The two security issues I propose to cover are firstly the impact of aging population and secondly the potential for shared use of resources between Australia and New Zealand. Both of these issues will be explored from the perspective of the New Zealand Defence Force.
In the aging population issue, I propose to examine the changing demographics predicted in New Zealand, and consider the impact on the NZ Defence Force. I anticipate that this will raise issues such as reduced and changing employment pool, and greater pressure on government funding with lower tax base and increased superannuation and health care costs in particular.
Issue 2 - Shared Australian/NZ resources
In this area, I propose to consider the opportunities that may exist for Australia and NZ to mitigate their shared resource pressures by greater co-operation. This could include shared procurement, joint contingents, or even operating niche/complementary capabilities. Issues with such an approach which may be considered could include sovereignty, extent of shared interest, command and control, fairness of contribution and logistical/practical considerations.
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New Zealand is facing a significant shift in population demographics, and in particular an aging population, which will have far-reaching implications for its economy, and will result in some major challenges for the New Zealand Defence Force (NZDF).
New Zealand Treasury forecasts indicate that the proportion of people over the current superannuation age of 65 compared to the working age population (those aged 15 to 64) will more than double, from 19% in 2009 to 42% by 2050.  This means that
As the population ages, there will be increasing pressure on government funding, particularly in areas such as health and superannuation.
Points to cover:
Changing employment pool
Pressure for resources, and desire to keep lid on expenditure growth
Demands from population trends elsewhere?
Uncertainties in forecasting
Long term nature of people and equipment means need to consider early
So what can be done
Canada and the United States, along with Australia and New Zealand, have maintained relatively robust population growth and thus are different from the MDCs [more developed countries] of Europe.
Almost all population growth over the next 40 years will be in developing countries.
PRB staff, "World Population Highlights: Key Findings From PRB's
2009 World Population Data Sheet," Population Bulletin 64, no. 3
The Mäori population is much younger than the total population. The median age of the
Mäori ethnic group was 22.9 years of age at 30 June 2009, 13.6 years younger than
that of the total population. Pg 8
New Zealand has an ageing population because of a shift to sustained low fertility and low
mortality rates. This is also observed in other Organisation for Economic Co-operation and
Development (OECD) countries. At 30 June 2009, half the New Zealand population was
over the age of 36.5 years, compared with a median age of 34.0 years a decade earlier. Pg 2
Decreasing fertility rates have been accompanied by decreasing mortality rates. The transition from high fertility and mortality to low fertility and mortality has resulted in an overall increase in the median age of the population (known as population ageing). Pg 6
All projection series indicate more older people and further ageing of the population. The
median age (half the population is older, and half younger, than this age) of New Zealand's
population increased from 26 years in 1971 to 37 years in 2009. According to projection
series 5, half of the population will be aged 40 years and older by 2031, and by 2061 half
the population will be aged 43 years and older. Pg 32
The working-age population (those aged 15-64) more than doubled from 1.20 million in
1951 to 2.87 million in 2009. It is projected to grow gradually to 3.15 million in 2031 and
3.36 million in 2061. The working-age population will then make up 58 percent of the total
population, compared with 67 percent in 2009. Pg 32
Ethnic diversity is set to increase in New Zealand in the future. All ethnic populations will
increase numerically, but their relative percentages of the New Zealand population are
Always on Time
Marked to Standard
projected to change considerably. Mäori will comprise 17 percent of the population in 2026,
up from 15 percent in 2006 (series 6). In a similar trend, Pacific peoples will comprise 10
percent of the population in 2026, up from 7 percent in 2006.
The most significant change will be to the broad Asian ethnic group, comprising 16 percent
of the total population by 2026, up from 10 percent in 2006. 'European or Other (including
New Zealander)' will still be the largest ethnic group, making up 69 percent of the total
population in 2026, although this is a drop from 77 percent in 2006.
