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New Zealand politicians are facing unprecedented fiscal challenges over coming decades to deal with the country's ageing population, an economic think-tank warned Thursday.
A report from the New Zealand Institute for Economic Research ( NZIER) said the approach to fiscal policy needed to change, and postponing the cost of the changes required to cope with an ageing population would raise the cost in future.
"Without significant changes, government debt will be almost twice New Zealand's GDP by 2060, compared to 26.3 percent of GDP now. That is simply not affordable," NZIER senior economist Dr Kirdan Lees said in a statement.
Tough decisions around taxes and government spending needed to be taken now, and stuck to, in order to avoid a U.S.-like situation in the future when the economic and political costs of correcting debt levels became dangerously high.
A bipartisan agreement on funding superannuation costs would be a good starting point, he said.
"Our research shows that over the past century, New Zealand governments have reacted to high public debt levels by changing tax rates and spending levels. They haven't let dangerous debt imbalances persist," he said.
"Today, New Zealand's fiscal position is sound -- our public debt is low compared to the Organization for Economic Co-operation and Development (OECD) peers. We have room to adjust tax and spending in the face of any future shocks."
The NZIER recommended the government should better manage expectations about what New Zealand could afford in the future by mapping out the types of spending and taxation policies that would change.
Broadening the tax base and reorienting welfare back to those most in need were good starting points.
The report said that New Zealand had "ample flexibility to start lifting tax rates -- over time -- without taxation distorting the incentives to work and invest so much that revenue falls."
"In reality, we would expect fiscal adjustments to come about through a combination of lower government spending, broadening the tax base as well as lifting existing taxes," it said.
