What is the cost climate change

Which is Scarier: the Cost of Climate Change, Diabetes or Pension?

Geoff SimmonsEnvironment, Health, Tax and WelfareLeave a Comment

In recent blogs we have been looking at the Government’s deliberate exaggeration of the costs of taking action on climate change. Their intention is to divert attention from our lack of progress thus far, and to justify their weak target going forward. On this front they are doomsayers, wanting us to be scared that the kind of emission reduction targets most submitters called for (40%) would wreck the economy.

However, even if we take their shonky workings at face value, how big a deal would it be to take action on climate change? To answer this question properly we need to make some comparisons with other challenges we face, such as rising health and superannuation costs. These are challenges that the Government have previously brushed off as manageable, yet when put in context, they make taking action on climate change look comparatively easy.

Climate Change

The Government has put the costs of meeting its 2030 emissions target (a reduction of 11% on 1990 levels) at 1.2% of household income. We’ve already noted that almost all of that cost is fictional or unavoidable, so the true cost of this emissions target is negligible. Also note that the same costings say a target in line with the EU (a 40% reduction on 1990 levels) would cost around 1.7% of income.

John Key said a target of a 40 percent reduction on 1990 levels would be disastrous for the New Zealand economy.

Is he right? Let’s compare that with other challenges we face.

Superannuation

Known by some as the “Grey Tsunami”, the ageing population is a well-known problem facing our country. Over the coming decades, a glut of baby boomers will become eligible for superannuation payments. Given that they are likely to live longer than any previous generation, working New Zealand faces an ever-increasing number of pensioners to fund out of its taxes. Up until very recently there was roughly 1 pensioner for every 5 people of working age (15-65), but by 2060 that could be 1 pensioner for every 2 people of working age.

As a result the superannuation budget is increasing by over half a billion dollars every year, far faster than our incomes. This has been a political hot potato for some time – the last Labour Government set up a fund to pay for super costs in advance, but payments to that got canned when the global financial crisis hit. Since then the Labour Party has lost two elections on a policy of increasing the retirement age. Meanwhile the National Government has sat tight, assuring everyone that superannuation is affordable. Mr Key has even offered to resign if they tinker with it.

In 2010 National Superannuation cost 4.3% of GDP (our national income). Think of it as 4c in every dollar you earn. That is projected to rise to 5.1% of GDP by 2020, and 6.4% of GDP by 2030 – an increase of 1.3% of GDP over that decade alone. But costs will keep rising out to 2060, by which time they would take up nearly 8c in every dollar we earn. Puts his “disastrous”, though exaggerated 1.7% of household income cost of a 40% emissions reduction in context.

Yet Bill English has said that “New Zealand can afford to pay the bill for super“. Go figure.

Health and diabetes

Healthcare is another challenge for New Zealand in the 2020s. People demand more treatment, particularly at the end of their lives and you know that baby boomers won’t go quietly (or cheaply). As a result healthcare costs typically grow faster than the rate of inflation, at around 4% pa.

In 2010 healthcare costs were 6.8% of GDP. By 2020 that is projected to stay the same – a brave assumption by a Government that thinks it can restrain healthcare costs. But by 2030 official projections suggest this will creep up to 7.7% of GDP – an increase of almost 1c in every dollar. Remember that is only the cost to the taxpayer – we can expect out of pocket healthcare expenses to rise by a similar amount.

Many experts think this projection is far too optimistic, because it excludes some key drivers of healthcare spending. In addition to new technology (which generally pushes up costs), chronic diseases like diabetes are projected to cripple around 1 in 4 people. This will cause a massive cost – the bill for our health system is already over $1billion and growing – but more importantly for our productivity. Obesity and diabetes increase unemployment, sick days and reduce output; according to Morgan Stanley the rising prevalence could knock a quarter off our growth rate. Over a decade that adds up – we would be about 6% poorer by 2030 than if we didn’t have this burden.

Suffice to say that the healthcare costs above are most certainly a conservative estimate of the challenges we face in the 2020s. Yet the Government does not see any issues here that demand immediate action. You certainly won’t hear our PM saying obesity and diabetes will be disastrous for our economy – yet in comparison to the cost of reducing carbon emissions by 40%, they sure are.

The Overall Challenge

In addition to the costs of health and super, there will be costs from the debt the country will need to take on to meet these obligations. In total, health, superannuation and debt will chew up an additional 3c in every dollar we earn as a country by the end of the 2020’s compared to the beginning of that decade. According to the Government these are all challenges that can be managed. She’ll be right mate.

Contrast this with the Government’s flawed and exaggerated costing for a 40% reduction in emissions – 1.7% of household income. This would be a position of leadership – an emissions reduction target in line with what the European Union has pledged. Our Doomsayer-in-Chief said that this number would be “disastrous” for the New Zealand economy. Yet somehow his Government thinks that health, super and other, bigger challenges we face are manageable. His claim just doesn’t stack up to logical scrutiny. There’s an agenda here.

Source: Treasury Long Term Fiscal Report

Which is Scarier: the Cost of Climate Change, Diabetes or Pension? was last modified: December 15th, 2015 by Geoff Simmons
About the Author
Geoff Simmons

Geoff Simmons

Facebook Twitter

Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.