The ageing population and health expenditure in New Zealand

Abstract

The elderly are the biggest users of public health service, and they are a growing proportion of the New Zealand population. Prima facie there is a case for pressure on health expenditure to increase. The question is, how large will that pressure be? Expected improvements in the health of the elderly, as well as the fact that many costs are associated with the death event rather than getting old, will help to dampen these pressures. This thesis concludes that another pressure will help to keep downward pressure on health spending, and that is the unwillingness of the median voter to vote for large increases in the tax rate. This thesis develops an overlapping generations model to examine the effect of ageing on government health expenditure. Majority voting is found to be inefficient, except in a special case. The equilibrium solution delivers less health care spending than in the optimal solution, and increases in health spending lead to reduced savings and reduced growth rates in this model. In a micro-simulation model of New Zealand data, the proportion of GDP spent on health care is predicted to rise. This is caused by increases in the probability of illness of the median voter. In the equilibrium solution health expenditure increases from its current 6.3% to 6.8% of GDP by 2051. However, optimal health expenditure is substantially higher. The increasing probability of illness of the median voter pushes up health expenditure, but not by enough to compensate for the increased prevalence of illness. As a result health expenditure per sick person falls over the next 50 years. An empirical cross-section study of nations from around the world, provides evidence that the proportion of the population aged over 60, does influence government health spending as a percentage of GDP.