Annex 4

FSRProjections and the Treasury's Long-term Fiscal Statement

Fiscal projections are currently produced in two forms. The FSR projections cover the period to 2025 and assume the continuation of current policy. The Treasury includes projections out to 2050 in its Long-term Fiscal Statement. This annex reconciles the two approaches and sets out the assumptions behind Figure 16.

The 2009 Long-term Fiscal Statement included a scenario where the path of government spending was adjusted over the period to 2050 to achieve “sustainable net debt” (20% of GDP), and a scenario where spending was influenced by “historic trends” and net debt was unanchored (eventually exceeding 200% of GDP).[2] In both scenarios, NZS and welfare spending were projected in line with current policy. NZS spending is driven by demographics and wages, and welfare spending is driven by demographics and CPI indexation of benefits. The 2009 Statement used Budget 2009 as the base for the projections.

The 2011FSR projections also assume current policy for NZS and welfare. This is consistent with the approach used to guide Budget decisions (ie, the Fiscal Management Approach). Operating allowances are assumed to cover spending increases in health, education and other expenses. These spending increases could include new policy initiatives, cost pressures and demand-driven increases stemming from demographics. Capital allowances are assumed to cover net increases to property, plant and equipment.

The key assumptions behind the three scenarios in Figure 16 are as follows:

• “Current assumptions” - assumes FSR operating and capital allowances until net debt reaches near zero in 2025. After 2025, the revenue from fiscal drag is removed and historic spending growth trends for health, education and other expenses are assumed.
• “Constant debt” - assumes FSR allowances until net debt reaches 20% of GDP in 2022. After 2020, the revenue from fiscal drag is removed and operating allowances are set so as to stabilise net debt at 20% of GDP.
• “Historic trends” - assumes that historic spending growth trends for health, education and other expenses take effect from 2016 and the revenue from fiscal drag is removed from 2026.

In all three scenarios, NZS and welfare spending are determined by the factors discussed above and tax-to-GDP is broadly constant. Contributions to the NZS Fund are assumed to restart in 2016/2017 in all three scenarios. Although they use the 2011 Budget as the base, the “Constant debt” and “Historic trends” scenarios are similar in method to the respective “Sustainable debt” and “Historic trends” scenarios in the 2009 Long-term Fiscal Statement.

Operating allowances of $1.19 billion in 2014/15 (growing at 2% per year) equate to around 0.5% of GDP per year. In the “Constant debt” scenario, operating allowances are maintained at this size before eventually settling at around 0.8% of GDP per year. The profile for specific spending areas in this scenario depends on the allocation of the operating allowance. For example, if health's allocation of the allowance is based on recent shares then health spending to GDP declines from around 7% now to 6% by 2020, before rising to around 8% in 2050. This compares with projected health spending rising above 9% of GDP in the “Historic trends” scenario.

In terms of overall spending, the “Constant debt” scenario has non-finance core Crown expenses at 30.5% of GDP in 2050. This compares with 32.1% of GDP in the “Historic trends” scenario. Although net debt is lower than the “Historic trends” scenario in the 2009 Long-term Fiscal Statement, it remains on an upward path. The “Current policy” scenario has non-finance spending at 28.1% of GDP in 2050.