Raising taxes to fund health and pensions in an ageing New Zealand – Alternative tax bases

New Zealand, like many advanced economies, faces long-term fiscal pressures arising from population ageing. Over coming decades, demographic change is projected to increase government expenditure on New Zealand Superannuation and public health care relative to the size of the economy. Addressing these pressures will ultimately require policy choices about how government revenue, expenditure, and public debt evolve over time. This Analytical Note is one of a series of background papers that informed the Treasury’s 2025 Long-term Fiscal Statement (LTFS). The LTFS considers a broad range of possible responses to long-term fiscal pressures, including changes to government spending, revenue, and the design of major policy settings. The background papers supporting the LTFS provide additional technical detail on particular modelling approaches and policy scenarios, complementing the more accessible analysis presented in the LTFS itself. In this paper we use the Treasury’s overlapping generations (OLG) model to explore how different tax bases interact with demographic change and fiscal sustainability. The scenarios examined are stylised analytical exercises designed to illustrate the economic mechanisms within the modelling framework rather than represent specific policy proposals. The model assumes that health and pension spending follow projections based on current policy settings, and that tax policy adjusts over time to fund these expenditures and stabilise the government debt-to-GDP ratio. We examine three illustrative fiscal strategies. In the Baseline strategy, increases in expenditure are funded through higher marginal tax rates on labour income. In the GST strategy, expenditure increases are funded through higher consumption taxes. In the Combination strategy, fiscal adjustment is shared across labour income taxes, consumption taxes, and capital income taxes. These alternative strategies highlight how the choice of tax base affects economic behaviour and fiscal outcomes within the model. Taxes influence labour supply, saving, investment, and consumption decisions, which in turn affect economic activity and the size of the tax bases available to fund government spending. Because the labour, consumption, and capital tax bases differ in size and respond differently to taxation, the strategies generate different macroeconomic and fiscal outcomes over the projection horizon. Within the model, strategies that rely entirely on labour income taxation lead to larger reductions in effective labour supply and economic activity over time than strategies that spread fiscal adjustment across other tax bases. Strategies that rely more heavily on consumption taxation or a combination of tax bases tend to generate somewhat stronger labour supply and capital accumulation outcomes in the long run. However, the transition paths and distributional consequences differ across strategies, and households born in different periods and with different lifetime income profiles experience different outcomes. The OLG framework can be used to examine these distributional and intergenerational effects. The model shows that the alternative fiscal strategies have different implications for households with different lifetime income levels and for people born in different years. Some strategies impose larger adjustment costs on households currently alive, while others shift more of the fiscal adjustment toward future generations. While the analysis highlights the efficiency implications of different tax bases within the model, governments may pursue particular tax structures for a range of reasons, including redistribution or equity considerations, and administrative or political constraints. These broader considerations are outside the scope of this Analytical Note. The purpose of this paper is instead to provide technical insight into how alternative tax bases interact with demographic change within our OLG modelling framework. Together with the other background papers released alongside the LTFS, it contributes to the evidence base supporting discussion of New Zealand’s long-term fiscal sustainability.