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Budget 2008 Home Page Budget Economic and Fiscal Update 2008

Fiscal Scenarios

The fiscal position is strongly influenced by the economy. The major economic determinants, and how they impact on the fiscal position, are listed below. While each effect is expressed in terms of an increase in the determinant, the opposite impact applies for a decrease.

Figure 3.10 – Gross sovereign-issued debt
Figure 3.10 – Gross sovereign-issued debt.
Source: The Treasury
  • Nominal GDP – higher GDP levels are reflected in higher tax revenue, which increases the operating balance and lowers the Government's net debt.
  • Interest rates – higher interest rates lead to increased debt-financing costs, although this would be partially offset by higher interest-based revenue on assets.
  • The level of unemployment – higher levels of unemployment translate to an increase in spending because the number of unemployment beneficiaries rises. This decreases the operating balance and raises net debt levels.
  • CPI inflation – as most benefits are indexed to CPI movements, higher inflation results in increased benefit costs. This reduces the operating balance and increases debt.

The scenario results in lower tax revenue and more Government debt …

The scenario is characterised by weaker domestic demand and lower inflation throughout the forecast period compared with the main forecast. The weaker domestic demand and lower inflation – plus a muted export response to the lower exchange rate – lead to lower nominal GDP reducing tax revenue. Relative to the main forecast, there is cumulatively $10.4 billion less tax by June 2012.

Figure 3.11 – OBEGAL (excluding NZS Fund retained revenue)
Figure 3.11 – OBEGAL (excluding NZS Fund retained revenue).
Source: The Treasury

Expenses are lower overall relative to the main forecast, as the increase in debt financing costs owing to the larger stock of debt (see below) and the increase in the number of unemployed are offset by the lower cost of inflation-indexed benefits owing to lower inflation.

Despite the lower expenses, lower tax revenue means the OBEGAL (excluding NZS Fund retained revenue) is lower over the forecast period and is, when expressed as a percentage of GDP, 1.5 percentage points lower in the final year of the forecast than in our main forecast (see Figure 3.11). As a result, gross sovereign-issued debt is 21.9% of GDP at the end of the forecast period compared to 16.8% of GDP in the main forecast.

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