoner number forecasts of the spectrum and therefore unlikely to attract a prison sentence. A key question 10000 is whether the changes seen over the past 8000 two years will be sustained or whether the previous trend of rising numbers 6000 entering the criminal justice system and opulation increasing prisoner numbers will return. P 4000 Despite the overall reduction in crime, 2000 there has been an increase in certain types of crime. For example, illicit drug 0 offences have increased by 5.1% in the last year. This may represent a change in focus Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-22 Prison Population 2009 Forecast 2012 Forecast and more effective police operations. However, to sustain the overall reduction Figure 4: The imprisonment rate per 10,000 people by age and ethnic group in crime the sector will need to remain vigilant and adapt its response to match 300 the changing composition of crime. 250 Who are the people in the criminal justice system? 200 Certain groups of New Zealanders are over-represented in the criminal justice 150 system. Figure 4 shows the imprisonment rate by age for Mäori and non-Mäori. 100 In 2011, 39% of the prison population was under 30 years of age (Department 50 of Corrections, 2011). Mäori are over- Individuals imprisoned per 10,000 population represented both as victims and as 0 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 perpetrators of crime. Over half the Age prison population identify themselves as Ma-ori Non-Ma-ori Total Mäori, compared to 14.6% in the general Source: Ministry of Justice data population (Statistics New Zealand, Figure 5: Cost projections for law and order operating expenditure to 2059/60 2006). 1.800 The prison population also has significantly higher rates of mental 1.700 illness and substance abuse than the 1.600 general population. When surveyed in 1.500

1999, nearly 60% of inmates had ‘at least 1.400 one personality disorder’, and 90% of 1.300 those with a disorder were also suffering % of Nominal GDP 1.200 from substance abuse (Department of Corrections, 2007). 1.100 1.000 4 6 0 4 4 8 2 4 6 8 0 2 0 3/1 5/1 9/2 3/2 3/3 7/3 1/4 3/4 5/4 7/4 9/5 1/5 9/6 1 1 17/18 1 21/22 2 25/26 Future population changes may help reduce 27/28 29/30 31/32 3 35/36 3 39/40 4 4 4 4 4 5 53/54 55/56 57/58 5 the rates of crime Costs based on constant age profile of offenders Unlike spending on health and retirement Costs based on working age population with population ageing not considered income, the demand for spending on criminal justice services is unlikely to were handed to young men aged 17–30 (for justice sector costs are strongly dependent increase as the population ages. Indeed, men aged 17–20 it was 12.7% of sentences) on policy and operational choices, and the crime rate may decrease further as (Statistics New Zealand, 2012). The smaller less dependent on the levels of crime. the population ages, which should help proportion of the population in younger However, if the assumed reduction in reduce numbers entering the criminal age groups over the next 40 years could the crime rate comes to pass, this could justice system. Young men are the largest see a further reduction in crime rates. reduce justice sector costs – relative to offender group. In 2011, 43.6% of all We are uncertain if this fall in crime the situation where the population does sentences (custodial and non-custodial) will reduce justice costs. As noted above, not age – by a maximum total of $80

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 49 Window of Opportunity to Deliver Better Justice Sector Outcomes over the Long Term billion between 2011/12 and 2059/60 (the successful in further reducing crime and income, housing, education and ‘demographic dividend’). numbers entering the criminal justice health) can help support people Figure 5 shows the expenditure on system, it might be possible to reprioritise outside a life of crime. law and order projected to 2060 as a spending from law and order to other • Delivering better public services proportion of GDP under two scenarios: priority areas, or to reduce taxes or debt. through modernisation and • a constant age profile of offenders as reinvestment the population ages (blue line); Making the most of the current The policy and operational settings • costs increase based on spending window of opportunity matter hugely in terms of achieving assumptions aligned to the working- The current and expected reduction improved outcomes, including age population (the potential reduced in crime and fall in numbers entering reducing harm and numbers in the costs from population ageing are not the criminal justice pipeline creates criminal justice system. Reduced included). an opportunity for the justice sector. harm and numbers of victims would However, the size of this demographic Resources previously needed to keep up be a good result in itself, but the sector would benefit further from translating this into savings – for example, by closing buildings that Effective policy and operational settings should are under-utilised. The savings and resources freed up can be redeployed help to reduce the harm caused by illegal into areas that will deliver even better activities. They will also reduce the number of results. If the savings are cashable, they could also be used in other areas people in each part of the criminal justice pipeline. of public spending, or to reduce taxes or government debt.

The virtuous cycle: policy and operational dividend is uncertain. Various factors with increasing demand can be used to settings could reduce it: improve services and increase efficiency As discussed above, the costs of the • the age profile of offenders may rise instead. criminal justice sector are strongly in line with the general population: The sector can use this opportunity influenced by policy and operational this would result in no reduction in to deliver a ‘virtuous cycle’ (depicted in settings. The government and justice crime due to the changing average Figure 6). The virtuous cycle is the result sector agencies have choices about how age of the population; of two elements: these settings are calibrated in order to • further rural–urban migration may • Policy and operational settings that minimise harm to New Zealanders and increase crime because of the greater reduce crime and reoffending maximise the benefits of the sector. Some concentration of the population in The sector is thinking about other of these choices include: urban centres; ways to measure performance other • social sector interventions: how the • income inequality and social than the number of people flowing social sector can deliver interventions deprivation may increase, which through the system. This change of that reduce harm and the demand could lead to greater crime; focus may have a significant effect on for criminal justice services; • societal preferences may change: as the policy and operational settings • dealing with at-risk groups: how the population ages, society may in the sector, as well as spending the sector works with victims to place more value on maintaining patterns and interventions delivered. reduce their vulnerability to further public safety and therefore seek to For example, if the sector focused on offending, and how it manages those increase the amount of spending on minimising harm and victimisation at risk of becoming offenders; law and order; prior to and along the criminal • apprehensions: when and how police • wage cost pressures and expensive justice pipeline, it may choose apprehend offenders; service delivery models based on to spend its resources differently • prosecutions: how the police use fixed assets may reduce the impact and make changes to prosecution, prosecutions effectively to reduce of any cost decreases resulting from sentencing and parole policies. harm and victimisation as well as lower crime rates. Looking at how the sector can delivering the best outcomes for the help support other agencies deliver victim and offender; While the factors mentioned above interventions before contact with the • sentencing: the court sanctions given may reduce the potential demographic criminal justice system is likely to to offenders, and the balance between dividend, the justice sector will not face help them deliver their results. For penalties and other expectations or pressures for increased spending due example, this may include considering requirements such as participation to an ageing population. If the sector is how the social sector (e.g. work and

Page 50 – Policy Quarterly – Volume 9, Issue 4 – November 2013 in restorative justice and other Figure 6: The virtuous cycle rehabilitation programmes; • rehabilitation: how much the sector Social Sector At Risk should invest in rehabilitation interventions Groups and which programmes are most effective; • parole: how to ensure that prisoners Parole Policy and Apprehensions are prepared for parole hearings and Operational Settings set supported upon release to live law- to maximise abiding lives. benefits There is also a need to consider Rehabilitation Prosecutions interventions before people come into contact with the criminal justice system. Sentencing How the virtuous cycle works: benefits from reduced numbers in the system Effective policy and operational settings Harm and numbers should help to reduce the harm caused in the Justice Sector by illegal activities. They will also reduce Pipeline the number of people in each part of the criminal justice pipeline. Capturing the As discussed, however, falling numbers Reinvestment of resource benefits entering the justice sector pipeline will freed up resources Delivering better from falling numbers not automatically reduce costs. New to deliver justice public services through by reducing the sector goals modernisation and sector’s footprint Zealand and the sector would benefit and modernising from being able to translate reductions in reinvestment service delivery court appearances and prisoner numbers into freed-up resources (e.g. staff who can be redirected to other activities Costs across the sector) and cashable savings (e.g. by closing under-utilised buildings). The government and justice sector have choices about how to use the freed-up Money directed to higher value areas across resources. They can be reinvested into the public sector further improving outcomes within the justice sector. Alternatively, any cash savings could be taken out of the sector Collaborating even more to achieve results There is a strong appetite to achieve and used in other areas of public spending The sector has come a long way over further collaboration, including on the (which may reduce crime indirectly) or the past three years in terms of working front line: for example, justice sector to reduce taxes or public debt. together more closely to deliver better agencies will co-locate in a justice services to the public. Staff in the justice and emergency services precinct in Potential actions to help deliver on the sector agencies work well together on Christchurch. There are additional opportunities the front line, sharing information and opportunities to embed a more The virtuous cycle will not happen coordinating activities to improve local collaborative sector approach, including automatically. The decisions in each part results. At the senior level, the chief establishing shared goals for capital of the cycle involve a number of different executives of the three large sector agencies investment and joint capital planning, players, some of whom are outside the (the New Zealand Police, Ministry of more collaboration amongst the sector’s sector (e.g. charity groups and other social Justice and Department of Corrections) policy groups, and prioritisation of sector departments) or independent (e.g. have established a Justice Sector Leadership funding across the sector to where it judges), and may involve competing Board that is responsible for setting overall achieves the best return. priorities and interests. Consensus across strategy and goals for the sector and the justice sector, the social sector and the monitoring progress towards these. This Focusing on the most effective interventions wider public about how best to deliver the collaboration improves decision-making to reduce crime, based on evidence sector’s aims of a safe and just society is and can facilitate better prioritisation of By better exploiting information the required. To help produce the virtuous resources across the sector. sector already has about who commits cycle, the sector could benefit from: particular types of crimes, when and where

