Will Treasury's outlook be more cheerful next time?

Every four years or so Treasury releases its long-term fiscal update, which sets out the costs if current welfare, education, health and other policies are kept as they are.

Journalists and economists are invited to a briefing at No 1 The Terrace and those of us who have done it before know the drill.

We hand in our cellphones and are given, in return, sackcloth and ashes, before being us ushered into a stony, sepulchral and dimly lit chamber.

A hush falls. Any noises echo off into the chilly, damp-laden and doom-ridden atmosphere.

Occasionally, bats fly out of the eaves. Weird agonised shrieks are heard in the middle distance, cries which are cut off in mid-scream with a dull and squelchy thud.

The assembled hacks and eminent forecasters – by now huddled together in the middle of the room, clinging to each other for warmth and for emotional comfort – are then approached by Treasury officials brandishing the latest report on long-term fiscal projections.

Despite flinching away, whimpering, the reports are forced on us by the Treasury bods, who then cackle maniacally. There is a sound like ripping leather, wings sprout from their backs and they fly off into the distance, screeching and howling.

The reports usually say much the same thing: in summary, by 2051 the only people left in the country will be a couple of ailing 83-year-olds fighting over the last dialysis machine.

This time it is going to be different.

Drawing on the approach – and some of the same key personnel – as the Tax Working Group in 2009,  Treasury is combining with Victoria University for a panel and a series of papers to discuss the issues which arise from the combination of New Zealand's fairly generous welfare state and its ageing population.

There is to be a series of studies between now and December, followed by a conference along the lines of the one which closed the Tax Working Group's year of kicking around issues such as raising GST, hammering property investors, cutting corporate and personal tax, and milling around a bit on issues of a land tax or a capital gains tax.

The same man who headed the tax group is performing a similar role this time: Victoria University's pro-Chancellor and veteran economist Bob Buckle, who heads an "external panel" which will act as a kind of reference group for Treasury.

The ageing population is too often talked of as a negative and a drain on country, he says.

"The fact that people are living longer, healthier and more active lives is a very positive thing. And it's not a temporary thing, either – it's not simply the baby boomers coming through and there's a bubble and it settles down. This is a longer term phenomenon than that."

Two things to bear in mind are that life expectancy tends to be under-estimated, and therefore the longer term demand on public services, particularly in health and superannuation, under current policies is likely to be even higher than it appears right now.

The other lesson from previous experience is that if changes to such policies are made in the medium term "it makes quite a difference to the longer term projections".

The focus of the panel is going to be on coming up with options for future policies, not only to do with the policies themselves but also the timing of any change, he says.

The country is, by the end of next decade, likely to be facing much greater pressures than today on government spending, the tax base, against the backdrop of a world in which it is much less easy to borrow than it has been in recent years.

"The key questions are, what options do we have? How serious is the problem? And also, how urgent is the problem, if there is one, and does it have to be dealt with yet?

"Then the questions arise, if debt is a challenge, or if the pressures on public finances start to emerge in 20 or 30 years, is it good to act early? What are the risks around acting sooner rather than later?"

Tax will feature prominently. Mr Buckle knows preliminary work suggests that one of the effects of the ageing population is that the tax mix will probably shift towards indirect taxes even if there is no change to tax rates, simply because there will be fewer people earning.

"If demographic change means the costs of superannuation and healthcare are going to be higher in future. And if nothing is done about it and you have to manage to a debt target – or even if you do not, but debt gets to a level that is not sustainable – then you are going to have to look at taxes."

The other constraint, of course, is the big neighbour next door. How much will New Zealand governments of the future be able to raise taxes without adding to the trans-Tasman exodus.

Although it is government superannuation, especially the age of entitlement, which attracts the most public attention, Mr Buckle says the biggest challenge is health spending.

Health is already the largest single outlay the government makes, at a bit more than 20% of total government spending.

"If any government wants to keep that, or superannuation, as they are, they are going to need to move on other areas.

"You have to manage this. There's no escaping it."