In the case of the Asian population, growth is mainly driven by net migration gains. In the
case of the Mäori and Pacific populations, the growth is mainly driven by higher fertility rates
combined with a youthful age structure. Pg 32
New Zealand's labour force is projected to rise from an estimated 2.24 million at 30 June
2006 to 2.65 million in 2031, and 2.79 million in 2061 (series 5M). The median age of the
labour force was 36 years in 1991 and 40 years in 2006. A further increase in the median
age to 42 years in 2011 is projected and it is likely to remain about 42-43 years through to
2061. In 1991, there were two people aged 25-44 years in the labour force for every one person aged 45-64 years. By 2018, these age groups will be equal in number. There will also be a significant increase in the labour force aged 65+, which is expected to increase from an
estimated 25,000 in 1991 and 62,000 in 2006, to 160,000 in 2021. Pg 33
Statistics New Zealand (2010). Demographic Trends: 2009.
Wellington: Statistics New Zealand
Discussions on Australia's current and future defence needs have traditionally been dominated by considerations relating to the strategic military environment. However, with demographic change now threatening Australia's economic growth potential, the strong budget position that has supported defence expenditures in the past will come under pressure. The supply of defence recruits will also grow more slowly. Defence, like other areas of government spending, will need to prepare for increasing budgetary scrutiny and a more challenging labour market.
Australia's Defence to 2045: The macro-economic outlook. Defender Spring 2005
By 2050, the total population is projected to have grown by 25%, while the number of people aged over 65 is projected to have increased 150%. By mid-century, the number of people 85 and older will have grown by about 400% - from 64,000 now to 330,000. That highlights the major change in life expectancy. Over the past 55 years life expectancy at birth has increased by about two years every decade. Although this rate is projected to slow, a person turning 65 in 2050 would still expect to live an additional 24 years, 4.4 years more on average than a 65 year-old in 2008.
Population ageing is important fiscally as 25% of government spending is currently on the 12% of the population aged over 65 and this will grow.
Population ageing is also likely to cause a slowdown in economic growth because of the shift to a relatively smaller working-age population.
Now, if government spending returns to historic patterns, net public debt could reach more than 220% of GDP midway through the century. The major change between 2006 and 2009 is that the government's budget is already in deficit - by $5.9 billion in the Crown Financial Statements. Around half of the difference between the 2006 and 2009 projection is due to the lower revenue and increased expenses associated with the recession and the resultant downward revision to economic growth and tax revenues over the next few years. The remainder is due to increased costs in existing programmes and changes to government policy over the past three years.
The second main scenario we use recognises that governments will want to manage debt - and it takes the Government's Fiscal Strategy Report goal of net public debt at 20% of GDP as the desired level. So the "sustainable debt" works from a top down basis of setting this debt target and then looking at what would have to change to achieve that.
The major difference between this scenario and the historic trends one is that the much smaller increase in government spending each year - the operating allowance of $1.1 billion plus 2% for inflation each year that was set in the 2009 Budget - continues not just for the forecast period but though until 2023. The key thing to take away from these graphs is that dealing with budget imbalances means spending less, taxing more, or borrowing. The long-term fiscal problem is "solved" if governments have budget surpluses over time.
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But achieving a sustainable level of debt - or any particular spending or tax level - is not simply a matter of drawing a line on a graph. In this case what it shows is that living with the $1.1 billion operating allowance over the next 15 years means reducing some public goods and services.
Make early change. Policy reforms will become harder and the changes required more severe as each year passes. Making early incremental policy change reduces the risk around the quality of decision-making and gives people time to adjust.
Keep debt under control. If current policies lead to increasing debt, future generations will find it difficult to set their own spending priorities or to meet unforeseen challenges. High levels of public debt increase the cost to everyone through higher interest rates, debt servicing and taxes, and ultimately could limit the ability of governments to set the policy they want.
Focus on outcomes. We need to focus on what works and what doesn't and it's important for the public to think about what it wants overall - for example, about having healthier people rather than high numbers of doctors visits - instead of measuring a government's commitment to policy by spending levels. The media (you) has a big role in lifting this level of debate.
Focus on growth. Growth means the country and individuals will be wealthier and there will be a larger tax base. Fiscal policies should also consider the impact on growth - this is particularly relevant in terms of the overall level of government spending, and tax policy. But growth alone doesn't solve the fiscal problem; that requires a fiscal response.
Encourage workforce participation. Demographic shifts mean all developed countries will be competing for labour and skills. We need policies that encourage New Zealanders to stay here, or to return after their OE, and to work if they can. Particularly important will be policies that allow older people to maintain paid work.
Keep spending under control and focus on public sector productivity. Focussing on value for money and efficiency across all areas of government spending will provide a win win.
