Comparison with longer-term fiscal projections

By contrast, the Treasury's longer-term fiscal projections out to 2049/50 (page 16) are driven solely by cost pressures reflecting the expected demand for public services. An explanation of the approach behind these projections can be found in the Treasury's 2009 Long-Term Fiscal Statement.[9]

Table A3.2 - Summary of fiscal projection assumptions out to 2025/26

Tax revenue

Linked to growth in nominal GDP. Source deductions (mainly PAYE tax on salary and wages) is grown using employment growth and nominal average hourly wage growth for the first five years of the projection period. The latter is multiplied by a fiscal drag elasticity of 1.35. After the first five years of the projection period source deductions are returned to a long-term stable value of 11.2% of GDP. The three other major tax categories, Corporate tax, Hypothecated Transport taxes and Other taxes (dominated by GST), are gradually returned, from their end-of-forecast values, to long-term constant ratios to GDP. This transitional adjustment is to ensure that tax revenue projections are based on ratios to GDP that are neither higher nor lower than would be expected when the economy is performing at its potential. All tax categories change at a rate of 0.2% of GDP per annum, with final ratios-to-GDP of 4.5% for Corporate tax, 1.3% for Hypothecated Transport taxes and 11.7% for Other taxes. The long-term ratios are based on historical data, taking into account tax rate and policy changes that could affect these. Once the long-term ratios are reached the tax types remain at them in later projected years.

New Zealand Superannuation (NZS)

Demographically adjusted and linked to net wage growth, via the "66% wage floor". The latter refers to the net (after-tax) weekly New Zealand Superannuation rate for a couple being constrained to lie between 66% and 72.5% of net average weekly earnings. As tax on average weekly earnings, being a part of overall PAYE, increases owing to fiscal drag, the net average weekly earnings do not grow as quickly as the gross earnings.

Other benefits

Demographically adjusted and linked to inflation.

Health

Held constant at the end-of-forecast values, because their growth is assumed to come from a share of the projected Operating Allowance annual increment.

Education

As with Health, except for the student allowances and student loan write-off components. The former grows as "Other Benefits" do, while the latter grows in line with Ministry of Education projections.

Other expenditure

Held constant at the end-of-forecast values, because their growth is assumed to come from a share of the projected Operating Allowance annual increment. Two exceptions are KiwiSaver expenses, which grow in line with projections from the Inland Revenue Department, and Emission Trading Scheme (ETS) expenses. For the latter, see the ETS section in this table.

Finance costs

A function of debt levels and interest rates.

Operating allowance

$1.24 billion in 2016/17, which is equivalent to the Budget 2010 Operating Allowance of $1.1 billion, growing at 2% per year in intervening years. Operating Allowances for subsequent projected years grow at 2% per year from this value.

Capital allowance

$0.918 billion in 2016/17. This is based on a track of $0.9 billion in Budget 2016 as the starting point, grown at 2% per annum.

Surplus NZDMO financial assets

Nil.

NZS Fund

Contributions to the Fund suspended until 2016/17. Contributions begin again in 2017/18, and are consistent with the New Zealand Superannuation and Retirement Income Act 2001.

Emission Trading Scheme (ETS)

The fiscal impact of the ETS depends on several highly uncertain factors, most notably future carbon prices and New Zealand's emissions targets from future international climate change agreements. The ETS has been modelled as having no net fiscal impact in the projection period (expenses equal revenues), as the net impact of the ETS and future international obligations is highly uncertain. Any net revenue (the value of credits received after free allocation of credits to participating industries) is assumed to be required to meet future international obligations, or alternatively used for fiscally equivalent, unspecified tax reductions or spending increases.

Future emissions liabilities

The Kyoto liability included in fiscal forecasts reflects the Government's obligation for Commitment Period 1, which is for the period 2008 to 2012. Projections beyond 2015/16 do not incorporate a quantitative estimate of any net emissions liability that may eventuate from New Zealand's obligations under future international climate change agreements.