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 51 Window of Opportunity to Deliver Better Justice Sector Outcomes over the Long Term it is already achieving better outcomes improve outcomes. The sector may Conclusion for society. However, there is potential also benefit from revisiting policy The justice sector’s long-term outlook is to improve outcomes even further by and operational settings to ensure promising. The number of people flowing adopting an approach which ensures that that they are geared towards reducing through the criminal justice pipeline is the benefits realised from falling volumes harm and improving outcomes. falling. This is likely to continue with an are re-invested across the criminal justice This may include the prosecution, aging population, which may deliver a pipeline to areas that provide the greatest sentencing and parole policies, as demographic dividend. benefits. This may include measuring well as what should be considered The sector has a window of ‘harm’, and seeking interventions that a crime and put through a civil or opportunity to deliver a virtuous cycle minimise harm through: criminal procedure. of improved performance and financial • Knowing which crimes to target sustainability. To help with this, it is to reduce social harm, and when Telling a clear and compelling story on starting to consider different measures of and how to intervene to deliver justice sector performance, focusing more performance: for example, focusing on these reductions. This will help on what is being achieved and less on how harm minimisation instead of numbers prioritisation of resources across the services are provided in the pipeline, and other interventions sector. When deciding on the crimes Public perception of the quality of justice within and outside the criminal justice to target, the reduction in social services is often linked to having a visible pipeline to achieve better results. The harm should be weighed up against presence in the community. This often sector architecture is in place to deliver the resources required to deliver it: means service performance gets measured results in a coordinated way across the for example, providing more support by inputs (for example, the number of justice and social sectors. for people who are at the greatest risk courthouses, police stations and officers). However, delivering the virtuous of becoming offenders, or investing What really matters, however, is the cycle will not happen automatically: the more in rehabilitation services for quality of service the public experiences: sector will need to modernise service those who have already committed for example, how quickly police respond, delivery models and free up under-utilised an offence which may give a better how safe we are, and how easily we can resources for redeployment in priority return. access justice services. This matters more areas. To help deliver its goals, the sector • Understanding how the organisations than the number of buildings or people may benefit from collaborating even more outside the justice sector can help. used to provide the service. on the front line and towards shared Agencies outside the core criminal Measuring what is achieved will sector objectives; focusing resources justice sector (including charities, remove a critical handbrake on service on the most effective interventions to iwi and other public sector agencies) improvements and will mean the sector reduce harm and crime, in the short can help the sector deliver its results. can redesign operating models to provide and long term; and telling a compelling The justice sector is already working better services to New Zealanders. performance story, focusing more on closely with these organisations, They will be able to take advantage of what the sector is achieving, to help the but there is potential to build on productivity gains from technological sector modernise service delivery. this, and to use outcomes-based advances and better operating 1 For a discussion of the issues facing the justice sector then approaches to contracting. practices, such as police using mobile see Sonerson and O’Connell (2011). • Choosing the policy and operational communications technology. settings that may reduce harm and

References Department of Corrections (2007) National Study of Psychiatric Morbidity Sonerson, A. and P. O’Connell (2011) Setting the Scene: fiscal and in New Zealand Prisons, www.corrections.govt.nz/resources/national- public sector management perspective on the justice sector in New study-psychiatric-morbidity-in-nz-prisons.html Zealand, Wellington: Institute of Policy Studies Department of Corrections (2011) Offender Volumes Report 2011, http:// Statistics New Zealand (2006) QuickStats about Culture and Identity, www.corrections.govt.nz/resources/offender-volumes-report/offender_ www.stats.govt.nz/Census/2006CensusHomePage/QuickStats/ volumes_report_2011.html quickstats-about-a-subject/culture-and-identity/ethnic-groups-in-new- Ministry of Justice (2012) Justice Sector Forecasts 2012–2020, http:// zealand.aspx justice.govt.nz/publications/global-publications/j/justice-sector-forecast- Statistics New Zealand (2012) Criminal Conviction and Sentencing 2012-2022/ Statistics: 2012 calendar year – tables, www.stats.govt.nz/tools_and_ New Zealand Police (2012) New Zealand Crime Statistics 2011/12, services/tools/TableBuilder/criminal-conviction.aspx www.police.govt.nz/service/statistics

Page 52 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Susie Krieble and Finn O’Dwyer-Cunliffe

Engaging Youth on New Zealand’s Long-Term on how the Treasury can further its commitment to engaging young people in a Fiscal Position conversation surrounding the long-term health and It would be fair to assume that the majority of the country’s viability of the New Zealand young people have not read the Treasury’s most recent economy. statement on New Zealand’s long-term fiscal position. While more needs to be done to bring However, for the 27 young people who participated in the the country’s most apathetic voting bloc to the table, together the LongTermNZ 2012 LongTermNZ workshop the release of the document initiative – made possible by the 1 was a matter of eager anticipation. This article is written by McGuinness Institute, the Treasury and Victoria University of Wellington – two of those who took part in the workshop. It explores the and the Treasury’s recently published statement have produced the biggest step group’s response to the Treasury’s 2013 Statement on the forward to date. Long-Term Fiscal Position, and the participants’ thoughts The LongTermNZ workshop The December 2012 LongTermNZ workshop, hosted by the McGuinness Susie Krieble and Finn O’Dwyer-Cunliffe were participants in the LongTermNZ workshop. Susie is Institute with support from the Treasury a student at the University of Otago, and is currently completing her degree, majoring in economics and finance, on exchange at Université Jean Moulin in Lyon 3, in France. Finn graduated from the and Victoria University, saw 27 politics University of Otago in 2011 with a BA (Hons) majoring in politics and economics. He is currently and economics students take on the task undertaking a Masters in Politics at Victoria University of Wellington. of producing a ‘youth statement on New

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 53 Engaging Youth on New Zealand’s Long-Term Fiscal Position

Zealand’s long-term fiscal position’. The The group’s suggestions for improving shared the document with, and what process involved the group – referred to youth engagement focused on high reaction it had received from their peers. here as ‘the Long-termers’ – attending the schools, and included the introduction of Not surprisingly, the vast majority of Treasury/Victoria University Affording Treasury staff dedicated to youth affairs the participants confirmed that they had Our Future conference and meeting with and a ‘beat the bank’ strategy involving read the statement. While there was a a number of key players in public policy the creation of a ‘fiscal policy challenge’ range of reactions to it, the overwhelming before preparing the document over two to rival the Reserve Bank’s monetary consensus was a stamp of approval for long, hectic, thoroughly enjoyable but policy challenge. This last suggestion in the crafting of the document. The Long- painstaking and sleep-deprived days. The particular seemed to pique the interest of termers almost universally noted the aim of the 2012 Youth Statement on New the organisation’s movers and shakers. improved layout, design, formatting and Zealand’s Long-Term Fiscal Position was From the Long-termers’ perspective, imagery, and there was a sense that the to communicate the key issues discussed the Treasury’s 2013 Affording Our Future: clear and concise use of language made at the conference and workshop to Statement on New Zealand’s Long-Term it a more engaging read than earlier other young people, especially those not Fiscal Position (published on 11 July) is an versions. Many remarked on the value of previously engaged in this discussion. enormous improvement on past efforts. the ‘Quick Guide’ – a ten-page summary Presenting the document to the minister At first glance the statement appears which briefly but distinctly sets out the challenges faced and options to address them. One Long-termer summarised the While the Long-termers’ reactions to the improvements by stating that the 2013 statement was ‘100 times easier to read document were overwhelmingly positive, than the last two’. a glaring majority reported that they had There was also a positive response to the extent to which the Treasury had not shared the statement with people incorporated the points raised at the December 2012 Affording Our Future outside the group. conference. Long-termers were asked to identify issues that had been missed, and while there was very little criticism, of finance during the final stages of the bolder, brighter and more appealing a concern emerged regarding the lack of workshop was a valuable exercise for the in its design than its predecessors, and coverage on environmental issues. One Long-termers, particularly as it provided throughout the 71-page document there respondent argued that it ‘treaded the an opportunity to put forward opinions is an obvious effort to provide a greater government’s line of not wanting to do from the perspective of their generation, level of accessibility. As is the case with anything’ on climate change. the generation with the greatest stake in any publication looking to broaden its While the Long-termers’ reactions these decisions. appeal, the authors of Affording Our to the document were overwhelmingly In April 2013 the group was invited to Future have aimed to moderate the depth positive, a glaring majority reported that give an additional presentation to a wider and sheer volume of the content without they had not shared the statement with assembly of Treasury officials, focusing on significantly compromising the level of people outside the group. Furthermore, youth engagement and communication. information and analysis. over 50% of those who hadn’t shared it said This enabled them to reunite and they did not plan to do so. The common collaborate further on ideas obtained The survey: a youth reaction to the theme was an assumption that those who from the conference. The aim was to statement did not have a core interest in fiscal policy show how, with the right approach, this To test whether the Treasury had realised would find the document uninteresting information could in fact resonate with its goal of increasing the appeal and and difficult to read. The Long-termers youth from all over New Zealand. accessibility of the statement, Long-termer felt that ‘the average bloke’ wouldn’t The presentation certainly resonated Susie Krieble put together a four-question have too much time for the material, with the Treasury people. For the Long- mini-survey seeking feedback from the and cited the length of the document as termers, it was a unique opportunity to other participants.2 Two key questions a problem for those who did not ‘have a express their perspectives and concerns were asked: 1) had they actually read the prior interest in the subject’. The results to the leaders of New Zealand’s pre- statement, and, if so, what were their initial conveyed the inescapable feeling within eminent source of economic analysis and reactions to it, and 2) had they shared the the group that the average university- advice. There was plenty of interaction document or discussed its implications aged student didn’t have much time for with the Treasury crowd, and it was with anyone outside the workshop group? ‘fiscal issues’, a sentiment that certainly particularly encouraging to see the The Long-termers were also asked to reflected the tenor of discussion during Treasury’s chief economist, Dr Girol comment on their motivations for reading the LongTermNZ workshop. However, Karacaoglu, enthusiastically taking notes. or avoiding the statement, who they had it is possible that the Long-termers have

