Time to rethink health spending: New Zealand is facing some difficult political choices, if government spending is to be sustainable in the long term.
Health care industry (Government finance)
Health care industry (Political aspects)
Health care industry (Economic aspects)
Health planning (Political aspects)
Health planning (Economic aspects)
|Publication:||Name: Kai Tiaki: Nursing New Zealand Publisher: New Zealand Nurses' Organisation Audience: Trade Format: Magazine/Journal Subject: Health; Health care industry Copyright: COPYRIGHT 2011 New Zealand Nurses' Organisation ISSN: 1173-2032|
|Issue:||Date: Sept, 2011 Source Volume: 17 Source Issue: 8|
|Topic:||Event Code: 200 Management dynamics; 900 Government expenditures Computer Subject: Company business management; Health care industry|
|Product:||Product Code: 9000144 Expenditures-Total Govt; 9210124 Expenditures-State Govt; 8000310 Health Planning NAICS Code: 92113 Public Finance Activities; 62 Health Care and Social Assistance|
|Geographic:||Geographic Scope: New Zealand Geographic Code: 8NEWZ New Zealand|
The recent economic and political problems in Europe and the United
States (US) are a sign that New Zealand needs to face up to politically
difficult choices. Greece, Spain and Italy might seem far away. But what
is happening there is directly relevant to us. Not only because we trade
with them, but also because their troubles tell us something about the
consequences of unsustainable public spending.
An ageing population means the growth in government spending we have seen over the past decade is not sustainable in the long term.
The long economic boom we enjoyed in the 2000s is over. The global financial crisis triggered a deep economic recession among some of our key trading partners. First, access to cheap finance, and then demand, dried up. Private sector demand has not recovered yet.
New Zealand households are paying off debt too. Household debt had risen to 170 percent of income, compared to 80 percent of income a decade ago. (1) Consumer confidence has returned, but this has not translated to spending. Retail spending per head of population fell 10 percent in 2008, and it has not recovered. (1) This means that every person is now spending $1000 less a year than they did in 2007.
The New Zealand government has done what most governments around the world have done: borrow more to inject some fiscal stimulus to take the edge off the pain of the recession (and then some more in response to the devastating Canterbury earthquakes). The government has since put together budgets to get the books back to surplus by 2015 or earlier.
Long-term fiscal pressures
This return to surplus is prudent, but does not deal with the long-term fiscal pressures stemming from an ageing population and, in the case of health care, also from new technologies. For years the Treasury has warned about these pressures and the consequential unsustainable growth in net government debt if costs are not managed. It is now time to address these pressures, to avoid becoming like Greece, Spain, Italy, the United Kingdom or the US.
Any government has three strategic choices to eliminate the difference between income and spending: grow the economy faster; raise taxes; or cut government spending. A combination of the three is needed.
Growing our way out of the problem is the most attractive option. But it is risky--there are no guarantees it will work, and the history of previous financial crises tells us we are faced with a few more years of slow growth. The best way to get ahead is to make New Zealand attractive to business and workers. That means a highly skilled labour force, a great infrastructure, a regulatory system that promotes trade and competition, and low corporate and income taxes to reward innovation and entrepreneurship. Voters should look for policies that improve on these elements.
The second option is to raise taxes. But this is risky too. The government could destroy incentives to work, save and invest if it picked on the wrong taxes. That would undermine economic growth. For this reason it is better, if taxes must be raised, to raise GST than income taxes. There are other options to raise tax revenues in ways that could also reduce distortions in the economy. The capital gains tax suggested by the Tax Working Group could be looked at.
But we cannot get away from the fact that we have to tackle the two single biggest areas of public spending--New Zealand Superannuation (now $9.5 billion per year) and health care ($14 billion per year). (2) Health and superannuation costs will grow exponentially and, if uncontrolled, can force governments to borrow and push public debt levels to those of the US or Greece.
We should seriously consider the Retirement Commissioner Dianne Crossan's proposal to raise the age of eligibility for New Zealand Superannuation, as other countries have done. It seems reasonable to gradually raise the age from 65 to 67 over time, recognising the rise in healthy life expectancy. Both major political parties have already dismissed the idea, but it ought to be debated.
We also need to contain growth in health care spending. Health spending grew an average eight percent per year over the last decade or so,3 more than double the rate of economic growth. While recent budgets have contained growth, they have not addressed the big cost drivers. The lid will eventually blow off this pressure cooker.
As a country, we need to rethink what publicly funded health care we can access, where, by whom care is delivered, and who pays for what. It will require new incentives, management structures, workforce roles, and models of care that promote quality and productivity. If we start debating ideas seriously now, changes can be introduced gradually without patients' access to quality services being disrupted.
New Zealanders will be trading off many considerations when casting their vote in November. Those considerations should, I think, include whether politicians are offering a credible strategy to put government spending on a long-term, sustainable footing.
Jean-Pierre Raad is the chief executive of the New Zealand Institute of Economic Research.
(1) New Zealand Institute of Economic Research (NZIER). NZIER Calculations. Wellington: Author.
(2) Treasury. (2011) Budget 2011: the estimates of appropriations for the Government of New Zealand for the year ending 30 June 2012. Wellington: Author.
(3) New Zealand Ministerial Group. (2009).The Horn Report: Meeting the challenge: enhancing sustainability and the patient and consumer experience within the current legislative framework for health and disability services in Hew Zealand. Wellington: Author.
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