This means getting the most out of the existing $64 billion of total government expenditure each year and very carefully evaluating the quality of new spending proposals.
The reality of government is that it is easier not to introduce a new programme than to remove an existing one. And to give the greatest possible flexibility of response, all policies should be examined.
But look at what's happened since 2006. The first statement said we had time - about 25 years from then, until around 2030 - before the government's accounts might move into deficit.
Three years later, and we are facing that future now. We are in deficit, and deficits are forecast to last for a few years yet. A lot of the headroom we had, financially and just as importantly in time, has disappeared. Our experience of the last 12 months - the global financial crisis and the worldwide and domestic recession - has reminded us that economic shocks do and will occur.
New Zealand's Long-term Fiscal Statement: Challenges and Choices
John Whitehead, Secretary to the Treasury
Thursday 29 October 2009
we simply can't keep doing what we have done without significantly increasing taxes or debt (pg5)
the developed world faces major demographic change. New Zealand's shift to an ageing population will accelerate soon, as the first baby boomers begin to retire from 2011 - and then live more than a further two decades on average (pg 5)
Three years and one recession later, we are facing that future now. The government's accounts are already in significant deficit and these are forecast to last for a few more years yet. A lot of the headroom we had, financially and just as importantly in time, has disappeared.
So looking at the big issues of government spending, public debt, the tax we need to pay for it - and of course our ageing population - is suddenly much more relevant.
what can be done so that projections of public debt rising to 223% of Gross Domestic Product (GDP) do not occur
The first baby boomers will receive New Zealand Superannuation (NZS) from 2011 and the numbers of new superannuitants will peak in the late 2020s.
Population ageing is likely to cause a slowdown in economic growth because of the shift to a relatively smaller working-age population.
The unprecedented demographic trends mean the old-age dependency ratio - the ratio of people
aged 65 and older relative to the working-age population aged 15 to 64 - rises from 19% in 2009
to 42% in 2050. The following table shows that the ratio of people 65 and older to those between
15 and 64 more than doubled in the 100 years to 2000, and will do so again in the next 50 years. (page 18)
the significant thing to note for this Statement is that the present Government has adopted an operating allowance for new spending of $1.1 billion (plus inflation) each year over the forecast period. This is significantly less new spending in each Budget than previously - for example, the allowances (excluding revenue initiatives) in Budget 2007 were around $3.3 billion and $2.4 billion in Budget 2008. [Note that this excludes growth in benefits and superannuation]
The major change between the projections in this Statement and the Budget forecasts is that, beyond 2013, we assume that governments resume historic trends in spending and provide new public goods and services at similar rates to those over the past 20 years.
core Crown revenue is below spending throughout the projection, resulting in deficits for the next 40 years.
Challenges and Choices: New Zealand's Long-term Fiscal Statement
surpluses are not projected to return until 2016/17
net debt is projected to peak at around 30% of GDP... and then fall towards 20% of GDP, in line with the Government's long-term fiscal objectives
The decline in net debt to around 20% of GDP towards the end of the projection period is in line with the Government's long-term fiscal objective. Meeting this objective would mean the Crown is better placed to absorb economic shocks. It would also put New Zealand in a better position when the long-term fiscal pressures from an ageing population and other factors begin to escalate. The Treasury recently published its Long term Fiscal Statement, which showed significant fiscal challenges posed by an ageing population and the unsustainable nature of growth in government spending in recent years. The Statement also showed ongoing cost pressures and an ageing population would likely require reductions in some areas of services, even with annual operating allowances of $1.1 billion (growing at 2% per annum) and growth in public sector productivity.
Capital Allowance. Continues at $1.65 billion for one year, 2014/15. Then resorts to a track of a $900 million starting point, in 2013/14, growing at 2% p.a. Value in 2015/16 is $936 million.
Super Fund contributions. Assumed to recommence at $2.8 billion in 2019/20 when
projected core Crown operating balance can cover the contribution.
Defence expenditure to remain at around $1.8B through to 2014.
Shared Australian/NZ Resources
Australia is New Zealand's largest trading partner. In the year ended 30 September 2008, two-way merchandise
trade amounted to $NZ18.2 billion, with Australia taking 24% of New Zealand's exports and supplying 19% of imports.
Economic and Financial Overview - 2009