Page 54 – Policy Quarterly – Volume 9, Issue 4 – November 2013 underestimated their peers, as the survey efforts to engage young New Zealanders. cut expenditure and increase revenue also showed that those who did share the The dominant sentiment was that, despite when tackling the country’s long-term material with friends and family received the considerable value of the conference fiscal imbalances. While the Treasury’s largely encouraging feedback. One Long- and workshop, much more needed to be goal of a 20% debt/GDP ratio by 2020 is termer reported satisfaction that a friend done to reach youth beyond those who echoed in the government’s strategy for who did not study politics or economics were fortunate enough to take part in fiscal consolidation (Treasury, 2013, p.5), had found the statement particularly these events. As a group the Long-termers the statement was less about praising or interesting. believe that the Treasury should start criticising policy pursuits than it was a young by targeting high school students means to start a conversation. The survey: New Zealand’s economic through outreach programmes and essay As a conversation starter, it certainly prospects and initiatives for youth competitions. Many expressed the hope succeeds. While natural economic engagement that Treasury would put more resources fluctuations mean the fiscal projection In the second part of the survey the into youth-targeted marketing, including goalposts are constantly being shifted, the participants were asked to answer, on a an improved social media strategy. Overall true value in the 2013 statement lies in its more personal level, exactly what effect it was felt that the statement contained articulation of the worrying trends that the workshop process and the Treasury’s ‘a lot of technical terms … [which] could lead the New Zealand economy statement had had on them and how it could be a barrier to understanding’, past the point of no return. The issue of had influenced their perspective on New and a common response was that intergenerational inequity, a recurring Zealand’s prospects in the long term. ‘something different’ was needed for theme at the Affording Our Future Given that, like most people, the Long- termers had previously been largely unaware of the fiscal challenges that One Long-termer cited ‘a massive student need addressing, a gauge of the change in attitudes brought about by the process was loan which means home ownership is out particularly useful. In addition, they gave their frank opinions on how the Treasury of the question for the next decade’, and could further improve youth engagement understandably asked, ‘If I was to have when preparing for future statements, and how long-term thinking might become a children where would they live?’ natural part of everyday conversation. While the experience may have led to ‘some awkward conversations about superannuation at Christmas dinner’, the youth engagement. Suggestions included conference, became the prime concern Long-termers applauded the process as more interaction with the Ministry of of the Long-termers. Each additional providing special insight and increased Youth Development, an online ‘Stabilise chart, graph, diagram or statistic used to understanding of the situation, and the Debt’ game similar to the one explain the imbalance simply reinforced expressed their passion for tackling the developed by a non-profit organisation the view within the group that urgent country’s fiscal difficulties. While most in the United States, publishing articles and significant action is needed. The had at least a solid grounding in fiscal in student magazines, creating quizzes or Long-termers learnt that spending on policy and a reasonably strong knowledge polls with spot prizes, setting up stalls on superannuation will significantly increase of the New Zealand economy, it was campuses, and even getting a well-known over time. In the 2011 Budget, 43% of consistently noted that this opportunity personality to endorse long-term fiscal social assistance spending was on New had given them a better appreciation thinking as a means of removing ‘the Zealand Superannuation. This is expected of the issues and challenges faced, the stigma surrounding finance and politics’. to increase to 51% by 2016, and will stakeholders involved, and the trade- continue to rise if policy settings remain offs or ‘unintended consequences’ of The need to act now: a conversation on unchanged (Treasury, 2012, p.31). various policy directions. A few Long- change These trends were reflected in the termers noted their appreciation for the Throughout the workshop process and Long-termers’ fears for the future. One individuals and institutions who are the creation of the statement, Treasury Long-termer cited ‘a massive student loan steadily working towards a solution, and officials emphasised that their mandate which means home ownership is out of the Treasury was praised for ‘opening was to provide advice. The organisation the question for the next decade’, and up to the public and becoming more was not looking to back the government understandably asked, ‘If I was to have transparent and accessible’. into a corner over the adoption of certain children where would they live?’ Another As a group it appears the Long- policy choices, nor did it necessarily seek noted the ‘misalignment of expectations’ termers are not short on ideas on how the to recommend how policy makers could over tertiary funding, believing they Treasury should continue to improve its find a compromise between efforts to would have to lend significant financial

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 55 Engaging Youth on New Zealand’s Long-Term Fiscal Position support towards their children’s education Since the members of the LongTermNZ generations and to promote long-term despite the fact that the majority of group first convened in Wellington on thinking, this conversation must take parents currently taking on the same task Sunday, 9 December 2012, it has become place within families, between friends and had had the benefit of free university clear that the long-term fiscal position colleagues throughout the country. Fiscal education. In an earlier survey of the 27 of New Zealand has weighed heavily on sustainability and superannuation should LongTermNZ participants, conducted the participants’ minds. They were the 27 be words to understand and embrace, not directly after the Affording Our Future young Kiwis who were fortunate enough avoid and underweigh. conference, 59% said they believed they to be given a platform from which to The Treasury’s statement sought to would not own a home by the time they speak out and articulate their hopes for carry this message to youth by making were 30; 63% believed health care would the future. The group’s interaction with accessibility a principal aim. The not be free and of the same quality in the Treasury truly opened their eyes to organisation has succeeded in creating a well-designed, clear and readable document, particularly with the inclusion The [LongTermNZ] interaction with the of the Quick Guide. While ongoing efforts to engage young New Zealanders Treasury truly opened their eyes to the will require more innovation and greater fact that costs are increasing, risks and devotion of resources, the Treasury’s commitment to the issue should lead us shocks are inevitable, and difficult trade- to believe the solutions to the country’s economic imbalances may be found on offs will need to be made the horizon and are not simply distant delusions of grandeur.

1 The McGuinness Institute is a non-partisan think tank based 40 years’ time; and a resounding 89% of the fact that costs are increasing, risks in Wellington, specialising in strategic foresight, research and respondents said they did not expect to be and shocks are inevitable, and difficult policy analysis. 2 Susie completed a month-long internship at the McGuinness entitled to a universal pension by the time trade-offs will need to be made. But why Institute in June/July 2013. they retired. The Long-termers had come stop at 27? Why not continue to shape to the realisation that significant changes and educate all New Zealanders who are were needed, and that expectations for uninformed on the issue of long-term References their future could not be the same as fiscal sustainability? The LongTermNZ Treasury (2012) Budget Economic and Fiscal for those who had gone before them. workshop led the group to realise that the Update, Wellington: Treasury They could not help but wonder, though, most immediate and crucial challenge is Treasury (2013) Affording Our Future: whether their peers outside the bubble to find a way to engage youth in a matter Statement on New Zealand’s Long-Term had any idea that their dreams were that will determine the nature of their Fiscal Position, Wellington: Treasury slowly being eroded away. future in New Zealand. To protect coming

The School of Government presents a unique, new Master’s qualification Master of e-Government The programme provides For more information visit the students with the opportunity Chair of e-Government website to learn about how to success- http://e-government.vuw.ac.nz fully manage transformational Domestic students should contact the School of Government: e-government initiatives, such [email protected] or Master of as innovative technology- www.victoria.ac.nz/sog e-Government enabled forms of service International students should School of Government contact Victoria International: Victoria University of Wellington provision and online [email protected] or New Zealand engagement. www.victoria-international.ac.nz

Page 56 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Miriam Chaum

Long-Term Challenges and Opportunities in the Natural Our natural resources are central to New Zealand’s cultural heritage, both for Päkehä and Mäori. Mäori draw identity Resource Sector and whakapapa from the environment and exercise kaitiaki responsibilities over land and resources. We have a responsibility to recognise this cultural relationship Introduction: New Zealand’s natural capital in accordance with the principles of the New Zealand’s cultural, social and economic Treaty of Waitangi. Natural resources such as land, water prospects are inextricably intertwined with the health and fish provide a large proportion of the and sustenance of our natural capital. inputs to our economic system in 2011: • export in 2011, export revenue from New Zealand is wealthy in natural 120 countries and second out of OECD the primary industries amounted resources. We have plentiful, clean water; countries in natural capital per capita; to over $31.5 billion or over 70% of clean air; fertile soil and a climate well- we are outranked only by petroleum- total merchandise export revenue suited to humans, trees, livestock and exporting countries (World Bank, 2011). (Ministry for Primary Industries, agriculture; long coastlines and significant While it is still substantial, natural capital 2011); aquaculture resources; significant mineral in New Zealand has been reduced since • agriculture and primary industries and petroleum reserves; and extraordinary the arrival of humans, however, including contribute dover 17% to our gross biodiversity on our land and in our losses to our lowland forest and reductions domestic product (GDP) (Statistics water bodies. The World Bank estimates in native biodiversity. New Zealand, 2011); that New Zealand ranks eighth out of • over 70% of our electricity was generated by renewable energies Miriam Chaum is a Senior Analyst at the New Zealand Treasury. The views, opinions, findings and conclusions or recommendations expressed in this article are strictly those of the author and do not (Ministry of Business, Innovation necessarily reflect the views of any organisation, including the New Zealand Treasury. and Employment, 2013).

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 57 Long-Term Challenges and Opportunities in the Natural Resource Sector

The New Zealand economy has grown The Crown carries liabilities associated degraded, scarce or extinct if they are on the basis of its natural capital stocks with natural resources, including not valued and managed appropriately and flows and our ability to generate contingent liabilities for our current (e.g. fisheries, fresh water); some of our wealth will be dependent on this stock obligation under the Kyoto Protocol. The resources are unconditionally renewable for the foreseeable future. Crown also possesses a number of natural and our actions will not jeopardise or Strong income growth in emerging resource-related assets, including physical otherwise affect their flow of goods markets will support demand for natural assets such as the conservation estate, and services (e.g. solar, tidal energy). resources in the short to mid-term, Crown-owned forestry and agricultural If the aim is to manage within various underpinning demand for New Zealand’s assets, and non-physical assets such as biophysical limits and protect ecosystem exports and reinforcing the importance the stock of international carbon units values, renewable resource management of the productive sectors for our collected through the emissions trading should aim to draw down the resource at growth, wealth and living standards. scheme (ETS). a rate and in a manner that will not exceed Should we fail to plan to and manage the rate at which the resource renews or within biophysical resource limits we Indirect impacts replenishes. In practice, communities may will undermine the productivity of our Given the importance of natural resources choose to manage renewable resources so primary sector in the long term and limit to our economy, changes in the availability as to protect additional values, such as recreational and cultural uses. In some cases New Zealand may be The goal of natural resource management and called upon to do its part to manage within global biophysical limits for environmental policy is to put in place incentives natural resources, as we are bound by the United Nations Framework Convention for efficient resource use by communicating the on Climate Change and the Montreal true value of those resources where feasible Protocol on Substances that Deplete the Ozone Layer. The goal of natural resource management and environmental policy is to put in place incentives for efficient our growth potential. This will in turn or quality of natural resources for extrac- resource use by communicating the true constrain the government’s ability to tion and use will have a significant impact value of those resources where feasible.2 provide for the needs of a growing and on New Zealand’s economic performance, Advanced natural resource management ageing population. which, commodity prices and all else and environmental policies facilitate better being equal, will affect government tax long-term investment decisions, prevent Natural capital in the Crown accounts revenue. For the same reason, changes to stranded capital, and avoid disputes over In New Zealand natural resource stocks resource management and conservation ownership and governance. Early non- and flows have both direct and indirect policies may have indirect impacts on the regulatory policies that build capability impacts on the government’s revenues, government’s finances in so far as they for measurement and monitoring can expenses, assets and liabilities. affect the productivity or profitability of ease the transition to later regulatory resource-dependent sectors. policies or market-based mechanisms. Direct impacts The Crown incurs expenses for natural Policy options Case studies resource management and regulation, Some of New Zealand’s resources are The following section of this article including the cost of managing public non-renewable, or finite (e.g. petroleum, present three case studies, intended to conservation areas, regulating fisheries, minerals); in some cases the benefits of illustrate the diversity of New Zealand’s and cleaning up lakes and rivers with extracting these resources and the risks natural resource base and, therefore, the deteriorating water quality. In limited associated with their extraction may be challenges we face in designing effective cases the Crown collects revenues from best managed by the Crown on behalf management regimes for its sustenance. natural resources, including royalties of all New Zealanders, including future for petroleum and minerals extraction, generations. These resources represent Oil and gas proceeds from radio spectrum auctions, wealth that New Zealand already holds: Petroleum already represents a significant and taxes on petrol and diesel fuels. In policies should be aimed at realising those revenue stream to the Crown, with these instances the Crown has asserted a assets at a rate and in a manner that will significant upside potential. To maximise right to manage a resource or regime on provide the greatest return to the economy the benefits of petroleum production, the behalf of all New Zealanders, including the as a whole, over time.1 Crown needs to carefully consider fiscal redistribution of any accrued economic Some of our resources are conditionally terms and ensure robust regulatory settings benefits. renewable, meaning that they become to maximise economic and fiscal benefits

