Treasury is warning the Government that its debt is on an “unsustainable trajectory” over the coming 40 years thanks to an ageing population driving up superannuation and health costs.

The Government’s main economic adviser released a draft report on Monday looking at Government spending out to 2060, the first of these legally mandated reports to be released since 2016.

Treasury is not worried about current debt levels brought about by Covid-19 spending, saying this spending is temporary and remains low by international standards.

But the officials are concerned about the impact that an ageing population will have in coming decades on health spending and New Zealand’s largest benefit – superannuation.

They have even modelled some very controversial possible policy changes that could alleviate the burden, including higher taxes, moving the super age to 67, and indexing superannuation to price growth instead of wage growth.

“Our projections indicate that the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends, in the absence of any offsetting action by the Government. This will cause net debt to increase rapidly as a share of GDP [gross domestic product] by 2060,” the officials write.

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They also caution that climate change is likely to impact the Government’s books but are not yet certain how large this impact will be.

And a major earthquake could dramatically alter New Zealand’s economy and debt position for over a decade.

Treasury’s modelling expects that under current settings Government spending will make up 43.4 per cent of the total economy (GDP) in 2061, while the tax take will sit about where it is now at just under 30 per cent of GDP.

The major driver for this will be the ageing population, with over a quarter (26 per cent) of Kiwis in 2060 expected to be over 65 years old, compared with 16 per cent in 2020.

Spending on superannuation would grow from 5 per cent of GDP in 2021 to 7.6 per cent of GDP in 2061, while healthcare would grow from 6.9 per cent to 10.5 per cent.

These percentage changes would be worth hundreds of billions of dollars as the economy continued to grow: Healthcare would cost about $155b a year instead of its current $20b, and superannuation would cost $112b instead of about $15b now.

Treasury modelling showed that large savings in superannuation could be found by indexing it to cost inflation instead of wage inflation, with costs staying relatively stable from the 2030s and saving the equivalent of 2.3 per cent of GDP. By comparison, raising the age of eligibility to 67 by 2030 would save 0.6 per cent.

The officials note that the Government’s current health reforms could result in some efficiencies in healthcare but doubt they will have a real impact on the long-term factors driving higher healthcare costs.

They look at several possible tax options to raise revenue over the period, including a small rise in GST, capital gains tax, and the personal tax rate.

Treasury also modelled the effect of “fiscal drag” for 10 years – tax rates being kept the same as incomes rise. This policy would hit Pākehā and males far more than other groups, when compared with an across-the-board tax rate hike.

Treasury and others have long warned that the ageing population will eventually cost the country more than it can afford, including in the agency’s 2016 version of this briefing.

But superannuation policy has been politically fraught in the past, and the current Government has promised it will not change the age of eligibility. National’s John Key also made this promise but his successor, Bill English, did make moves towards raising the age of superannuation to 67 gradually from 2038.

Prime Minister Jacinda Ardern did not comment in detail when asked about the new document on Monday.

“At the last Budget we were very careful to make the decisions that in our view would help the recovery while being mindful about our long-term debt.”