Fiscal Forecast Assumptions
The fiscal forecasts are based on assumptions and judgements developed from the best information available on 4 May 2010, when the forecasts were finalised. Actual events are likely to differ from some of these assumptions and judgements. Furthermore, uncertainty around the forecast assumptions and judgements increases over the forecast period. Significant tax reform in Budget 2010 adds additional uncertainty to the economic and fiscal forecasts.
The fiscal forecasts are prepared on the basis of underlying economic forecasts. Such forecasts are critical for determining revenue and expense estimates. For example:
- A nominal GDP forecast is needed in order to forecast tax revenue.
- A forecast of CPI inflation is needed because social assistance benefits are generally indexed to inflation.
- An unemployment forecast is needed to underpin the projected number of Unemployment Benefit recipients.
- Forecasts of interest rates are needed to forecast finance costs, interest income and discount rates.
A summary of the key economic forecasts that are particularly relevant to the fiscal forecasts is provided in the table below (on a June-year-end basis to align with the Government's balance date).
| 2009/10 | 2010/11 | 2011/12 | 2012/13 | 2013/14 | ||
|---|---|---|---|---|---|---|
| June years | Half Year Forecasts |
Budget Forecasts |
Budget Forecasts |
Budget Forecasts |
Budget Forecasts |
Budget Forecasts |
| Real GDP (P) (ann avg % chg) | 0.7 | 0.9 | 3.3 | 3.1 | 2.9 | 3.1 |
| Nominal GDP (E) ($m) | 184,466 | 189,526 | 203,876 | 215,722 | 225,820 | 237,609 |
| CPI (annual avg % change) | 2.1 | 2.1 | 4.8 | 3.1 | 2.4 | 2.5 |
| Govt 10-year bonds (ann avg %) | 5.8 | 5.9 | 5.9 | 5.9 | 5.9 | 6.0 |
| 5-year bonds (ann avg %) | 5.0 | 5.1 | 5.5 | 5.7 | 5.8 | 5.9 |
| 90-day bill rate (ann avg %) | 2.9 | 2.8 | 3.9 | 5.1 | 5.4 | 5.6 |
| Unemployment rate (ann avg %) | 6.9 | 7.0 | 6.4 | 5.6 | 5.1 | 4.6 |
| Employment (ann avg % change) | -1.9 | -1.7 | 0.9 | 2.1 | 2.0 | 2.1 |
| Current account (% of GDP) | -3.6 | -3.2 | -5.0 | -6.3 | -7.1 | -7.2 |
In addition there are also a number of other key assumptions that are critical in the preparation of the fiscal forecasts.
Government decisions
Incorporate government decisions up to 4 May 2010.
Tax package
Estimated second-round macroeconomic effects of the tax package have been incorporated into the tax, benefit and debt servicing forecasts. There is uncertainty associated with the full impact of the policy changes on the fiscal position, so there is a risk there could be additional impacts not captured in the fiscal forecasts.
Operating allowance
Net $1.1 billion in 2010/11, growing by the rate of 2% per annum for subsequent Budgets.
Capital allowance
$1.39 billion in Budget 2011, 2012, 2013 and 2014 allocated as follows over the forecast period:
| $billions | 09/10 | 10/11 | 11/12 | 12/13 | 13/14 |
|---|---|---|---|---|---|
| Contingency | - | 0.12 | 0.02 | - | 0.33 |
| Budget 11 | - | 0.16 | 0.56 | 0.30 | 0.26 |
| Budget 12 | - | - | 0.16 | 0.56 | 0.30 |
| Budget 13 | - | - | 0.16 | 0.56 | |
| Budget 14 | - | - | 0.16 | ||
| Total | - | 0.28 | 0.74 | 1.02 | 1.61 |
Investment rate of returns
Incorporate the actual results to 28 February 2010. Beyond the June 2010 year, gains on financial instruments are based on long-term benchmark rate of returns for each portfolio.
Finance cost on new bond issuances
Based on 5-year rate from the central economic forecasts and adjusted for differing maturity.
Top-down adjustment
Top-down adjustment to operating and capital as follows:
| $billions | 09/10 | 10/11 | 11/12 | 12/13 | 13/14 |
|---|---|---|---|---|---|
| Operating | 0.46 | 0.41 | 0.06 | 0.06 | 0.06 |
| Capital | 0.13 | 0.30 | - | - | - |
| Total | 0.59 | 0.71 | 0.06 | 0.06 | 0.06 |
Borrowing requirements
The forecast cash deficits will be met by reducing financial assets and issuing debt.
Property, plant and equipment
For the purposes of the forecast financial statements, no revaluations of property, plant and equipment are projected beyond the current year. Valuations as recorded for the 2009 annual financial statements and any additional valuations that have occurred up to 28 February 2010 are included in these forecasts. A number of revaluation exercises are currently underway and are planned to be completed in time for the 2010 annual financial statements (published in early October). The results of these valuations are, therefore, not reported in these forecast financial statements.
Student loans
The carrying value of student loans is based on a valuation model adapted to reflect current student loans policy. As such, the carrying value over the forecast period is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and discount rates used to determine the effective interest rate for new borrowers. Any change in these assumptions would affect the present fiscal forecast.
Government Superannuation Fund and ACC liabilities
The Government Superannuation Fund and ACC liabilities included in these forecasts have been valued as at 28 February 2010 and 31 December 2009 respectively, with the ACC valuation being adjusted for the 31 March 2010 discount rate. Both liabilities are valued by projecting future cash payments, and discounting them to present value. These valuations rely on historical data to predict future trends and use economic assumptions such as inflation and discount rates. Any change in actual payments or economic assumptions would affect the present fiscal forecast. For example, if the discount rate decreases, the value of the liabilities would increase.
The Government Superannuation Fund's assets are offset against the gross liability and have been updated to reflect market values at 28 February 2010. The value of assets over the forecast period reflects long-run rate of return assumptions appropriate to the forecast portfolio mix.
Emissions Trading Scheme (ETS)
The forecasts have been prepared in accordance with current government ETS policies and the effects of these policies over commitment period 1 (CP1) (2008 to 2012). Details of current climate change policies are listed at:
www.mfe.govt.nz/issues/climate/policies-initiatives
The carbon price assumption is constant at €10.75 with an exchange rate of 0.5298 (a carbon price of NZ$20.29). The forecast assumes a 67% uptake of post-1989 foresters into the ETS over CP1.
Beyond 2012, ETS net revenues have been modelled as neutral (revenues equal expenses), as New Zealand currently has no international commitments beyond this period. Net revenue (the value of credits received after free allocation of credits to participating industries and after meeting future emissions liabilities) is assumed to be recycled back to the public through fiscally equivalent, unspecified tax reductions or spending increases.
Kyoto position
The Kyoto position included in fiscal forecasts reflects the Government's obligation for CP1, which is for the period 2008 to 2012. Base case projections beyond 2012 do not incorporate a quantitative estimate of any net emissions position that may eventuate from New Zealand's obligations under future international climate change agreements.
NZS Fund contributions
A $250 million contribution in 2009/10 and no contribution is assumed in the forecast period beyond the 2010 fiscal year.