Page 58 – Policy Quarterly – Volume 9, Issue 4 – November 2013 while managing potential environmental fiscal regime is highly competitive against and should be treated as hypothetical and health and safety risks. comparator countries, based on data from only. currently producing fields (Aupec, 2009). Introduction Similarly, the Journal of World Energy and Risk In New Zealand the Crown owns the Business has ranked New Zealand the A high degree of aversion to health, safety subsurface petroleum resources; any fourth most fiscally attractive jurisdiction and environmental risks may effectively company wanting to prospect, explore between 1998 and 2007 (Ministry of limit the extent to which resources can be or mine petroleum must obtain a permit Economic Development, 2012b). A highly discovered and extracted by prescribing from New Zealand Petroleum and competitive royalties and taxation regime certain methods that must be used or Minerals (NZPAM). In 2011/12 the Crown makes New Zealand more attractive than areas where exploration and production collected $335 million in royalties and other oil-producing jurisdictions, where cannot be undertaken. levies on petroleum, excluding associated corporate tax revenue or indirect taxation revenue – or 0.2% of GDP. However, A highly competitive royalties and taxation most of New Zealand’s territory is yet to be explored and the potential for further regime makes New Zealand more attractive than development of petroleum resources may be significant. other oil-producing jurisdictions, where all other Today all petroleum mining and factors, including distance to markets, are held production in New Zealand occurs in the Taranaki basin. Gas generated over constant. 20% of New Zealand’s electricity in 2010 (Ministry of Business, Innovation and Employment, 2012).3 The Ministry of Business, Innovation and Employment estimates that in 2009 the oil and all other factors, including distance to Environmental risks gas industry, including exploration, markets, are held constant. Oil and gas exploration and production and the supply chain, directly Changes to the fiscal regime for production operations have the contributed $1.9 billion (1.5%) to national petroleum could be reviewed, particularly potential for a variety of impacts GDP (ibid.). In 2011 crude oil was in the event that future discoveries increase on the environment, including New Zealand’s fourth largest merchandise demand for petroleum exploration in noise; spills, emissions and other export at $2.0 billion, or over 4% of total New Zealand. discharges; site access and footprint; exports (Statistics New Zealand, 2012). socio-economic and cultural issues; Fiscal sustainability – quantity and interference with other resource Fiscal sustainability – price Woodward Partners has valued the users. Offshore, where the majority From the Crown perspective, the royalties arising from currently producing of New Zealand’s potential oil fields economics of petroleum exploration and fields and further discoveries based on lie, exploratory operations may production depend on three interrelated estimates of in-place oil and gas reserves harm benthic and pelagic organisms factors: price, quantity and risk. and a scenario analysis of commercially and marine birds and reduce water An optimal taxation regime for viable discoveries (Woodward Partners, and air quality. Development and petroleum is one that is targeted on 2011).4 The discounted total value between production processes carry increased economic rents, related to profits so as to 2011 and 2050 of the Crown’s royalty risks of soil and water contamination allow for cost recovery plus an adequate stream from currently producing fields from spills and leaks and ongoing return, and flexible to variations in in the oil and gas estate may be estimated disruption to the local economy prices and production and operational at $3.2 billion and from potential future (E&P Forum and United Nations costs (AUPEC, 2009). In New Zealand discoveries at $5.3 billion. The valuation Environment Programme, 1997). the Crown collects the higher of either of royalties from future discoveries could The frequency and severity a 5% royalty on gross revenues or a 20% be as low as $1.6 billion and as high as of significant environmental accounting profits royalty. Ultimately, the $10.3 billion, depending on the assumed disturbances in New Zealand, Crown receives approximately 42% of the rate of future industry activity, projected including oil spills, has been low accounting profit from petroleum field petroleum prices and projected exchange historically. According to Maritime developments as royalty and company rates (Woodward Partners, 2011).5 New Zealand, fewer than ten ‘more tax (Ministry of Economic Development, These discounted valuation figures significant’ marine oil spills have 2012b). veil the potentially significant future occurred in New Zealand since 1990 A study by Aupec completed in 2009 production and associated real tax and none of these incidents were the showed that the New Zealand petroleum revenue in the lower probability scenarios result of petroleum exploration or

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 59 Long-Term Challenges and Opportunities in the Natural Resource Sector

production activities (Maritime New Economic growth and efficiency may consist of avoiding pro-cyclicality Zealand, 2013). The economic benefits of enhanced by preventing increased revenues from In addition to these more petroleum exploration and production flowing through into tax reductions or localised environmental impacts, can be observed in terms of GDP, direct increased spending; promoting ongoing oil and gas productiuon and use royalty and taxation returns, more and structural reform; and improving emits carbon dioxide (CO2), higher-paying jobs, investment, regional financial regulation and supervision to which contributes to climate development and exports. contain credit booms and asset bubbles change. Were limits or charges on General equilibrium modelling by (Cordon, 2012; Garton, 2012; Magud and production of greenhouse gases put New Zealand Institute of Economic Sosa, 2010; IMF, 2012; OECD, 2012). in place globally, demand for oil Research has shown that a South Island Even the lowest probability scenario internationally would be expected basin development scenario including the modelled by Woodward Partners is to decrease significantly and we discovery of ten new oil and gas fields over unlikely to be large enough to trigger would expect that the economic 2010–2040 could drive an increase in gross these macroeconomic effects. However, attractiveness of prospecting in New national disposable income of 0.77%, and in the event of a significant petroleum Zealand would similarly reduce. in GDP of 1.2% on average per annum. The resource discovery New Zealand should increase in export values results in higher be prepared to consider such measures.

Equity and distribution Because they are finite, exhaustible The OECD ranks New Zealand fourth among OECD resources, the extraction of oil and gas countries for volume of fresh water per capita and entails obvious intergenerational equity issues: oil and gas should be produced so third for water withdrawal as a percentage of gross as to realise the highest returns and those maximised returns should benefit current annual availability. We currently extract less than and future generations. As explained, these 5% of the freshwater resource ... characteristics of natural resource rents have encouraged many oil-producing nations to establish sovereign wealth or oil funds, which are designed to manage and invest a nation’s wealth accumulated through the sale of natural resources, both Health and safety risks income and improved living standards for to manage macroeconomic effects and Workplace health and safety New Zealanders, an improvement in the the effects of exchange rate appreciation, legislation plays a key role in balance of trade, and indirect tax revenues. and to distribute both the benefit of oil ensuring that operators prevent The upside is restricted by a number of wealth accumulated and the risk of price the uncontrolled release of oil counterbalancing effects, including an volatility and extraction uncertainty and gas at their operations. While appreciation in the exchange rate, which across generations. an uncontrolled release of oil could disadvantage competing exporters, and gas can result in substantial and an increase in net foreign liabilities Fresh water environmental damage, it can also (Ministry of Business, Innovation and While New Zealand has a very large lead to a major accident, resulting Employment, 2012c; Zuccollo and freshwater resource, the quality and the in multiple injuries and fatalities. Ballingall, 2012). availability of water are deteriorating at An external review of New Zealand’s the regional and catchment level. Once health, safety and environmental ‘Dutch Disease’ and macroeconomic policy regions set objectives and limits for the legislation for offshore petroleum A significant increase in oil and gas quantity and quality of the water in their operations conducted in 2010 production as a result of new discoveries catchments, it will be important that revealed a number of gaps in can have material impacts on the economy. they have the regulatory and legislative the regulatory framework, the Overall increased wealth can be offset by tools they need to manage within those majority of which will be addressed an exchange rate appreciation that reduces limits and maximise the value they obtain by the Exclusive Economic the competitiveness of other sectors, such from the water available for use. Market- Zone and Continental Shelf Act as import-competing or non-petroleum based mechanisms, such as tradable water (Environmental Effects) 2012 and export industries (e.g. manufacturing, permits and water charges, may be needed proposed changes to the health and agriculture, tourism). These effects are in some jurisdictions. safety provisions under the Crown sometimes collectively referred to as Minerals Act (Atkins Holm Joseph ‘Dutch Disease’. Introduction Majurey Ltd, 2010). The literature suggests that the optimal Fresh water provides an essential, life- policy response to Dutch Disease effects supporting service to our communities

Page 60 – Policy Quarterly – Volume 9, Issue 4 – November 2013 and adds significant value to our economy. which ran a stakeholder-led collaborative the development of market-based In 2004, charges for water supply by process to build a consensus view on mechanisms where possible to manage the local authorities, value-added from shared outcomes, goals and long-term supply and quality of fresh water (OECD, irrigation, and value-added from water in strategies for fresh water in New Zealand. 2013). Market-based policies assign, either hydroelectric power generation amounted Drawing on the advice of the forum, the implicitly or explicitly, a price for water to nearly 1.4% of GDP (Statistics New government introduced a National Policy or discharge of contaminants that reflects Zealand, 2004). Statement on freshwater management supply, economic or full costs associated By international standards fresh in 2011 which directs local government with that use or discharge. These policies water in New Zealand is both clean and to manage water in an integrated and include quantity-based controls, such as plentiful in supply. The OECD ranks sustainable way while providing for trading of water permits, rights or quotas, New Zealand fourth among OECD economic growth within set water quantity and direct price interventions such as countries for volume of fresh water per and quality limits. The government is water charges, rent taxes or royalties. capita and third for water withdrawal as now in the process of further responding The application of market-based tools a percentage of gross annual availability. to the recommendations of the Forum to fresh water will be informed by the We currently extract less than 5% of the and has proposed a number of potential particular scarcity or quality challenges freshwater resource, primarily drawn reforms to the freshwater management relevant to the locality. A number of from surface waters. system (Ministry for the Environment, market-based tools are already being

