Fiscal Crisis: Could a Parliamentary Budget Office help?

This piece was originally published in The Post as part of a series on six crises facing New Zealand.

New Zealand is a distinctive high-income economy. By global standards it is small, geographically remote and highly exposed to commodity price cycles. Yet over recent decades it has delivered living standards that compare favourably with many larger and more diversified economies, particularly when living standards are measured more broadly than GDP per capita.

But we do face structural challenges, especially weak productivity growth and rapid population ageing, that create rising medium-to long-term macroeconomic and fiscal risks. While New Zealand’s strengths have supported high wellbeing and relatively robust income growth, these challenges threaten the economy’s capacity to absorb shocks and risk lower living standards for future generations.

A range of policy directions has been proposed to lower these risks, including tax reform, restraint in ad hoc industrial policy and changes to retirement income settings. This column’s central recommendation is to establish an independent fiscal institution – a Parliamentary Budget Office – to strengthen fiscal decision-making, transparency, and public understanding of long-term trade-offs.

Ageing and fiscal sustainability

The costs of funding an ageing population have arrived, but we’ve become so numb to these warnings that many of us have stopped listening – instead deciding that rising government spending must just reflect mismanagement.

We have been warned since Treasury’s first long-term fiscal statement in 2006 that an ageing population would push up government spending and act as a drag on economic growth.

However, it hasn’t been that noticeable as several headwinds have moved in New Zealand’s fiscal favour: rising labour force participation among older workers and inward migration which delayed fiscal pressures relative to other countries.

Even so, ageing has put increasing pressure on government spending. A full 18% of the increase in government spending over the last 20 years has been due to increasing payments on New Zealand Superannuation. Spending on super, health and aged care are forecast to keep rising rapidly with the proportion of New Zealanders aged over 75 is projected to double over the next four decades.

By 2065, Treasury’s long-term fiscal model projects that – if no policy actions are taken – government spending will rise from nearly 33% of GDP to almost 44%.

Ageing and rising interest on government debt are not the whole story. Fiscal headroom is also required given the risky world we find ourselves in, as well as community agreement that government should do more to support those who face these risks.

New Zealand faces growing external and technological risks. The rules-based global economic order is under strain, while rapid advances in artificial intelligence are likely to be disruptive even as they create opportunities.

To its credit, Treasury has put these costs in front of us. Their August 2025 long-term insights briefing indicated that the average annual cost of responding to economic shocks since the 1980s was around 1% of national income. This reinforces the importance of maintaining prudent debt levels to preserve future policy flexibility

A Parliamentary Budget Office?

So what do we do? To some the answer is obvious, we need to protect the services we’ve committed to for older and vulnerable New Zealanders and accept broadly higher taxes to pay for it. Another group comes to the obvious answer that we need to cut spending, or find efficiencies in government, so that taxes can be left as is or cut.

Both paths are legitimate, but the preferred direction depends on the values you hold. We can’t have a reasonable discussion about values unless we are realistic about the trade-offs.

Politicians and private sector economists are too focused on the here and now to give this to us. Government departments, forced to manage relationships and responsibilities, are somewhat constrained from doing that.

Another approach by way of an institutional guardrail would be the establishment of a Parliamentary Budget Office (PBO) focused on providing visibility, transparency and public credibility to discussions about fiscal sustainability.

However, if this is just another government department won’t the same concerns about credibility be faced by this new organisation?

To see why this wouldn’t be the case, we can look at the Australian PBO. They have been willing to publicly disagree with government regarding costings and projections, and in turn have become an increasingly trusted voice in Australia.

The clearest example of this was last year, when the opposition was pitching an exemption from fringe-benefit tax when a small business takes people out for lunch. The PBO estimated this would cost A$250 million. The government commissioned Australian Treasury to cost it, leading to a A$10 billion costing in the news.

Australian Treasury costings were used in a politically motivated way – even though the officials provided free and frank advice. The PBO did not face this and was able to provide non-partisan analysis – helping improve public perception of its impartiality.

For this reason, the New Zealand PBO will require sharp independence from government and the ability to do policy costings – as this is where such an organisation builds a reputation as a trustworthy and independent body.

Unlike proposals from the Greens, Labour, National and Opportunity, the policy costing function should not be the main purpose of a PBO. Instead, the independent assessment of the fiscal stance would be the most important function. But undertaking such policy costings would improve the information about policy platforms before an election and help this organisation to build credibility.

Clarifying trade-offs

In many respects New Zealand is doing an admirable job for its population. But slowing growth domestically and around the world, rising economic and social shocks, and a smaller share of the population that is working age looking after a greater number of older New Zealanders are trends that will put pressure on this.

Setting up a PBO will help clarify what is happening and what different trade-offs we face to ensure fiscal sustainability. After that, it is up to all of us to decide what direction we want the country to go.

Matt Nolan is a senior research manager at the e61 Institute. This opinion piece is based on his chapter in the Helen Clark Foundation's latest book, Facing Up to Our Future: Challenges and Choices for New Zealand.