Reconciliation with long-term fiscal projections

The fiscal projections in Figures 12 to 15 are based on a continuation of current policy as represented by Budget 2011 forecasts and assumptions about operating allowances, capital allowances and tax rates (eg, extra revenue created by the non-indexation of tax thresholds - known as fiscal drag). Details of the projection assumptions are set out in Annex 3.

The projections indicate that a continuation of current policy settings into the medium term would create fiscal policy choices in the future. They would allow future governments to cut taxes, increase spending, or both.

The Budget projection period extends to 2025. In the long run, a range of demographic factors come into play. The accelerating effects of population ageing and bottom-up cost pressures in areas like health will place increasing and significant upward pressure on expenses, such as NZS and healthcare.

For these reasons the Treasury also publishes Long-term Fiscal Projections every three or four years, which extend to 2050. Figure 16 highlights how net debt could evolve, given projected demographics, in the long term under three alternative sets of policy assumptions:

• The “Current policy” scenario assumes operating allowances of $1.19 billion (growing at 2%) out to 2025, with spending reverting to historic growth patterns thereafter. Under this scenario the Crown eventually generates sufficient surpluses that debt implodes, and the Crown becomes a large net owner of financial assets.
• The “Historic trends” scenario allows spending in health, education and other expenses to grow more rapidly. Under this scenario, spending in health, education and other expenses grows more rapidly, and debt starts to increase steadily from the late 2020s.
• The “Constant debt” scenario adjusts revenues and expenses within the context of longer-term fiscal challenges and a 20% of GDP net debt objective. Although this scenario suggests some scope to increase operating allowances in the medium term, the ratio of government spending to GDP would not rise to the levels seen in the last cycle.

Figure 16 – Core Crown net debt under three scenarios

Source:  The Treasury

These scenarios do not downplay the long-term demographic challenge. For example, the “Constant debt” scenario is challenging in that with broadly constant tax-to-GDP and unchanged NZS settings, the required spending adjustments are made elsewhere in the Budget. Although the operating allowance does eventually increase, it will need to cover rising costs, including rising demographic effects.

Figure 16 does highlight how fiscal decisions in the near to medium term can substantially alter the longer-term fiscal outlook. Budget 2011 takes responsible fiscal decisions that limit the near-term lift in debt, and therefore create wider options for future taxpayers and governments.

The assumptions behind these scenarios, and how they compare with those in the Treasury's 2009 Long-term Fiscal Statement, are set out in Annex 4.