Quality The state of water quality in New Zealand’s rivers is highly variable, and Coming decades will be characterised by declining in some places. Rivers in urban increasing water scarcity and reduced reliability and rural areas generally have poorer water quality compared to rivers in of water supply and quality in key catchments native forest. Catchment features, such as land cover, climate and geology, have and regions, at the times of year and in the places a large influence on water quality, which where water is in highest demand. highlights the significant contribution of non-point sources, such as run-off from agriculture, to poor water quality. Water quality is degraded in some lowland areas of Northland, Auckland, Waikato, the 2013). Later reforms could include employed in New Zealand to manage east coast of the North Island, Taranaki, further central government direction and demand and reduce pollution. Manawatu–Wanganui, Canterbury and guidance on management approaches, Southland, where nutrients could stimulate including tools to promote efficient use Market-based mechanisms for managing plants and algae to grow to excessive levels and alternative allocation models. water quality in some rivers, lakes and coastal areas. There is some experience with market- Quantity Fiscal sustainability and economic growth based mechanisms for managing water Quantity pressures are generally a and efficiency quality in New Zealand. To address local catchment or regional rather than a Coming decades will be characterised and national concerns over the potential national issue. In 85% of large catchments by increasing water scarcity and reduced for decreased water quality in Lake there is low allocation pressure on the reliability of water supply and quality in Taupo, the Waikato Regional Council has available water relative to mean annual key catchments and regions, at the times implemented a cap-and-trade scheme low flow (MALF); in 8% of catchments, of year and in the places where water is for nitrogen discharges in the catchment. current allocations are greater than the in highest demand. Failure to plan for The scheme aims to reduce total annual modelled MALF.6 These allocation bands these challenges may entail significant anthropogenic nitrogen discharges to are modelled on consented water use. This fiscal costs, in the form of both decreased the lake by 20% by 2020; this target will is an important distinction, as the average tax revenue from the agriculture sector largely be accomplished through the buy- national actual water use for consumptive and increased expenses for ex post clean- back of nitrogen discharge allowances by takes is estimated to be 65% of consented up resulting from over-use and under- the Lake Taupo Protection Trust at a rate volume, meaning that consent holders management. Since 2008, approximately of $0.4 million per tonne. are entitled to use more water under $340 million in Crown funding has been their permit than they are actually using committed to the clean-up of just eight Trading (Aqualinc, 2010). lakes and rivers. There is substantial international evidence In 2009 the government commissioned The OECD has suggested that that demonstrates that water markets can advice from the Land and Water Forum, New Zealand continue to encourage reveal the value of water to existing and

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 61 Long-Term Challenges and Opportunities in the Natural Resource Sector potential users, generating short-term and contamination accrue privately production, New Zealand is vulnerable to incentives to use water more efficiently to businesses, like manufacturers and changes in the climate. While New Zealand and longer-term incentives to shift water farms, which require water as an input to may not be as severely affected by climate to higher-value uses. Water trading in production or rely on the ability of water change as some countries, impacts may the southern Murray-Darling Basin bodies to absorb contaminants that are by- include an increased frequency and contributed over 2% to Australia’s GDP in products of production processes. These intensity of natural hazards and extreme 2009. The total benefits were even greater firms have a significant incentive to secure events, such as floods, landslides droughts, within the southern Murray-Darling Basin consents to take and discharge to water. hot days, storms and coastal erosion (Joshi itself, where water trading increased gross As a result, more passive recreational et al., 2011; Ministry for the Environment, regional product by over $A370 million and cultural users, whose water use isn’t 2008). in that year, indicating that water trading monetised or easily valued, have relatively New Zealand emits only 0.2% of maintained productive capacity within the less influence over the availability and global greenhouse gas emissions. For this southern Murray-Darling Basin, rather quality of freshwater resources. reason, our mitigation policies will be than shifting it to other areas of Australia. Decisions about policy for managing most effective in contributing to a global In the New Zealand context, there may fresh water quality have implications solution to the extent that they encourage larger-emitting nations to take action. New Zealand faces significant New Zealand emits only 0.2% of global greenhouse challenges in reducing its greenhouse gas emissions. Nearly 50% of our emissions gas emissions. For this reason, our mitigation come from the agriculture sector, where fewer abatement options are available. policies will be most effective in contributing to a The forestry sector has large potential for global solution to the extent that they encourage carbon sequestration in the short term, but carbon stored in wood products is larger-emitting nations to take action. emitted at or over time after harvest. Our non-agricultural sectors are relatively carbon-efficient: New Zealand’s emissions intensity – emissions of fossil be only a few regions that will surpass for intergenerational equity, as some CO2 per unit of economic output – is limits for water takes and otherwise discharges take years or even decades to close to the OECD mean and far below possess the prerequisites for trading. reach water bodies and affect the water’s that of the rapidly developing Asian Trading has taken place in a number of quality, and costs incurred by current economies. New Zealand’s electricity regions experiencing water shortages, taxpayers may not realise water-quality- is over 70% renewable, including including Canterbury, Hawkes Bay and state benefits for many years. Good hydroelectric, geothermal and wind Otago, often as shares within irrigation planning now, which imposes lower-level power, and may reach nearly 90% schemes that have a single consent or costs over longer transition timelines, renewable by 2040 (MBIE, 2013). bilaterally between farmers or brokers. can avoid damage to water bodies which Transport-related emissions comprise may be either too costly or impossible to a high proportion of our total emissions Charging correct in the future. from fuel combustion relative to other Water taxes have been successfully countries and the OECD mean. There implemented in other jurisdictions with Climate change are currently few lost-cost emissions significant success. A study undertaken by New Zealand faces challenges and reduction options in the transport sector, the European Commission in 2011 found information barriers in reducing its and consumer demand tends to be more that volumetric charges on drinking and greenhouse emissions and adapting price-inelastic.8 industrial water in the Netherlands and to climate change. While the shape of Unlike many other developed nations, Cyprus have reduced consumption by international policy post-2020 remains New Zealand has a growing population: between 8% and 40%, depending on user unclear, it will be economically important between 1990 and 2009 the population group (European Commission, 2011). that New Zealand contributes its ‘fair share’ rose by 30%, making New Zealand Six of 66 New Zealand local authorities of global mitigation in step with other the second fastest-growing developed meter and volumetrically charge across countries and maintains its competitive country. The population is expected to the whole of their jurisdictions,7 and an advantage in those areas where our be have grown more than 60% from 1990 additional eight meter and volumetrically production is less emissions-intensive. by 2050 (Statistics New Zealand, 2009). A charge across parts of their jurisdictions. larger population drives increases in total Equity and distribution Introduction emissions. Generally speaking, the most significant As an island nation with a long coastline The nature of future international market benefits of water extraction and an economy reliant on primary climate change commitments, and their

Page 62 – Policy Quarterly – Volume 9, Issue 4 – November 2013 relation to domestic action, is unclear. equivalent (CO2e) by 2040, or 5% below The importance of the primary Negotiations under the United Nations business as usual.9 industries in New Zealand makes our Framework Convention on Climate The ETS can be calibrated to be economy relatively more susceptible to Change have recently agreed that a global fiscally neutral to the Crown over the shifting weather patterns and changing deal should be negotiated by 2015, to long term. On this basis, emitters would climatic conditions, suggesting a need enter into force from 2020. New Zealand surrender in aggregate no more than the for better and more information on the has recently announced a target to reduce number of units and/or cash necessary likely impacts of climate change and early emissions to 5% below 1990 levels by to satisfy New Zealand’s international investment where viable infrastructural 2020. commitments. and preparedness options exist (Treasury, Opportunities do exist for 2002). Likewise, the proximity of New Zealand firms to realise lower- International commitments significant infrastructural assets, urban carbon growth while staying globally When New Zealand made its commitment centres and residential properties to the competitive. Government and the private under the Kyoto Protocol, the commitment coastline gives rise to fiscal risks. sector can tailor investments in energy was treated as a financial liability and transportation infrastructure in equivalent to the difference between the Economic growth and efficiency coming decades towards lower-emitting total projected emissions over 2008–2012 Decisions about whether and how to outcomes. It may be possible to realise and the target level. New Zealand has reduce greenhouse gas emissions have real growth while avoiding emissions increases by making smarter, longer-view investment and research and development Decisions about whether and how to reduce decisions in the short to medium term. greenhouse gas emissions have real implications Fiscal sustainability for New Zealand’s economic growth, in both the Both domestic greenhouse gas mitigation policies and international commitments short term and the longer term. to reduce emissions have financial implications, which are both driven by and in turn have an impact on New Zealand’s emissions profile. New Zealand’s emissions profile is cyclical as a result of our large recently committed to reducing emissions implications for New Zealand’s economic plantation forestry industry: as forests to 5% below 1990 levels by 2020, and this growth, in both the short term and the grow they absorb or sequester carbon, and commitment will likely entail fiscal costs longer term. as they are harvested the carbon stored in to the extent that our net emissions exceed Studies have suggested that, at a the trees over their lifetime is released. the target over the period. global level, the benefits of strong, early If ETS settings are attuned to deliver action far outweigh the potential long- Domestic mitigation policies international commitments, climate term combined costs of climate change New Zealand has already taken action in change policy will be fiscally sustainable damage and mitigation required to adopting and implementing the ETS. The over the long term as business and avoid dangerous climate change (Clarke ETS was designed to assist New Zealand consumers pay the emissions tab. et al., 2009; Stern, 2006). In the context in meeting international climate change However, this tax burden will have growth of concerted global action, under which commitments at least cost and to reduce implications and associated longer-term developed and large-emitting developing New Zealand’s net emissions below fiscal implications, particularly in the economies alike provide comparable, clear business-as-usual levels by placing event that New Zealand takes earlier, more incentives to their domestic industries to obligations on emitters to surrender units aggressive action than its competitors. reduce the greenhouse gas intensity of in relation to their emissions. production, ambitious climate change While the ETS is a useful tool for Adaptation policy policy in New Zealand will encourage delivering international emissions As New Zealand’s emissions are such a low innovation, fuel economic growth, and reduction units, New Zealand’s limited percentage of the global whole, it will not ensure that our goods and services remain low-cost mitigation potential effectively be possible for our actions to meaningfully competitive in the global marketplace. restricts the scheme’s ability to drive decrease the probability of catastrophic At present, however, concerted significant domestic emissions reductions. events. In the long term, large-scale events international action is still under Economic modelling has shown that an entailing high global damages may impact negotiation. In this context, aggressive, increase in the price of carbon from $0 on New Zealand economically and fiscally, unilateral policies will entail negative to $25 may reduce gross emissions by suggesting the increasing importance effects on productivity growth and income only 6 million tonnes of carbon dioxide of maintaining prudent debt levels and for developed countries in the short term, investing in resilient infrastructure. primarily as shifting human and capital

