The rhetoric from the government is that for the good of the nation the government needs to get tough on the level of government spending.  They sell a story of being tough and prudent, but unless they are prepared to address the big spending items, health, education and superannuation there is unlikely to be any substantive change in the size of government.

In 2010 $13.1bn of public money was spent on health services.  A further $11.7bn was spent on education and $8.3bn on superannuation.   The combined spending in these three areas, $33.1bn, makes up 52% of government spending and 17.5% of national GDP.       Health and education have been sink holes for government spending in recent decades, with spending in health increasing by 201% (i.e. trebling) in the fifteen years since 1995.   This has meant that health spending has increased from 4.8% of GDP in 1995 to 6.9% in 2010.   The increase in education has been more subdued, it has increased by "only" 170% over the same period, increasing from 4.8% of GDP in 1995 to 6.2% in 2010.

To put this in perspective, if spending on health and education had remained at 4.8% of GDP this would reduce government expenses in2012 by $6.4bn from the forecast $26.6bn to $20.2 bn.   In other words, increases in the proportion of money spent on health and education are equivalent to two-thirds of the government deficit forecast for 2012.   Perhaps a more telling comparison is to note that in 2010 spending on departmental activities outside health and education summed to $6.5bn, 26% of total spending in health and education.   That is, the increase in health and education spending that we have witnessed over the last fifteen years is equivalent to the funding required to doubling the size of the entire bureaucracy.   Few would argue that doubling the size of the bureaucracy would constitute a better use of tax funded spending, but it puts in context the difficulty of making serious savings in government spending if one does not address spending in health and education.

At first blush, the fiscal forecasts accompanying the 2011Budget would suggest that the government is about to get serious about spending in health and education, but this is unlikely to materialise.   Instead, the recent Budget has sent the usual mixed messages to the health and education sectors, by indicating that they are going to be tough on spending in the future, but are content to be soft in the immediate future.   The Budget forecasts are for expenditure in health and education to be held at the levels forecast for 2012, but these levels already incorporate a $600m increase for health and a $200m increase for education in 2012.   With the Budget forecasting, yet-to-be-allocated new spending items of about $1bn per year, it seems more likely that spending in health and education will continue to increase, with spending in health likely to exceed $16bn by 2015 and education spending will be close to $13bn.

This is about as tough as it gets for health and education.  During the last 15 years the increase in government spending has averaged 7.6%per year for health and 6.9% per year for education.   With inflation averaging 2.2% pa in the fifteen years from 1995 to 2010, spending in health and education has exceeded inflation by about 5% each year over this period.   Thus expenditure growth of 2 to 5%pa will perhaps appear comparatively tough for these sectors.

In addition, spending on superannuation is about to ramp up as an increasing number of baby boomers reach retirement age.   Between 2010 and2015 spending on superannuation is forecast to increase from $8.3bn to$11.7bn.   This represents an increase in the superannuation burden from 4.4% to4.7% of GDP in five years.   But this is just the beginning.   With superannuation linked to wages and with increases in the proportion of elderly in the population likely to continue to increase in coming decades, the superannuation bill could potentially exceed 8% of GDP by the 2030s.

With increases in the age profile also likely to put upward pressure on the demand for health services, fiscal pressures are likely to intensify.   Once the easy spending targets for fiscal saving have been addressed, New Zealanders are going to have to begin confronting the tougher trade-off ‘between higher tax rates and the amount of spending on the big three: health, education, and superannuation.   Should eligibility for superannuation remain universal and/or is eligibility at the age of 65 appropriate?   Are there better ways of rationing health services than waiting lists and the decisions of clinicians?   Are we content with a health system that tends to spend disproportionate amount on the last year of life?   What is the appropriate balance between private and public returns from education?