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 63 Long-Term Challenges and Opportunities in the Natural Resource Sector

resources to work on mitigation reduces Conclusion be considered non-renewable when its consumption or use surpasses a threshold, as its degradation beyond this point the resources available for producing New Zealand is wealthy in natural gives rise to exceptional economic, social or ecological costs (de Groot et al., 2003; Dietz and Neumayer, 2007). other goods and services (Garnaut, 2011; resources, and these resources will be a 2 It is often true that ascertaining the true and comprehensive Mendelsohn, 2009; OECD, 2008). determinant of our social, cultural and value of natural resources can be difficult or impossible in practice, as the values derived are both market and non- The closer in step we are with economic development. Our resource market values, which are sometimes in conflict with one competitors, the lesser the relative impact endowment is very diverse and resources another. 3 This analysis assumes $100 per tonne carbon dioxide (CO2). on our growth. Modelling has suggested should be managed in ways that reflect 4 The valuation of forecast royalties from future discoveries draws on a complex model of forecast future discoveries that consistent action across the rest of this diversity. and production developed by the Ministry of Business, the world reduces GDP impact relative In order to use and protect this natural Innovation and Employment. The model performs a Monte Carlo analysis, using a number of probability-weighted inputs to business-as-usual by between 30% resource advantage we need to: to generate several hundred scenarios, where each scenario sets out a unique forecast of the total producing fields in and 50%, compared to a scenario under • Know more about what resources we each of the eight frontier basins, their revenues, profits and which New Zealand takes strong action have. The more and better-detailed royalties. 5 Valuations are derived using a discounted cash flow approach to reduce emissions ahead of the rest information we have about the with a weighted average cost of capital of 8.89% for current resources we have, their current basins and 11.85% for future discoveries. Estimates exclude of the world (Ballingal, Schilling and any corporate tax revenue. Estimates for future discoveries Stroombergen, 2011). use and their future demand, the based on the mid scenario with probabilities of 10%, 50% and 90% are combined according to Swanson’s Rule, which better able we will be to assess and assumes constant or slightly reducing industry exploratory Equity and distribution value our natural capital stocks and activity and slowly increasing petroleum prices. Six oil price paths and three gas price paths were applied; oil prices in The distribution of the ETS tax burden flows, conduct an informed public 2030 across the scenarios range from $US50 to $US200 per barrel by 2030. Gas is assumed to be sold domestically will remain, in the near-term, highly debate on the use of our resources, in NZ dollars; oil is assumed to be sold internationally in US differential by sector, as the ETS assigns and design effective management dollars at a long-run average exchange rate of 0.600. 6 Water availability is based on mean annual low flow (MALF), varying degrees of responsibility for frameworks to protect and utilise which assesses the surface water-level conditions during the them sustainably. driest part of the year and assumes that all allocated water emissions to various industries, taking is taken. The MALF is modelled for stream segments by into account the availability and cost • Think carefully and creatively about NIWA, and the most downstream value in each catchment is assigned to the catchment. The consented water allocation of mitigation options and exposure to how and when we use them. As non- includes consumptive surface water sources (i.e. it excludes international markets. This distribution is renewable resources are consumed storage, groundwater and non-consumptive takes), which captures 60% of all consented consumptive allocation in relevant within generations. and demand for renewable resources New Zealand in 2010. 7 These are Whangarei District, Auckland Council, Tauranga When designing and implementing increases, we need to improve City, Carterton District, Nelson City and Tasman District. climate change policies we must also environmental management tools 8 Note that these costs are technology-dependent and that technological breakthrough could significantly decrease the consider the distribution of costs between and financial mechanisms. These costs of abatement and increase the economic viability of improvements will ensure resources various mitigation options. generations. Early, ambitious action 9 Emissions projections sourced from the Ministry for the ahead of international competitors will flow to their highest-value uses Environment; assumptions include AR4 global warming potential values and central GDP, oil price and exchange rate be highly costly to current generations and promote sustainable long-term forecasts. and may yield only marginal cost savings growth. for future generations. Conversely, action 1 The literature on ‘strong’ and ‘weak’ sustainability has that is behind international competitors introduced the concept of ‘critical natural capital’, or capital could save costs now, but to the detriment which performs important ecosystem services and that cannot be substituted for other types of non-natural capital of future generations. (e.g. fresh water, climate, and soil). This natural capital may

References Aqualinc (2010) Update of Water Allocation Data and Estimate of Actual Clarke, L., J. Edmonds, V. Krey, R. Richels, S. Rose and M. Tavoni Water Use of Consented Takes 2009–10, report for the Ministry for (2009) ‘International climate policy architectures: overview of the the Environment EMF 22 international scenarios’, Energy Economics, 31 Atkins Holm Joseph Majurey Ltd (2010) Comparative Review of Health, Cordon, M. (2012) ‘The Dutch Disease in Australia: policy options for Safety and Environmental Legislation for Offshore Petroleum a three-speed economy’, Melbourne Institute working paper 5/12, Operations, report for the Ministry of Economic Development, Melbourne retrieved from http://www.med.govt.nz/sectors-industries/natural- de Groot, R., J. Van der Perk, A. Chiesura and A. van Vliet (2003) resources/oil-and-gas/hse-review ‘Importance and threat as determining factors for criticality of natural Aupec (2009) Evaluation of the Petroleum Tax and Licensing Regime capital’, Ecological Economics, 44 (2-3), pp.187-204 of New Zealand, report for the Ministry of Economic Development, Dietz, S. and E. Neumayer (2007) ‘Weak and strong sustainability in the retrieved from http://www.med.govt.nz/sectors-industries/natural- SEEA: concepts and measurement’, Ecological Economics, 61 (4), resources/oil-and-gas/petroleum-expert-reports/AUPEC-report-pdf/view pp.617-26 Ballingall, J., C. Schilling and A. Stroombergen (2011) Macroeconomic E&P Forum and United Nations Environment Programme (1997) Impacts of the New Zealand Emissions Trading Scheme: a Environmental Management in Oil and Gas Exploration and computable general equilibrium analysis, Wellington: New Zealand Production, London: E&P Forum and United Nations Environment Institute of Economic Research and Infometrics Programme

Page 64 – Policy Quarterly – Volume 9, Issue 4 – November 2013 European Commission (2011) The Role of Market-based Instruments govt.nz/sectors-industries/energy/energy-modelling/modelling/new- in Achieving a Resource Efficient Economy, retrieved from http:// zealands-energy-outlook-electricity-insight ec.europa.eu/environment/enveco/taxation/pdf/role_marketbased.pdf Ministry of Economic Development (2012a) ‘Fact file: economic Garnaut, R. (2011) Garnaut Climate Change Review – Update 2011, contribution oil and gas industry’ Australian Government Ministry of Economic Development (2012b) Review of the Royalty Garton, P. (2012) ‘Sovereign wealth funds and the exchange rate: Regime for Petroleum: background to the regime and options for comparing resource booms in Australia, Chile and Norway’, Australian changes, Wellington: Ministry of Economic Development, retrieved Treasury Economic Roundup, 22 (2), pp.19-38, http://econpapers. from http://www.med.govt.nz/sectors-industries/natural-resources/ repec.org/article/tsyjournl/journl_5ftsy_5fer_5f2012_5f2_5f2.htm pdf-docs-library/oil-and-gas/crown-minerals-act-review/review-of-the- IMF (2012) Macroeconomic Policy Frameworks for Resource-Rich royalty-regime-for-petroleum.pdf/view Developing Countries, International Monetary Fund OECD (2008) Climate Change Mitigation: what do we do?, Paris: OECD Joshi, M. et al. (2011) ‘Projections of when temperature change will OECD (2012) 2012 Economic Review: Australia, Paris: OECD exceed 2°C above pre-industrial levels’, Nature Climate Change, 1 OECD (2013) 2013 Economic Review: New Zealand, Paris: OECD (8), pp.407-12 Statistics New Zealand (2004) Water Monetary Stock Report, retrieved Magud, N. and S. Sosa (2010) When and Why Worry about Real from http://www.stats.govt.nz/~/media/Statistics/ browse-categories/ Exchange Rate Appreciation?, IMF working paper 10/271, environment/natural-resources/water-monetary-stock-report/wms- International Monetary Fund report.pdf Maritime New Zealand (2013) ‘Major oil spills around New Zealand’, Statistics New Zealand (2009) ‘National population projections: 2009- http://www.maritimenz.govt.nz/Environmental/Responding-to-spills- base to 2061’, retrieved from http://www.stats.govt.nz/tools_and_ and-pollution/Past-spill-responses/ services/tools/TableBuilder/population-projections-tables.aspx Mendelsohn, M. (2009) Climate Change and Economic Growth, World Statistics New Zealand (2011) ‘National Accounts: year ended March Bank Commission on Growth and Development working paper 60 2011’ Ministry for Primary Industries (2011) ‘International Trade: agricultural Statistics New Zealand (2012) ‘New Zealand in Profile: 2012: exports’, and forestry exports from New Zealand: 2011 June year end retrieved from http://www.stats.govt.nz/browse_for_stats/snapshots-of- highlights’, http://www.mpi.govt.nz/agriculture/statistics-forecasting/ nz/nz-in-profile-2012/exports.aspx international-trade.aspx Stern, N. (2006) The Stern Review on the Economics of Climate Change, Ministry for the Environment (2008) Climate Change Effects and London: UK Treasury Impacts Assessment: a guidance manual for local government in Treasury (2002) A Structural VAR Model of the New Zealand Business New Zealand, Wellington: Ministry for the Environment, retrieved from Cycle, working paper 02/26, Wellington: Treasury http://www.mfe.govt.nz/publications/climate/climate-change-effect- Woodward Partners (2011) Valuation of the Crown’s Royalty Streams impacts-assessments-may08/ from the Petroleum Estate, report for the Ministry of Economic Ministry for the Environment (2013) Freshwater Reform 2013 and Development, Wellington: Ministry of Economic Development Beyond, Wellington: Ministry for the Environment, retrieved from World Bank (2011) The Changing Wealth of Nations: measuring http://www.mfe.govt.nz/publications/water/freshwater-reform-2013/ sustainable development in the new millennium, retrieved from http:// Ministry of of Economic Development (2012) Economic Contribution data.worldbank.org/data-catalog/wealth-of-nations and Potential of New Zealand’s Oil and Gas Industry, Economic Zuccollo, J. and J. Ballingall (2012) Value of Oil and Gas Exploration: Development Group occasional paper 12/07, Wellington: Ministry of hypothetical scenarios, Wellington: NZIER Business, Innovation and Employment Ministry of Business, Innovation and Employment (2013) New Zealand’s Energy Outlook: electricity insight, retrieved from http://www.med.

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 65 Ernest Albuquerque

The NZ Transport Agency’s

Standard cost-benefit analysis theory Transport A conceptually correct transport cost- benefit analysis is very demanding: it requires a travel demand curve derived to incorporate the reorganisation and output effects as travel costs change. This Appraisal implies that it requires knowledge of the relevant conditions in all markets likely to be affected by a transport scheme, so that the required demand curve can be correctly estimated and equilibrated Framework with transport supply. In practice, simplifying assumptions are made, the Introduction most significant of which is that there is In a recent article in Policy Quarterly (August 2013) Michael perfect competition in all transport-using markets (Vickerman, 2007). Pickford claimed that economic efficiency (as determined This assumption implies that in all transport-using markets price equals by social cost-benefit analysis) has declined in importance marginal social costs, such that the as a factor in determining investment in state highways. He demand curve completely measures all the benefits associated with the use claims that this has led to the NZ Transport Agency investing of transport. Thus, any change in the in state highway projects with low benefit-cost ratios, such perceived price of transport will be completely and directly reflected in as the roads of national significance. This reply explains why decisions concerning the activities using transport. Hence, a transport cost-benefit Pickford’s assertions are not correct. analysis is a partial equilibrium method. Prices are taken to equal or at least Ernest Albuquerque is a Principal Economist in the Strategy Unit at the NZ Transport Agency. He has broadly approximate marginal social over 35 years’ experience in assessing transport infrastructure investments and has a background in costs in secondary markets (labour, land, finance, economics, urban planning and business management. etc).

Page 66 – Policy Quarterly – Volume 9, Issue 4 – November 2013 The implication is that surpluses Table 1: NZ Transport Agency scheme benefit matrix occurring in the secondary market double count surpluses in the primary transport market. Such secondary markets are therefore excluded from the cost-benefit analysis. However, if prices do not equal marginal social costs in the secondary Road Demand management Services and cycling Walking Education,promotion and marketing and land use Parking sector financing Private and road tolls markets, the primary transport market Travel time and cost savings • • • • • • surpluses do not capture all the benefits of the project. This shortcoming of Vehicle operating cost savings • • • • • • standard cost-benefit analysis has long Accident cost savings • • • • • been understood. Much progress has Seal extension benefits • been made with conceptualising and Driver frustration benefits • quantifying the impacts ignored or not Risk reduction benefits taken into account by standard cost- • • • • • benefit analysis. Vehicle emission benefits • • Other external benefits • • • • • • • Approach adopted by the NZ Transport Mode change benefits • • • Agency Walking and cycling health benefits • • • The Transport Agency methodology for standard cost-benefit analysis accords Transport service user benefits • • with best international practice. It Parking user cost savings • • • also assumes perfect competition. The National strategic factors • • • • standard appraisal methodology, as set Source: NZTA (2010) out in the Transport Agency’s Economic Evaluation Manual, focuses on savings in developments in economic theory and quantify the incentive. The (tolled) bridge travel time, operating costs, accident costs, evidence over the past 10 years. These have opened in May 1959 and its effects were and some external costs such as pollution significantly improved understanding immediate. In McLauchlan (1989) it is and health effects. of the interactions between transport stated: Table 1 shows the Transport Agency’s and the economy. These interactions are The rate of traffic vastly exceeded existing scheme benefit matrix, including referred to as the wider economic benefits forecasts. In the first ten months, the different types of benefits attributable or wider economic impacts of transport. 4,092,307 vehicles used the bridge. to each scheme type. These costs and The total was 5, 543,973 in the year benefits are valued using shadow Limitations of standard cost-benefit analysis to 31 March 1961, 15, 153,659 in the pricing to adjust for the differences in In line with overseas agencies, the NZ year to 31 March 1970 and exceeded the perceived market price and the true Transport Agency recognises that there 32 million by the mid-1980s … The resource costs. The latter often diverges are limitations to standard cost-benefit bridge triggered an explosion of because of taxes and subsidies. For analysis, as not all positive and negative development on the North Shore and example, when an individual purchases impacts are captured. These limitations the early traffic growth at more than a good in New Zealand they perceive include difficulties in assessing the land- 13 percent led to the decision in 1964 the price as the resource cost plus goods use changes and traffic changes that can to add two more lanes on each side and services tax (GST); however, when occur as the result of transformational of the bridge. the government purchases a good the transport projects. Grimes (2011) used price is merely the resource cost, because the example of the Auckland Harbour More recently, the New Zealand indirect taxes are ultimately returned to Bridge to show how significant changes in Institute of Economic Research raised its pocket. land-use activities are often not captured concern that current conventional cost- The approach used by the NZ in conventional cost-benefit analysis. He benefit analysis generally ignores any Transport Agency provides valuation states that the royal commission report induced changes to transport demand of the main impacts of transport in to Parliament which recommended the that occurs over a period of time. It states a comprehensive way. However, in construction of a harbour bridge was that: recognition that the standard cost-benefit very conservative in its estimates of traffic the assumption seems to be that approach has limitations (as discussed), build-up and the population growth of transport-induced land-use change it includes additional criteria, such as the North Shore. A truly accurate estimate in the longer term either does not strategic fit and effectiveness. was difficult. While a bridge itself would happen, or if it does happen, it is The standard cost-benefit approach be the biggest incentive for population immaterial to the CBA result. This also fails to account for some of the growth on the North Shore, nobody could is in stark contrast to the discussion

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 67 The New Zealand Transport Agency’s Transport Appraisal Framework

in the previous section, showing that distribution and growth of population Likewise, Australia’s Austroads cost- transport can have a large effect on and employment, or on the sectoral make- benefit analysis manual requires other long-term land use development, up of employment. Rather, it assumes that criteria to be taken into account, including which makes it a strong assumption. population and employment are static a strategic alignment assessment. This (NZIER, 2013) between the do-minimum option and requires assessments against broader the proposed activity, and that economic strategies, policies and plans. Many A more balanced approach gains arise mainly because of increased Australian states have adopted this Large transport schemes can have a efficiency from travel time savings. approach by including multi-criteria marked impact on land-use development Transport investments which are analysis in their transport assessment in the long term. Furthermore, induced focused principally on securing economic framework. traffic effects can be a primary long-term development through supporting and The NZ Transport Agency also characteristic of major transport schemes facilitating structural changes in the recognises that transport schemes cannot (such as the roads of national significance). make-up of population and employment be considered in isolation. A package For these reasons the Transport Agency do not necessarily deliver a strong benefit approach should be used which takes into has incorporated two other criteria – stream in the standard framework. By account the relevant regional land strategic fit and effectiveness – into its incorporating two additional criteria in transport strategies, regional land transport programmes and long-term council community plans. Guidance is Transport investments which are focused provided in the Transport Agency’s Economic Evaluation Manual to en- principally on securing economic development courage approved organisations (where appropriate) to develop packages of through supporting and facilitating structural interrelated and complementary activities, changes in the make-up of population and either individually or in association with other approved organisations. An example employment do not necessarily deliver a strong of a package approach would be where a major state highway upgrade is combined benefit stream in the standard framework. with traffic calming on adjacent local roads to improve safety on the adjacent local road network. When considered project selection process. Investment its assessment framework, the Transport individually, neither activity may proposals are assessed as ‘high’, ‘medium’ Agency has adopted a more balanced represent an efficient use of resources. or ‘low’ against three criteria: approach. This ensures that the appraisals Travel time and capacity issues may • strategic fit: how policies align with of transport schemes (including non- reduce the benefits of the traffic calming the government policy statement road alternatives) do not over- or when considered as an isolated activity. priorities (economic growth and underestimate the total economic impact Similarly, main road traffic volumes may productivity, value for money and of the proposed activity. not be sufficient to warrant the highway road safety); Similar approaches are adopted by upgrade as an isolated activity. However, • effectiveness criteria: ensuring that transport agencies overseas. For example, the combined activity will benefit from whole-of-system options have been the UK Department for Transport also the complementary nature of the two considered and have been given recognises the shortcomings of standard activities. appropriate considerations; cost-benefit analysis. Its multi-criteria To manage the investigation, design • efficiency criteria: the value of the framework, the New Approach to and construction of the roads of solution in relation to the resources Appraisal (NATA), allows qualitative and national significance effectively, the total used (based on cost-benefit analysis non-monetised quantitative impacts of a corridors have been split into smaller calculation in the Transport Agency’s scheme to be captured. Projects are also projects. However, the benefit-cost ratios Economic Evaluation Manual). considered using the UK Treasury’s five- of each of the smaller projects cannot Michael Pickford (2013) takes case model: be considered in isolation. The most issue with the use of strategic fit and • strategic fit; appropriate measure is the package effectiveness, and claims that the matters • value for money; cost-benefit ratio. This is because the listed are already incorporated in the • ability of the promoter to deliver the benefits of and the synergies between efficiency criteria using cost-benefit project; complementary activities cannot be fully analysis. This assertion is not correct. • project affordability and financial realised without each component being Standard cost-benefit analysis adopts stability; implemented. Pickford’s claim that each a restrictive assumption that there is • evidence that the project can be individual component of the corridor, little or no impact of a scheme on the satisfactorily procured. developed solely for administrative and

Page 68 – Policy Quarterly – Volume 9, Issue 4 – November 2013 construction management purposes, productive advantages that arise from the Graham to carry out research to derive should be taken into account is contrary close spatial concentration of economic agglomeration elasticity estimates on an to good project appraisal practice. activity. The Economic Evaluation Manual aggregate, one-digit industry and on a Like other road projects, the individual operates with two types of agglomeration regional level. Prior to this, considerable segments which comprise the Wellington economies: research had been carried out overseas, Northern Corridor are designed to • Localisation economies: the such as that by Graham (2006a, 2006b, work as a whole corridor. To selectively efficiency gains that arise from 2007; Graham, Gibbons and Martin, examine benefit-cost ratios for individual the increased scale of a particular 2009), Venables (2007) and Ciccone segments of the corridor in isolation – industry operating in close proximity. and Hall (1996). The UK Department such as the Otaki expressway – does not These economies are external to for Transport had also carried out tell the whole story, as people’s journeys organisations but internal to the development and testing work on the are seldom limited to the arbitrary industry. agglomeration methodology (Department boundaries of single sections chosen for • Urbanisation economies: the for Transport, 2005). management purposes. Collectively, the productive advantages that accrue In a paper published in the Journal improvements to individual sections will to organisations by being located of Urban Economics, Maré and Graham unlock benefits along the whole corridor. in large population centres. These concluded that: This is in accordance with best practice. The Transport Agency is in the process of incorporating aspects of the Treasury’s The Transport Agency has a continuous Better Business Case framework into its decision-making process. The Treasury’s improvement programme for its Economic framework is based on the UK Treasury Evaluation Manual and an active programme to framework, but also takes into account some elements from the Investment research such matters. Management Standard produced by the State of Victoria Department of Treasury and Finance (Mackie and Worsley, 2013). Under the Treasury’s Better Business Case economies are external to the • Our preferred overall agglomeration framework, a project is assessed on the organisation and the industry elasticity estimate of 0.066 indicates following matters: but internal to large population that a 10% increase in effective • is it supported by a robust case for centres. Organisations derive density is associated with a 0.66% change – the strategic case; benefits from the scale of markets increase in firm productivity. The • does it maximise value for money – (including labour markets), from overall estimate is well within the economic case; the proximity of market areas for the consensus range of 0.01–0.10 • is it commercially viable – the inputs and outputs, and from good identified by Graham (2005) though commercial case; infrastructure and public service. slightly above the median estimate • is it financially affordable – the Pickford claims that the Transport of 0.041 documented by Melo et al. financial case; Agency was quick to embrace the concept (2009). • is it achievable – the management of agglomeration benefits despite the • The preference for this estimate case. concept not being free from controversy. reflects a tradeoff between reducing The Treasury’s Better Business Case The concept of agglomeration is not new. the upward bias due to sorting of framework is being adapted to ensure Economic literature has identified a range high-productivity firms into dense that it is fit for purpose when evaluating of possible sources for higher productivity areas, and the downward attenuation transport projects. This will require some in densely populated areas. Marshall bias due to limited within-enterprise minor changes to existing Transport (1920), for example, discussed the variation in effective density when we Agency procedures, including developing advantages of thick labour markets, ease control for firm heterogeneity using a strategic case for change first, followed of linkages to input and output markets, enterprise fixed effects. (Maré and by a detailed economic appraisal. and knowledge spill-overs arising from Graham, 2013). proximity to others in the same industry The Transport Agency is satisfied Wider economic impacts (localisation). Each of these potential that the agglomeration estimates derived In line with international best practice, the sources is consistent with agglomeration accord with studies carried out and that Transport Agency has also strengthened effects – the observed positive relationship the methodology adopted in its Economic the way it evaluates economic efficiency between agglomeration and productivity Evaluation Manual is line with best by including agglomeration impacts (Maré and Graham, 2009). practice adopted overseas. in its Economic Evaluation Manual. In 2008 the Transport Agency Pickford’s comment that the Agglomeration economies describe the commissioned David Maré and Daniel agglomeration concept and methodology

Policy Quarterly – Volume 9, Issue 4 – November 2013 – Page 69 is far from settled could apply to many fails to take into account the limitations benefit analysis is the cornerstone of our economic theories and concepts, of standard cost-benefit analysis and the economic appraisal for investment, but including those used in standard development of cost-benefit theory and it is not the only aspect relevant to the cost-benefit analysis such as travel practice. The criteria of strategic fit and decision-making process for transport time, travel time reliability and safety effectiveness seek to ensure that a more projects and programmes. impacts. The Transport Agency has a balances approach is achieved and that continuous improvement programme appraisals of transport schemes do not for its Economic Evaluation Manual and over- or underestimate the total economic an active programme to research such impact of the proposed activity. matters. The Transport Agency has also adopted a package approach when assessing Summary and conclusions transport schemes to ensure that benefits The Transport Agency’s review of the of and synergies between complementary Pickford article concludes that the article activities are fully realised. Rigorous cost-

References Ciccone, A. and R. Hall (1996) ‘Productivity and the density of economic Mackie, P. and T. Worsley (2013) International Comparison of Transport activity’, American Economic Review, 86 (1), pp.54-70 Appraisal Practice, Leeds: Institute for Transport Studies, University Department for Transport (UK) (2005) Transport, Wider Economic of Leeds Benefits, and Impacts on GDP, discussion paper, July Maré, D. and D. Graham (2009) Agglomeration Elasticities in New Graham, D.J. (2005) ‘Transport investment agglomeration and urban Zealand, research report 376, Wellington: NZ Transport Agency productivity’, paper presented to World Bank symposium, Imperial Maré, D. and D. Graham (2013) ‘Agglomeration elasticities and firm College, London, March heterogeneity’, Journal of Urban Economics, 75, pp.44-56 Graham, D.J. (2006a) Investigating the Link between Productivity Marshall, A. (1920) Principles of economics (8th edn), London: and Agglomeration for UK Industries, report prepared for the UK Macmillan Department for Transport, London: Imperial College McLauchlan, G. (ed.) (1989) The Illustrated Encyclopedia of New Graham, D.J. (2006b) Wider Economic Benefits of Transport Zealand, Auckland: Bateman Improvements: link between agglomeration and productivity, stage 2 NZIER (2013) Appraising Transport Strategies that Induce Land report prepared for UK Department for Transport, London: Imperial Use Changes: estimating benefits of long-term land use change College from standard transport model outputs, NZIER public discussion Graham, D.J. (2007) Wider Economic Benefits of Transport Investments: document, working paper 2013–04, Wellington: NZIER evaluating the application of UK agglomeration elasticity estimates NZTA (2010) Economic Evaluation Manual, Wellington: NZTA in the New Zealand context, report to Land Transport New Zealand, Pickford, M. (2013) ‘State highway investment in New Zealand: the Wellington decline and fall of economic efficiency’, Policy Quarterly, 9 (3), Graham. D.J., S. Gibbons and R. Martin (2009) Transport Investment pp.28-35 and the Distance Decay of Agglomeration Benefits, report prepared Venables, A.J. (2007) ‘Evaluating urban transport improvements: for the UK Department for Transport, London: Imperial College cost-benefit analysis in the presence of agglomeration and income Grimes, A. (2011) Building Bridges: treating a new transport link as a taxation’, Journal of Transportation Economics and Policy, 41 (2), real option, Motu working paper 11-12, Wellington: Motu Economic pp.173-88 and Public Policy Research Vickerman, R. 2007 Transport Project Evaluation, Aldershot: Edward Grimes, A. and Y. Liang (2010) ‘Bridge to somewhere: valuing Auckland’s Elgar Northern Motorway extensions’, Journal of Transport Economics and Policy, 44 (3), pp.287-315

Page 70 – Policy Quarterly – Volume 9, Issue 4 – November 2013 Michael Pickford A Brief Reply to Ernest Albuquerque

Mr Albuquerque challenges my article in Policy Quarterly the expressway from Wellington airport to Levin. In 2012 the Otaki-Levin section (Volume 9, Issue 3, 2013) on three main grounds. Firstly, was abandoned in favour of a lower cost he uses the well-known limitations of standard cost-benefit road upgrade because the BCR was re- estimated to be only 0.29.2 analysis (CBA) in transport project appraisals as the basis Finally, Mr Albuquerque challenges for claiming that the ‘strategic fit’ and ‘effectiveness’ criteria my view that the WEBs are controversial. He cites the building of the Auckland adopted by the NZTA lead to a better estimation of the total Harbour Bridge, which facilitated the economic impact of the proposed activity than using the city’s expansion on the North Shore, as an example of the development benefits that ‘efficiency’ criterion alone. He implies that these criteria can result from major transport projects. attempt to capture the impact of large transport schemes on However, it is perhaps not surprising that the bridge had this effect, as it facilitated long-term land use development and on induced traffic effects. the first direct road connection. The However, he does not substantiate this claim, and it is unclear RoNS are different, because they generally involve replacing existing state how use of these criteria could achieve that goal. highways with expressways, which offer only incremental improvements on the A better argument would be that the RoNS should be viewed as a ‘package’, existing connections. Consequently, the NZTA is addressing the limitations of because of the interrelations between the benefits are limited, and combined with conventional CBA by including the component road sections. He argues that high costs, result in only modest BCRs. wider economic benefits (WEBs) in the evaluating each individual component of Further, even accepting the NZTA’s appraisal. In doing so, NZTA is implicitly the RoNS separately would be ‘contrary WEB estimates, the numbers are often no longer assuming perfect competition to good project appraisal practice’. relatively small. For example, the in markets, and so this limitation can no I disagree. It would be economic Wellington RoNS’s conventional BCR of longer be held against CBA. folly to focus only on the best cost ratio 1.0 increases to 1.2 with agglomeration Mr Albuquerque disagrees with my (BCR) for an arbitrarily-defined RoNS, benefits added, and to 1.4 with WEBs contention that the ‘strategic fit’ and and to ignore the low BCRs of individual (2009 figures). These BCRs still fall well ‘effectiveness’ criteria lead to a double- components. A component project’s BCR below the average of about 4.0 for state counting of the benefits already included can be developed using a base case which highway projects in the recent past (even in the ‘efficiency’ evaluation. However, the assumes that the rest of the package though WEB assessments were not then double-counting is obvious. For example, is implemented. If the incremental included). the Wellington Northern Corridor RoNS benefit added by a component relative My view remains that even with the was given a ‘high’ rating for strategic fit to its incremental cost is low, then WEBs included, the BCRs of NZTA’s state on two grounds: that it was identified as a that component should be excluded highway projects are suffering because the RoNS in the GPS of May 2009, and that it from the package. His argument about goals of ‘strategic fit’ and ‘effectiveness’ was an important freight route.1 The first interrelationships provides no defence. are given greater weight than economic adds no new information other than that This incremental approach is consistent efficiency, resulting in hundreds of the Government wanted the road built, with section 2.10 of the NZTA’s Economic millions of dollars of benefits annually and the second was based on a benefit Evaluation Manual, Volume 1. being sacrificed. already included in the efficiency analysis. The NZTA does not always act in the 1 See: NZTA, “NZ Transport Agency: (SH1) Wellington The road got a ‘high’ effectiveness rating way that Mr Albuquerque advocates, for it Northern Corridor RoNS Endorsement and Funding for on similar grounds. sometimes focuses on incremental BCRs Investigation, Design and Property Purchase”, Board paper 09/11/0292, 27 November 2009. Mr Albuquerque’s second main in the refinement of packages of work. In 2 See: NZTA, ‘Otaki to Levin Staging Options’, DMT Paper, 12 criticism relates to NZTA’s view that a 2009 the Wellington RoNS was defined as January 2012, page 4.

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